Office of the Chairman
News Release

NCUA CHAIRMAN SAYS CREDIT UNIONS SHOULD REMAIN FOCUSED ON SAFE AND SOUND MORTGAGE LENDING  

Las Vegas, NV, October 10, 2005 – As America’s consumers are becoming more attracted to a variety of exotic mortgage lending products, credit unions must remain vigilant in maintaining safe and sound mortgage lending portfolios, said National Credit Union Administration (NCUA) Chairman JoAnn Johnson.

In an address to the American Credit Union Mortgage Association, Chairman Johnson said recent trends indicate a shift in consumer demand towards more exotic products such as adjustable rate or interest only mortgages, particularly in real estate markets that have experienced unprecedented appreciation in housing prices. In response, borrowers have resorted to these new loan options, and to relaxed lender credit standards, to be able to qualify for home financing. She emphasized that the trend is recognized across all mortgage lenders.

“We want credit unions to be at the forefront of helping their members achieve the American Dream of homeownership, and at the same time realize that as a financial partner and in empowering them toward homeownership, credit unions should do so safely and soundly,” said Chairman Johnson. “Thanks, in part to America’s credit unions, minority homeownership is at an all time high. Credit unions will continue to play a major role in making the dream of homeownership a reality for millions of Americans.”

Credit unions hold $204 billion in real estate loans. Fixed rate first mortgage loans still account for two thirds of all credit union first mortgages, with the remaining one third being adjustable rate. “A recent Wall Street Journal article highlighted the fact in the second quarter of 2004, adjustable-rate and interest only loans accounted for 63% of mortgage originations and in recent months option adjustable rate mortgages and interest only loans accounted for 65%-75% of all jumbo-mortgage originations,” quoted Chairman Johnson. “In the first two months of 2005, nearly 61% of California purchase mortgages were interest only, up from 47% in 2004 and less than 2% in 2002.”

The NCUA issued a Letter to Credit Unions regarding the increasing risks in mortgage lending. NCUA field staff will be monitoring these trends and will evaluate not only interest rate risk related to mortgage lending but the increased credit risk associated with these newer mortgage products and more liberal underwriting standards.

Chairman Johnson said credit unions should be familiar with these newer mortgage loans products and the increased level of credit risk associated with them, especially in markets with high levels of appreciation in housing prices. Many lenders offer these products ahead of standard fixed rate mortgages as a way for borrowers to increase their purchasing power. The need to use these types of products to simply qualify for a loan may increase credit risk, especially as interest rates (and minimum payments) increase, and if the rate of home price appreciation flattens, or worse declines.

The Letter to Credit Unions may be found at http://www.ncua.gov/letters/letters.html

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