August 2008 Articles

To understand why credit unions avoided the record foreclosures that the mortgage industry experienced recently, we need to look at why so many consumers got into so much trouble so quickly with something as important as their home. What happened? Part of the reason is "exotic" mortgages appeared as an option. During the recent mortgage boom, a lot of mortgage companies were offering products that are now termed "exotics." These included:

• Mortgages with teaser rates that offered loan rates well below market rate with a rate escalation clause that forced the rate to increase well above market at some time in the future (two to five years). 
• Interest only mortgage options were available.  These allowed the consumer to only pay the interest on their loan without any principal payments.  The homeowner was betting that home prices would increase, providing them with equity if they had to sell their home.
• Aggressive Adjustable Rate Mortgages (ARMs) – These had very low rates to start with but had a very aggressive rate escalation clause that kicked the rate up significantly in 2 to 5 years, and in some cases the escalated rate was well above the competitive market rates.  Keep in mind that ARMs are a valid product option for many homeowners and are not necessarily bad, it is the terms of the rate escalation that can make them bad.

These "exotics" provided consumers with a way to purchase a home they couldn’t afford.  But that is only part of the story because millions of families purchased homes during this time period without getting into financial trouble.  These successful homeowners had the financial knowledge, savvy and discipline to buy what they could afford, not what they could qualify for.

How did credit unions dodge this mortgage crisis?  The short answer is our credo: "People Helping People." Credit unions were started to meet a social need first, not a profit need.  Credit unions were started because some consumers were not being served by traditional banks and needed a safe alternative. Today, credit unions operate with their time-proven philosophy but now anyone can participate in these sophisticated, best-of-breed alternatives to traditional banks.  We offer similar products and services, without the punitive or predatory clauses or terms and conditions. 

During the time that exotic mortgages were being offered on the radio, TV and in newspapers, credit unions stayed with mortgages that were priced appropriately for the market conditions (fair price) with terms that were fair (not punitive or predatory) and we made every effort to qualify loan applicants based upon their ability to make their payments without getting into financial trouble (consumer education and counseling). Our primary business purpose is to provide a fair and safe product that fits consumers’ needs. Because of this focus on member value, not corporate profits; we are able to make pricing, fee, terms and conditions decisions that are fair and consumer-friendly.

The financial services industry is very crowded with options; it sometimes can seem as if there is a bank on every corner.  In times like this, it’s comforting that a choice designed exclusively to benefit the consumer is available.  Why would you bank anywhere else?  Credit unions are "worth the drive," every time.