NATIONAL HARBOR, Md.–NCUA Chairman Todd Harper touched on a number of housing-related issues in remarks to credit unions here.
Speaking to the American Credit Union Mortgage Association (ACUMA) annual meeting, Harper said owning a home is a “fundamental component of the American Dream.”
“Home ownership builds intergenerational wealth and contributes to strong and vibrant communities,” Harper told the meeting. “In just a few decades, we have seen the credit union system’s presence in the mortgage market grow significantly. Today, credit unions hold about 5% of all outstanding mortgage debt in the U.S., including a large and growing percentage of second mortgages. While this market share is small when compared to that of banks and non-bank lenders, credit unions play an important role in fostering home ownership in communities nationwide, especially in rural or underserved areas and communities often overlooked by traditional financial institutions.”
Consumers Face ‘Hurdles’
Harper said a number of “hurdles” are affecting Americans’ ability to own a home while maintaining a balanced family budget and gaining equal access to credit. That includes what he called a “complicated housing market.”
“The good news is that, despite inflation and higher interest rates, mortgage performance has stayed relatively solid. Mortgage delinquency rates, although rising, additionally remain at relatively low levels,” Harper said. “Compared to prior business cycles, especially the 2008 financial crisis, home equity levels also remain quite high, in large part because home values have remained resilient. The NCUA estimates that between 90% and 95% of credit union mortgage borrowers have 20% or more equity in their homes. That’s positive news, and it provides protection for mortgage lenders like you should market economics shift in the short term.”
The flip side, the chairman told ACUMA, is that higher mortgage rates are “sharply impacting both the supply and demand sides of the housing market,” and that “home affordability has fallen dramatically during the last few years, with many potential borrowers remaining on the sidelines because they simply can’t afford to buy property.”
Other Issues Addressed
Harper touched on a number of other housing-related issues with his audience, including:
Outstanding Junior Leans
Outstanding junior liens in the credit union industry have grown about 34% over the last four quarters, a trend line he said is “both good and bad.”
“While credit unions are meeting their members’ needs which is positive, I’m concerned what it means on the borrower’s side, and whether the higher volume in HELOCs and junior liens is indicative of increased levels of household financial stress. The answer, so far, is potentially. Overall, the performance metrics indicate the credit union system remains well positioned. For example, the industry’s aggregate net worth ratio grew to 10.63%, and we recorded a 12.6% year-over-year increase in the number of credit union loans.”
Growing Financial Strain
Harper said NCUA has seen growing signs of significant financial strain in household budgets, such as rising delinquency rates for various consumer loans, including auto loans and credit cards.
As CUToday.info has reported he noted the delinquency rate at federally insured credit unions was 63 basis points in the second quarter of 2023, up 15 basis points compared with the second quarter of 2022. Also in the second quarter of 2023, the delinquency rate for credit cards rose to 154 basis points from 107 basis points one year earlier, and the auto loan delinquency rate increased 22 basis points over the year to 67 basis points, Harper added.
Reinstatement of Federal Student Loan Payments
Harper said the reinstatement of federal student loan repayments and rising costs for property and casualty insurance will “presumably have an impact on these already strained household finances, and it seems more likely than not that credit union delinquency and charge offs will continue to rise.”
He urged CUs to carefully manage their credit risks going forward and consider early intervention to prevent a delinquency from becoming a charge-off or foreclosure.
Disparities in Mortgage Lending
Harper told ACUMA “persistent disparities” in mortgage lending are another area of concern for the NCUA.
“Research by regulators and academics alike provides evidence of the struggles of certain demographic groups to obtain access to safe, fair, and affordable financial services. For example, the Federal Deposit Insurance Corporation’s Center for Financial Research published a working paper stating that, after controlling for several credit risks and other factors, minority borrowers in 2020 faced higher mortgage loan denial rates, and Black and Hispanic borrowers paid higher interest rates than white borrowers,” said Harper.
Appraisal Bias
Harper said the bias being seen in credit union lending to people of color is also present in the determination of the home values for minority families.
“Appraisal bias, especially when compounded with higher mortgage denial rates and higher interest rates on approved mortgages for Blacks and Hispanics, decreases the ability of families to build intergenerational wealth,” Harper said. “To address this problem, the NCUA joined the Property Appraisal and Valuation Equity, or PAVE, Task Force, an interagency initiative to study and reverse the undervaluing of properties due to racial or ethnic bias. The NCUA has also worked in recent months with other agencies on proposed joint rules to establish quality control standards for automated valuation models.”
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