IRVINE, Calif. — Foreclosure numbers for 2006 are in and theypaint a worrisome picture. More than 1.2 million foreclosurefilings were reported nationwide in 2006, a 42% leap from theprevious year, according to the 2006 U.S. Foreclosure Market Reportreleased by RealtyTrac, an online marketplace for foreclosureproperties. That's a rate of one foreclosure filing for every 92households.

James Saccacio, CEO of RealtyTrac, attributed the increase tothe general slowing of housing sales and the impact of“dramatically increasing” monthly mortgage payments for homeownersthat opted for adjustable rate and subprime mortgages.

Despite the doom and gloom, credit unions were largelyunaffected, due in part to a continued effort to provide moreconservative and affordable products coupled with member educationregarding the various mortgage products on the market.

“Over the last five years we've probably averaged less than oneforeclosure per year,” said Steve Fagan, vice president of mortgagelending at $1.7 billion Texans Credit Union in Richardson, Texas.“We think that's because we haven't done any of the aggressiveoption ARM-type programs. We have traditional underwriting andperhaps we're more conservative than many when we underwrite forthe membership.”

RealtyTrac listed Texas reporting 156,876 foreclosure filings in2006, the most of any state and 13% of the national total. TexansCU holds a mortgage portfolio of $325 million with approximately $7million to $10 million per month on the books, Fagan said. Lastyear it added 125 total mortgages and was not impacted by theforeclosure boom thanks to a focus on fixed-rate, some modest ARMproducts, and its membership base remaining stable inemployment.

As of January, Texans had 15 one-year ARMs, 19 three-year ARMs,and 46 five-year ARMs, representing a relatively small number ofARMs to fixed, Fagan explained. When the CU has taken the time toexplain to members all the different mortgage instruments theyalmost invariably choose the fixed rate, he added.

“I think there's been a lot of people who have been misinformedby the lending industry over the years and they've gotten intothings that maybe they didn't fully understand,” Fagan said. “Wedon't have straight commission loan officers like a lot of mortgagebanker shops do. It puts pressure on closing the loan as opposed tothe member-type service that we try to give. We want the loans toperform on the books and we want the member to be happy, not getover-extended, stay here and come do business with us again.”

It has also been business as usual in the mortgage lendingdepartment for the $3.7 billion Ogden, Utah-based America FirstCredit Union. Utah saw its share of problems last year as 1.7% ofhouseholds, or one in 59, filed for foreclosure, but MortgageServicing Department Manager Larry Kano agreed with Fagan thatmembers' preference toward fixed-rate products has helped temperthe local and national climate.

“We're just not seeing the same level of foreclosures as thestate of national is experiencing,” Kano said. “We don't do a lotof ARMs and it seems like a lot of the foreclosures out there arethe result of ARMs. Less than 5% of our business has beenadjustable rates.” Factoring in Fraud

Of course, the rising number of foreclosures is a product ofmore than just an increase in ARMs. In Colorado, licensing andregistration issues and appraisal fraud have helped catapult it tothe top of RealtyTrac's report, with a 3% rate of foreclosure forthe entire state's households.

Prior to 2007, Colorado was one of only two states that did notrequire mortgage brokers to be licensed or registered–literally aperson could walk out of jail in Kansas, cross the border intoColorado and open up a mortgage brokerage business, explained JonPaukovich, director of mortgage lending at Colorado Springs-basedEnt Federal Credit Union. Many observers believe that was the causeof much of the mortgage fraud and foreclosures in the state,Paukovich said.

The problem has been further compounded since many going throughforeclosure have obtained either a stated income loan or a “no doc”loan, added Bill Vogeney, Ent's senior vice president and chieflending officer. Ten years ago these loans existed primarily forpeople with excellent credit who were self-employed businesspeople. They had excellent assets, but may have had a tough timeverifying their income since they were aggressive with theirwrite-offs and expenses with their business.

“In the last three to fours years it's become the darling of thesubprime market where now people with weaker credit and withoutsignificant assets have been offered these stated income or no docloans,” Vogeney said. “They're jokingly referred to in the industryas the 'liar's loan' but it's allowed a lot of people to buy ahouse that they may not have been able to afford otherwise.”

He offered the example of a mortgage broker working with acustomer seeking to buy a $300,000 house, but who can only afford$175,000. Instead of turning him down, the broker could put him inthat home with a stated income product. The loan gets approved butthe borrower has little chance of ever repaying that loan over along period of time, said Vogeney.

Ent primarily underwrites to Fannie Mae guidelines and offers aFannie Mae suite of products. The CU has never extended its creditguidelines beyond that into the subprime area, Paukovich said.

In qualifying borrowers Ent has come across situations wherepeople signed up for their first mortgages elsewhere and relied oncreative financing to qualify. Their loan and debt-to-income mayappear fine, but the CU attempts to determine the terms of thefirst mortgage. If someone had to use an Option-ARM and signed fora $200,000 first mortgage with a $700 payment in order to qualify,Ent will make an effort to qualify them on a more normal payment.Vogeney admitted that as a result, the CU has turned down someloans it felt that people would not be able to repay.

“We want to educate our members. Many people that got an exoticproduct the last few years can't even refinance out of it becausetheir home value has leveled off or declined,” Paukovich said.

An element of that education deals with appraisal fraud. TheColorado State Attorney General is looking at the issue, but togive an idea of its effect, Vogeney cited one example where an Entmember had refinanced six to eight months ago and received anappraisal of $185,000. The appraiser used properties a couple ofmiles away where there were homes within walking distance of themember's home that sold for $145,000-$150,000. The member went to asubprime lender and got 100% cash-out refinance, paid anorigination fee, paid points and was sold a loan with a 3%pre-payment penalty.

“Overall [increased foreclosure rates] haven't really impactedus here in Colorado Springs,” Vogeney said. “We didn't see therapid appreciation experienced by the greater Denver area and we'renot seeing that rate shock that sets in with many of those thatselected exotic mortgage products.”

While not the bulk of its business, $2.75 billion Desert SchoolsFederal Credit Union in Phoenix does offer quite a few variablerate products and has seen a rise in popularity among the 3/1, 5/1,7/1 ARMs and also home equity lines of credit. It has alsowitnessed some of the early signals of Arizona's foreclosureclimate–27,886 total in 2006 according to RealtyTrac figures.

It is seeing almost twice the delinquency rate in the variablerate versus fixed-rate, noted Robin O'Rorke, vice president andchief lending officer. With that in mind, Desert Schools'foreclosure numbers are still very low–less than half of 1%. Somemembers are getting a little bit late with payments, O'Rorke added,but the CU has not had many properties that it has had to takeback.

Desert Schools has decided to take an anticipatory approach tothe market by creating the Foreclosure Prevention Loan, similar toan accommodation loan, to try and help members stay in their homes.Another method is to move members out of home equity loans that arebased on the prime rate.

“With prime having gone up so much, a dozen times or so, we'retrying to be proactive and offer a home equity loan that it notprime-based. So we'll call our members that have our currentproducts and try to get them into this new product. Both this newhome equity product and the Foreclosure Prevention product arecurrently in the works and are just going to our ALM committee inFebruary.”

O'Rorke doesn't ascribe to the theory that since CUs are nowsuccessfully weathering the foreclosure storm they are imminentlyprepared for the future.

“The effect is pretty insignificant right now,” Rorke said, “butwe definitely have to keep our eye on it because we don't thinkthat the worst is over.” –[email protected]