As subprime credit dries up amid the worst housing slump since the Depression-era, many troubled subprime borrowers are apparently finding help from two sources that were oft-overlooked during the recent housing run-up: credit unions and community banks. Via the Wall Street Journal, a return to more personal lending:
Unlike big lenders, credit unions didn't suffer heavy losses in recent months because they never made risky subprime loans. Bill Hampel, chief economist at the Credit Union National Association, says that while some credit unions have experienced "collateral damage" from the subprime crisis, as members have lost jobs in depressed areas, most have strong balance sheets and near-record capital levels. As a result, they're "going to make any loan they possibly can make," he said. Many credit unions continue to refinance subprime loans and offer banking products no longer available from other lenders, including five-year adjustable-rate mortgages.
It's possible here that cash-flush community banks and credit unions -- more conservative lenders that judiciously avoided the rush to subprime -- are now setting themselves up to lose a good chunk of that cash. It's also possible, however, that a return to more personalized loan underwriting is exactly what's needed in the subprime credit space. While it hasn't received as much attention as other areas of the industry, a few sources have suggested recently that the emergence of automated underwriting in the subprime mortgage industry ultimately helped fuel the loose lending practices that have led to record financial losses. Those same automated systems that helped make so many subprime loans are now the very same systems responsible for rejecting many subprime borrowers looking to refinance. Proponents of local lending say that credit unions and community banks tend to offer more 'personal' service, and are therefore in a better position to more holistically judge credit risk. The WSJ, again:
Steve Renock, executive vice president of the Orange County Teachers Federal Credit Union in California, says credit unions are often more flexible in making loans because they make "story loans," he says. "We want to hear the story behind why they have had credit problems." That flexibility makes it more likely for them to lend to someone who had a temporary financial setback because of, say, an illness or divorce.