The sub-prime backlash—Why Prime lenders offer the safest mortgage solutions
Q: Is Tech CU a sub-prime lender or has it ever made sub-prime loans?
A: No. Tech CU has never engaged in sub-prime lending. We are known in the lending industry as a “Prime Lender,” which means that we only originate loans to borrowers with strong (good to excellent) credit qualifications that are in the best interest of the member.
Q: What’s the difference between a sub-prime lender and a prime lender?
A: The difference between a sub-prime lender and a prime lender isn’t just in the rates they charge or the types of mortgage options they offer. It has to do with risk. While sub-prime lenders measure risk in terms of their own bottom line, prime lenders measure risk with the borrower in mind. Prime lenders look at the whole picture—while they want to help get borrowers into a loan they can afford on the short-term (offering one-year to five-year adjustable-rate mortgages that keep the rate low initially), they also look for ways to make sure that the borrower can stay in the loan or can easily refinance when their loans adjust (offering no-prepayment-penalty options, expedited refinancing options for existing borrowers, etc.).
Tech CU is a prime lender, and we take our members’ individual financial situations into account whenever considering extending a loan to them. We make loans that make sense for our members’ financial health—not to sell on the capital markets at a profit like sub-prime lenders.
Q: I’ve heard that a lot of banks and mortgage companies aren’t able to make loans because they don’t have money to lend—is Tech CU still able to make loans?
A: Yes, Tech CU is able to offer mortgage loans to our members. Because we primarily use our own funds (from member deposits), not funds that we borrow from other financial institutions in the capital markets, we are for the most part unaffected by the sub-prime market crash. If you’re interested in getting a loan with Tech CU, please contact one of our mortgage consultants, call us at 800-553-0880 or go online to apply via our mortgage application at www.techcu.com.
Q: Has Tech CU been affected by the sub-prime crash?
A: No. Other lenders were affected by the sub-prime crash because they were dependent on funds that they were borrowing from other financial institutions to lend to their borrowers. While Tech CU has from time to time borrowed money to fund loans, we primarily originate loans with member deposits, so we are not affected by the current fluctuations in the market.
Q: Do you sell your loans?
A: Yes, within the prime markets to government agencies Fannie Mae (FNMAE) and Freddie Mac (FHLMC) and we are positioned to sell to the Jumbo market. Tech CU does not sell our loans on the capital market. Tech CU originates all of its own loans with its own funds.
Q: Does Tech CU offer negative amortization or option ARM loans?
A: No. Negative amortization or option ARM loans gained popularity among consumers because they keep borrowers’ monthly payments artificially low. By keeping the payments so low, negative amortization loans actually add more to the overall loan balance, which over time puts the borrower in a negative financial position. Tech CU only makes loans that are in the best interest of the borrower—which is why Tech CU does not offer negative amortization loans.
Q: Does Tech CU offer 100% financing?
A: No.Tech CU offers up to 95% financing on single-family home loans, up to 90% financing on condos, and up to 90% financing on second homes (i.e., not used as rental properties). All of our higher loan-to-value first mortgage products require mortgage insurance.
Q: I’ve heard that some credit unions were part of the sub-prime crash. If Tech CU doesn’t do sub-prime lending now, was there ever a time that Tech CU made sub-prime loans?
A: During the height of the sub-prime boom, many credit unions and smaller lenders were pressured to start underwriting sub-prime loans—and many jumped on the bandwagon. Without the risk management infrastructure that most large sub-prime companies could afford, smaller financial institutions are now finding themselves in hot water with low demand for new loans and high default rates on loans in their portfolios.
As a credit union, Tech CU looks out for what’s best for the member, and sub-prime lending practices have never been a part of Tech CU’s member-focused mission. Even though there was significant demand from the market, Technology Credit Union did not originate sub-prime loans.
Q: Is my money with Tech CU insured?
A: All Tech CU share accounts, including savings, checking, Certificates, health savings accounts, money market accounts, are insured by the National Credit Union Association, or NCUA, which federally insures deposits with credit unions within the U.S. financial system, insuring individuals for up to $100,000 on regular accounts and up to $250,000 on retirement accounts. Tech CU is NCUA insured and is an equal housing lender.
Q: For its own investment portfolio, does Tech CU invest in securities tied to real estate?
A: Credit unions as an industry are governed by very strict and conservative investment guidelines. For the most part, we invest with our corporate credit union, Wescorp, in liquid accounts or Certificate accounts or purchase other conservative financial instruments.
Mortgage Backed Securities (MBS) that TCU has invested in are investments securitized by government agencies. The securities that TCU has, and may purchase in the future, are backed by the U.S. government. The securities that TCU purchases are originated by: GNMA (Government National Mortgage Association); FNMA (Federal National Mortgage Association); and FHLMC (Federal Home Loan Mortgage Association). CMOs are Collateralized Mortgage Obligations and are not backed by the U.S. government and have various payment streams related to mortgages. Investors in non-government back MBS and CMOs are now experiencing major losses as many of these securities have sub-prime loans which are experiencing high default and foreclosure rates. This is part of the reason that the stock market is nervous right now.
While Tech CU has invested in mortgage-backed securities in the past, these have been Government backed securities from GNMA (Ginny Mae), FNMA (Fannie Mae) and FHLMC (Freddie Mac). We have not invested in this type of security for several years. We have not purchased CMOs for over 10 years—and our total balance in this type of investment is under $500.
Click here to listen to a podcast on this topic—a discussion with Tech CU’s AVP of Mortgage Originations.