Credit Unions Better Than Banks in Providing Quality Home Loans

Published by nora | Filed under Market Trends, Miscellaneous, Mortgage / Finance, Real Estate

Credit unions performed better than banks in the quality of home loans given to borrowers in the first three quarters of 2010, according to a study by compliance solution provider Quality Mortgage Services.

The study found that almost 50 percent of home loans provided by credit unions were rated excellent, a much higher percentage than the share of bank-provided home loans rated excellent, which was 34 percent. A home loan is rated excellent if the loan had no or only a few defects. The percentage for excellent non-bank loans was even lower at 22 percent. Non-bank lenders are financial firms which are not supervised by the Federal Deposit Insurance Corp, the Office of Thrift Supervision, or the Office of the Comptroller of the Currency.

Non-banks however led the others in percentage of home loans rated good, as 61 percent of non-bank home loans were good. Home loans were considered good if they only have minor defects and they were acceptable to secondary mortgage investors. Bank loans considered good accounted for 56 percent of all bank loans while good credit union home loans accounted for 43 percent.

For the fair category, home loans were evaluated based on their repurchase risk. Non-bank lenders led this category, as 14 percent of non-bank loans had repurchase risk. Bank loans and credit union loans posted percentages of eight percent and seven percent, respectively

Credit unions were also more thorough than banks and non-banks in their evaluation of home loans. Evidently, credit union officers complied with their underwriting policies, more concerned about the capabilities of borrowers to repay than about their initial underwriting profits. Home loans were rated poor if they should have not been made at all because fraud was involved. Only 0.75 percent of credit-union home loans were rated poor, whereas 1.1 percent of bank loans were poorly underwritten. Non-banks posted the highest percentage of poor loans, with a share of 2.76 percent.

Credit unions performed well in home loan quality largely because they chose borrowers with high credit scores, with the average credit score of their mortgage borrowers in the excellent category in 2009 at a high of 772. The average score in the first months of 2010 dropped to 761, but it was still higher than the average credit score for bank’s borrowers, which was 755 in 2009 and in 2010. Non-banks posted an average score of 737 in 2010 and 722 in 2009. In the good category in 2010, credit unions had an average credit score of 761 while banks and non-bank lenders posted 736 and 710, respectively.

In this study, home loan quality was evaluated based not on default but evaluated post-closing based on credit quality, federal regulatory compliance, collateral analysis, and presence or absence of mortgage fraud.