Starting May 8, federally chartered credit unions will be at last be able to enter the long-term mortgage lending field. Final regulations were signed last Friday, almost a year after Congress passed the enabling legislation.
First mortgage loans of up to 30 years can be made on one-to-four-family dwellings that are credit union members' primary residences provided the sales price - or the purchase price plus repairs in the case of rehabilitation - does not exceed 150 per cent of the median sales price in the area. The restrictions are aimed at excluding luxury housing, according to National Credit Union Administrator Lawrence Connell Jr.
Because this presents a quantum leap forward for federal credit unions, which have previously been limited to 12-year loans, the institutions are expected to proceed with utmost caution in this traditional preserve of big banking. The National Association of Federal Credit Unions, a professional organization, estimates that only 10 per cent of the 2,140 credit unions with the required minimum $2 million in assets will participate initially.
Yet, by 1982, Dr. Walter Stuart of the National Credit Union Administration, the government regulatory body, predicts federal credit unions will be granting mortgages in the order of $5 billion to $7 billion annually.
Stuart, assistant administrator for research and anlsyis, stressed that the figure, based on limited New England credit union experience, is only a "gut estimate. It could be $2 billion or $30 billion. We really don't know," he said.
Another projection chief economist Robert Van der Ohe of Union National Association, also a trade group, puts total mortgage holdings at $15 billion by 1982.
Among he pioneers will be he State Department Federal Credit Union with assets of $89 million, which plans to offer long-term mortgages right away to its 22,000 members. The Navy Federal Credit Union, the largest in the country with $683 million in assets, will initiate a pilot project next fall. The Redstone Federal Credit Union in Huntsville, Ala., anticipates making $10 million to $12 million in mortgages in the first year. Other states where credit unions intend to jump into mortgage lending include Florida, Montana, Texas and New York.
The entrance of federal credit unions into the mortgage market could eventually represent serious competition for traditional lenders just as credit unions' share drafts, or interest bearing checking accounts, alarmed the American Bankers Association to the point where it brought suit to stop them.
Over objections from the banking lobby, Congress decided last year to permit credit unions to get into mortgages in an effort to expand opportunities for home ownership, especially to persons who might otherwise be rejected by the banking establishment. Congress reasoned that credit unions, which are not primarily profit-oriented, would be more apt to accommodate members who wish to buy in areas in which savings and loan associations are not lending or members who have no account with a bank or are considered marginal credit risks.
As a spur to urban renewal, credit unions will be able to finance up to 95 percent of the cost of rehabilitating an existing home through an insured or guranteed mortgage. Flexible and graduated payment mortgages, which give the young home buyer a break by starting with lower payments, will be allowed on an experimental basis.
Interest rates charged by credit unions will be comparable to market rates, and in some cases could even be a shade higher, according to some credit union managers. The trade-off is lower front end costs, such as no appraisal or survey fees. This would permit the buyer, already strapped by the down payment and settlement taxes, to spread the costs out over a longer period. The total cost presumably would be lower.
In addition, NCUA has also proposed eliminating the loan origination fee and providing a refund in the case where interest charges exceed one percent a month, the legal limit for credit unions. This could happen if the mortgage were paid off before term.
The credit union movement is 70 years old and growing rapidly. There are now 22, 450 state and federal credit unions with over $54 billion in assets. For year's state credit unions have been able to make long-term mortgages, but they usually hold them to maturity.
A quarter of federal credit unions assets may be put into mortgages, but that does not include loans that are sold in the secondary market. When paper is turned over rapidly, the amounts available for lending grows immeasureably.