Credit unions more than doubled their home mortgage lending last year, and in the process they encountered some of the problems with appraisals that have plagued such traditional real estate lenders as savings and loan associations, according to Roger W. Jepsen, chairman of the National Credit Union Administration.
"Appraisal abuses are considered a major contributing factor leading to several recent credit union failures," Jepsen said in a recent letter to Rep. Doug Barnard Jr. (D-Ga.). Barnard, chairman of the House Government Operations Committee's subcommittee on commerce, consumer and monetary affairs, had asked Jepsen for an assessment of credit unions' mortgage lending. The subcommittee held hearings last December on real estate appraisal problems.
Barnard said Jepsen's report "increases my determination to force the federal banking agencies to do more" to curb appraisal problems. The credit union administration's acknowledgement of difficulties confirms his subcommittee's view "that appraisal abuses are a disturbing national epidemic," Barnard added.
About 7,300 credit unions held more than $5.8 billion in first mortgages at the end of 1985, a 57 percent increase over their home loan portfolio at the end of 1984, according to a spokeswoman for the credit union administration, which charters federal credit unions and insures federal- and state-chartered organizations. The amount includes $1.8 billion in 68,883 loans made in 1985.
Appraisal-related problems fall mainly into two categories -- inflated property values and failure to get a good appraisal from a qualified appraiser, Jepsen said in his letter. As an example, he cited an evaluation by an "insider," associated with a Missouri credit union, who "submitted appraisals at an average of 33 percent over the loan amount on the properties." The credit union, which subsequently failed, lost nearly $1.3 million on 11 loans in this case, according to Jepsen.
The credit union administration does not require its members to obtain appraisals before making real estate loans, but failure to get an appraisal "would be viewed as an 'unsafe and unsound' lending practice," Jepsen wrote. He said that, as a result of the big jump in real estate lending last year, his agency has begun training its examiners to ensure that they will be "better prepared to detect and deal with problems in this area."
Despite the increase in real estate lending, home mortgages still accounted for less than 5 percent of all credit union loans in 1985, said Michael Riley, director of the credit union administration's office of examination and insurance.
The organization's real estate figures include only first mortgages with terms of more than 12 years. Second mortgages and other types of loans secured by real estate would be classified as consumer loans in the administration's records, according to Riley. "We have preferred to keep information gathering and records simple . . . but we plan to pick up more information on real estate next year," he said.
Credit unions increasingly have turned to real estate lending as consumer loans leveled off after the boom in borrowing in 1983 and 1984 that led the recovery from recession, said Charles Bradford, chief economist with the credit union administration.
With consumer borrowing down, "Credit unions are seeking to put funds in other areas, and real estate is going to be very good . . . because of lower interest rates," he said.
The health of credit unions has been improving steadily since 1981, when 251 failed, requiring the National Credit Union Share Insurance Fund to pay out $78.6 million in claims, according to a spokeswoman. Last year the fund paid out nearly $15.5 million to the shareholders of 31 failed institutions, but recovered all but $6 million of the amount by selling assets of the credit unions, she said. None of the failures was in the Washington area.