The record drop in the global housing market since January has caused serious problems for many financial institutions across the country, but not for Brookings-based Chetco Federal Credit Union (CFCU).
According to CFCU Board Chairman John Zia, people should be worried about the banking crisis caused by defaulted loans, but in no way should people worry about CFCU's health.
For many years, the global economy grew aggressively in response to the strong real estate and housing markets.
"A strong housing market fueled a strong loan market, and financial institutions of every type, including credit unions, have reveled in the fee and interest income that has resulted," Zia said. "These were essentially bundles of loans, sold as larger denomination investmentsessentially a type of huge CD or Certificate for institutions with face values of $10 million, $100 million or even larger. But these bundles' contained mortgage loans with marginal underwriting standards."
According to Zia, as the global housing market fell, many of these loans defaulted. The loans and their higher return rates tempted even the most conservative of pension funds to invest. Credit unions for the most part stayed away.
"CFCU saw the dangers and said no,'" said Zia.
Nationwide, home prices fell 10.7 percent in January alone. According to the Standard & Poor's/Case-Shiller home price index of 20 major US cities, this is the largest decline in the two-decade history of the index.
The decline caused many of the "bundles of loans" to default, throwing the financial world into turmoil.
Loans with marginal underwriting standards and high return rates are known as subprime loans because they are loans that are lent with a higher interest rate than the prime rate. The prime rate in the U.S. is currently 5.25 percent and varies little among banks; it is based upon the rate at which banks lend to each other.
Subprime loans are risky due to the combination of high interest rates, poor credit histories on the part of the borrowers and the potentially adverse financial situations that are associated with subprime applicants. According to CFCU's CEO Stan Baron, "CFCU is not involved with subprime loans, or any of the myriad of collapsing derivatives. And our default ratio continues to be one of the lowest in the industry."