Conference 7.286::dcu

Here's a story from the February 1992 Journal of Light Construction, p.8:  


			Credit Unions Stronger than Banks

  Credit Unions are healthier than commercial banks, accourding to a recent
  study by Veribanc, of Wakefield mass.  The firm's analysus of financial
  data from more than 12,000 credit unions showed that the credit union
  industry has actually improved during the recession, even while the
  nation's banks have falled deeper into crisis.

  The data showed that credit unions have better equity-to-asset ratios, a
  smaller percentage of deposits that are not federally insured, and fewer
  problem real estate loans.  Only 0.4% of credit union real estate
  mortgages have been foreclosed, while banks have coreclosed upon 2.9% of
  their holdings.



It's interesting to note that the foreclosure rate of DCU loans to members
beats Veribanc's average (0.3%).  But in other repects (including equity to
asset ration and, I believe, total foreclosures), the DCU seems to match more
closely to their data on banks.

This story is from the Worcester Telegram & Gazette, March 2, page C1:


		N.H. Banks Succumbed in Frenzy

  Northfield Vt. (AP) -- By many measures, New Hapmshire's banks have
  been at the center of the nation's banking crisis.  Sixteen banks have
  collapsed since 1990 and the state's newspapers carry dozens of
  foreclosure aution notices.

  But to comprehend the troubled nature of New Hampshire's banks, cross
  the Connecticut River into Vermont.  In the past four decades, only
  one bank has collapsed here.

  The contrast speaks to a broader problem in the U.S. banking industry,
  how many small banks strayed from their community lending roots in the
  1980s into unfamiliar and riskier ventures to reap higher returns for
  shareholders.

  ...


The article goes on to talk about N.H. banks financing condo projects in
Massachusetts, etc., and talks about a "mutual bank" in Vermont, where
the depositors elect the Board of Directors, and which seeks "the highest
return on investments" by lending to homeowners and businesses in its
own local community.  Heavens, that bank sounds like what I thought a 
credit union was supposed to be!  It goes on to ascribe much of the
problem in New Hampshire to the conversion of savings banks away from
mutual ownership.

I guess part of the question of "is the DCU acting like a bank or a
credit union" should be "like a bank in which state?"

Re: .2

. . . the "Mutual Bank" is now an old idea quite similar to the idea of
a credit union - a bank owned by the depositors, rather than outside
shareholders.  I THINK the idea dates back to late in the last century
(anybody know more on the history of banking?)

				- - Steve

The "Mutual" designation seems to be reserved for "Account holders are owners"
institutions.  That is why a Mutual Insurance Company might usually reduce
premiums after a particularly good year wherease someone like Prudential (to pick
a name) might raise the dividend for shareholders (common stock) but not drop
premiums for the their insurance policies.

	And I think that a lot of the interstate banking laws are (were)
	designed to try to keep local money from going out of state. 
	And of course, the original intent of "Saving and Loan" institutions
	was to allow small savers a place to pool their money for local
	reinvestment.

					Tom_K

In the Boston Globe, September 30, 1991, is an article detailing
how the director of one bank in Boston received a mortgage, in spirit,
that was not available to the public.

This director formed a trust, K&B Trust Co. with his wife as the
trustee.  The bank in turn made the loan to this trust.  Since the
bank was NOT making the loan directly to a director, it was not
in violation of any Federal/State law.  The mortgage was interest only.

I am in no way implying any wrong doing on part of the DCU's 
Board of Directors. I am only pointing out how others in the banking 
industry are getting around the law.

Gim

Wall Street Journal, 2/12/92 "Lenders Gain", Front page.

This article describes the increasing net interest margins for banks.

It points out that cost for maintaining a checking account is about
$2/month per customer at one major bank.

Wall Street Journal, March 5, 1992, page A2

Delinquent Mortgage Rate fell to 4.78% in the 4th period.  

Though this is not an apples to apples comparison,  the
total delinquency rate for DCU Members is 

0.8% in terms of number of loans and
0.7% in terms of % of dollars.

The just reinforces that statements that DCU members are good credit
risks.


================================================================================
Note 272.37             DCU Statement of Condition Watch                37 of 43
WLDBIL::KILGORE "DCU Elections -- Vote for a change..."  65 lines  26-FEB-1992 08:42
              -< February 1992 SOC -- period ending 31-Jan-1992 >-
--------------------------------------------------------------------------------

CLASSIFICATION OF LOANS OUTSTANDING
Degree of delinquency           #            $
Current                      36,584   218,867,611
2 - 6 months                    228     1,178,500
6 - 12 months                    15       172,379
12 months and over
                             ------  ------------
                             36,872   220,218,490

    re .6
    
    > The mortgage was interest only.
    
    Did you mean the mortgage was principal only?  If not, then what is
    an interest only mortgage?
    
    Don

.9> Did you mean the mortgage was principal only?  If not, then what is
.9> an interest only mortgage?
    
Second question answered (I can see the 1st answer as 'no', but not for me to
decide):

Your mortgage payment (excluding escrow) is made up of two parts, principle and
interest.  An interest only mortgage is one where the principle portion of the
payment is waived, reducing the total payment, hence the advantage.  A loan of
this type has an (obviously) infinite payback period, and (obviously) keeps the
tax deduction for mortgage interest at its highest level as long as it remains
an 'interest only' mortgage.  If you have made payments on your mortgage for two
years or more, you will notice that your interest deduction you can claim this
year is less than what it was last year.  This is because of the principle por-
tion of the payment reducing the balance that interest is calculated.

    re .10
    
    Thanks for the answer.
    
    So, let me get this straight.  The only real advantage to a loan like
    this would be for the tax write off since I'd be able to itemize all
    of this interest, right?
    
    I would also assume that if I wanted to take out a loan like this, that
    once I decided to pay it off I'd have to pay off the WHOLE principal
    amount plus the interest due (which should equal what I'd been paying
    right along, provided I was on time).
    
    I guess it's hard for me to swallow that there's a benefit here.
    
    Don

	It seems to me that in a normal mortgage, the lender assumes a fair 
	amount of risk during the early years of the loan, since the
	lender has much more equity in the collateral than does the borrower.
	So if the borrower can't pay, the lender stands to lose more than
	the borrower, especially if the appreciation of the property does
	not keep up with inflation (or worse, if the property depreciates
	[sound familiar]). But as the loan goes on, the lender has less 
	and less risk, as the borrower gradually pays off the loan. If the
	borrower suddenly can't pay after 3/4 of the term of the loan has
	passed, the lender doesn't have to take as bad a hit, after all,
	a fair part of the principal has been repaid.

	But in an "interest only" mortgage, the lender is on the line with
	the whole risk for the entire duration of the loan. Also, since 
	the borrower has little equity in the collateral, there is less
	incentive to keep the property up. Now if the interest rate takes 
	into account that risk, that's one thing, if not, that's another.

					Tom_K
	

Re: .12

Tom, what you discuss is basically true - early in the life of a
mortgage, the lender is risking far more than the borrower, and the
lender's exposure decreases as the principle is paid back.

But the lender doesn't look at it that way.  You can be very sure
that lenders consider all the risks when they loan you money.  The
sum of all those risks is weighed against what other lenders are
charging to determine the interest rate.

From the lender's perspective, they are loaning you p dollars for
n months, at an interest rate of i% - and that's about it.  Now, to
make sure they get their money back, they are allowed to place a
lien or reposess the property - but what they (normally) expect to
do with it is sell it to get back as much of their money as possible.

And if you think a borrower doesn't have to keep the property up,
you'd better check your mortgage agreement - a standard mortgage
clause allows the lender "reasonable inspections" for the life of the
loan.  If you let the property deteriorate, the lender can insist
that you repay the *whole*balance* of the loan immediately, or can
forclose on the property!

				- - Steve

	My understanding of Interest-only loans are that they are of short-term
  duration only.  Examples I can think of are:

	1) Bridge Loans.  You get one of these when you buy another house and
  you haven't yet sold your previous house.  This loans tides you over and
  allows you to buy the new house while still in the process of selling the old.

	2) Commercial Loans.  Most commercial loans are short term and the
  full amount needs to be paid in full at the end of the term of the loan, for
  example at the end of 5 years.

	3) Builder Loans.  The bank loans the builder money to build houses,
  getting only interest.  As the houses are sold the loan is paid off.

  There are other possibilities, but I think they are less usual.  Note that
  you can almost never get one of these types of loans for a home and certainly
  not for the usual length of a home mortgage - 15 to 30 years.

			Danny

Re:  480.12

  >But in an "interest only" mortgage, the lender is on the line with
  >the whole risk for the entire duration of the loan. 

This is indeed an extra risk.

Re:  480.13

  >You can be very sure
  >that lenders consider all the risks when they loan you money.  The
  >sum of all those risks is weighed against what other lenders are
  >charging to determine the interest rate.

Exactly!  A loan that will still have
an 80% or 90% Loan to Equity ratio (assuming equity doesn't change)
10 years from now obviously is riskier than one which can be expected
to have a 60% Loan to Equity ratio 10 years from now.  Simply because
the decrease in risk factor is not immediate does not mean that
it is not a relevant factor.  This is also the reason why a 15 year
mortgage interest rate is often a little less than a 30 year mortgage
interest rate; there is less risk being assumed by the lender.

Collis

    For the most part, "interest-only" mortgages are a non-issue.  The
    difference in monthly payments between a 30-year mortgage, a 100-year
    mortgage, and an "interest-only" (perpetual?) mortgage is trivial. 
    Here's how things break down for a $100,000 mortgage at 9%.
    
    		 30 years =  360 payments of $804.62 each.
    		100 years = 1200 payments of $750.10 each.
    		Interest only on $100,000 is $750.00 per month.
                                                                  
    Lenders adjust the down payment requirement to limit their exposure
    during uncertain times.  Over the long haul, real estate values tend
    upward.  Lenders try to set the down payment to assure that short-term
    downturns won't result in the principal exceeding the market value. 
    That way, it's the borrower who assumes the bulk of the risks.

    
    Sorry, but I think you're all missing the point.  To me the point is
    that nobody should be getting loan terms that aren't also available to
    the general membership, or customers as the case may be.