Behind the headlines of the credit crisis that has engulfed the U.S. stock market, a growing number of Americans are defaulting on their mortgage loans. The rest of us are wondering how we can avoid becoming part of the statistics.
For those pondering a new mortgage, a home-equity loan, a car loan or some other form of borrowing at an uncertain time like this, federal credit unions may offer a credible alternative.
Consider this: While mortgage default rates are spiking at banks and other lenders like mortgage giant
, the default rates at credit unions on almost $200 billion in home loans outstanding in the U.S. is close to zero, according to the Credit Union National Association.
Credit unions are not-for-profit cooperative financial institutions that pay no corporate income tax. Their customers are their owners, and their capital base consists of deposits from their members, along with their retained earnings.
Many people assume that they only serve government employees, factory workers or underprivileged groups like immigrant communities and minorities. In fact, most Americans are eligible to join a credit union, and given the tumultuous times in the mortgage market, it could be a solid option.
Unlike other lenders that have now run into trouble with widespread defaults, credit unions hold the majority of the loans they make in their portfolio, rather than sell them off into the secondary market. This structure gives them a greater incentive to attract keep their members satisfied -- and solvent -- in the long term.
That means credit unions were largely absent from the predatory lending practices that proliferated during the housing boom as mortgage brokers with no stake in the outcome of their loans preyed on easy-credit conditions and unsophisticated borrowers.
Credit unions instead tend to make loans on terms that consumers can meet over time, and generally don't offer so-called exotic mortgages that have huge resets in store for borrowers who won't be able to make the payments.
Credit unions have historically provided credit access to people who would otherwise never be able to participate in a banking system, particularly those of modest means. In recent years, however, they've broadened their reach to all segments of society.
Aside from mortgage loans, the unions offer credit cards and many other banking services for which most consumers usually turn to the likes of
Bank of America
. Credit unions' tax-free status allows them to generally offer higher rates of return on deposits with lower fees and lower rates on loans of all kinds.
For this reason, the banking industry is targeting the tax-free status of large credit unions, claiming they are operating like banks while they enjoy an unfair competitive advantage.
Credit unions counter that their cooperative structure makes them inherently different than a corporate bank, and with roughly 90 million members in the U.S., they have less than 10% of the market share for deposits -- a statistic that has been flat for the last decade.
"If we were really such a competitive threat to the banking industry, wouldn't we have picked up more market share than that?" asks Bill Hampel, chief economist with the Credit Union National Association.
Regardless of which side has the edge in the debate, the political support for the tax-free status of credit unions isn't going away, and that presents an opportunity for consumers.
Directors at credit unions are volunteers elected by members. Executives are usually well-paid financial professionals, but they don't get showered with stock options like the leaders of corporate America. They don't have Madison Avenue marketing budgets, so you won't see advertisements for credit unions, and when credit unions do well, they don't pay dividends to shareholders. They plow their extra earnings into making their members happy.
Consumer Survey from 2005 showed that while the percentage of "very satisfied" bank customers was the highest on record in 14 years, credit unions achieved an even higher score in that category for the second year in a row. It said 71% of respondents said they were "very satisfied" with their credit union, compared with 58% for mainstream banks.
"People at credit unions tend to treat customers like the end result of what they are there for, rather than an intermediate step on the way to being able to get profits for stockholders," says Hampel.
The personal attention also can help with the process of securing a loan.
"In my experience, the loan application process has been much simpler and more straightforward with a credit union than it ever has been with a bank," says Tim Wesling, president of financial advisory firm Wesling Financial. "The people that work at credit unions tend to be the same people year after year. You can take out one loan from a loan officer and five years later you get another loan from the same guy, and he remembers you. That's a rare thing these days."
Consumers can only join a credit union that serves a particular community to which they belong, but many have recently loosened their membership criteria. To generate a list of credit unions that you're eligible to join, fill out the credit union match-up form offered by the
Credit Union National Association. You can also find your local credit unions on the association's Web site
Before leaving your bank entirely for a credit union, review its offerings carefully. While they do offer good rates, their products and services are sometimes limited, particularly when it comes to checking account services like online bill payment and ATM access.