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A credit union that serves more than 100,000 members in Colorado and Wyoming is offering zero-down mortgages backed in part by members who will provide some of the funding in exchange for earning higher yields on their deposits.
The size of Blue Federal Credit Union’s creative no-money-down mortgage program will depend on participation by members who buy high-yield share certificates that will be pooled and pledged as collateral in place of a down payment.
For those pledging money, the process is similar to putting money into a five-year certificate of deposit (CD). Although Blue members pledging money won’t be able to withdraw their principal for five years, they’ll earn higher yields than is typically possible on federally insured deposits — the prime rate minus 1.25 percent.
With the prime rate currently at 6.25 percent, members who pledge deposits stand to earn 5 percent interest. That figure could go higher, since the interest rate adjusts monthly, and the Federal Reserve is expected to continue raising rates this year to fight inflation.
To make the process “impartial and fair,” Blue says it has partnered with real estate agents to identify creditworthy borrowers, who will need a minimum credit score of 730 and be subject to Blue’s high underwriting standards.
“We know that this program will help our members compete with cash offers that can often go above the asking price,” Blue’s Jason Buchanan said in a statement.
Another plus for homebuyers is that they won’t be required to purchase private mortgage insurance (PMI), which is typically required by Fannie Mae and Freddie Mac when they’re putting down less than 20 percent.
Jason Buchanan
“As good as this product is for members seeking to purchase a home, it is equally attractive for members looking to earn competitive interest on their deposits,” said Buchanan, Blue’s chief credit and risk officer. “When you pledge your deposits into this program, not only are you helping someone in our community purchase a home, you’ll also earn an above-market interest rate that moves with the prime rate – a rare opportunity in today’s economy.”
The Cheyenne-based credit union says the no-money-down mortgage program “ties directly into the spirit of the foundation of the credit union movement with members helping members.”
Blue, which serves more than 114,000 members through 19 locations in Colorado and Wyoming, provides mortgages through a credit union service organization (CUSO), Centennial Lending LLC, which itself serves more than 100 credit unions.
“Even in a challenging and ever-changing real estate market, we are doing our best to help members discover pathways to realize the possibility of homeownership,” Buchanan said.
On its website, Blue notes that for those pledging deposits for the no-money-down mortgage program, there are important differences from investing money in a CD (or a “term share,” as such programs are known at credit unions).
For one, while deposits are federally insured, pledgers are subject “to a slightly increased risk” if borrowers default on their mortgages. Blue says it’s reducing the risk for members by pledging to cover 80 percent of any loss on a mortgage, with the remaining 20 percent divided up proportionately among those pledging money.
And because the money that’s pledged will fund a pool of mortgages, “there will not be an option to remove the funds before the maturity of the full five-year term. However, pledgers may withdraw the interest earned throughout the five-year term.”
In a prospectus for borrowers and members pledging deposits, Blue provides as a hypothetical example the potential losses if a house with a $400,000 mortgage ends up in foreclosure. If the house is sold for $380,000 for a net loss of $20,000, Blue would cover $16,000 of the loss, and the remaining $4,000 would be covered by Blue members. Assuming Blue members had pledged a total of $800,000 to the program, each member who’d pledged $10,000 would be out $50.
In the prospectus, Blue says it’s launching “a limited pilot to evaluate the willingness of members to buy share certificates which are pledged as collateral for pooled mortgages requiring no down payment. With a limited number of mortgage candidates in the pilot, we expect to learn about the level of demand both for the mortgage product and for the pledged share certificate. Additionally, we will evaluate the administrative requirements necessary to manage the portfolio.”
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