As U.S. banks retreat, credit unions step up loans

NOVI, Michigan (Reuters) - Some U.S. consumers hit hard by the credit and foreclosure crisis are finding that down-sizing their lender is paying dividends.

Thanks to his local credit union, for example, former automotive engineer Jim Greenshields is buying back his old house from the big bank that forced him out of it three months ago -- for $200,000 less than he owed in the first place.

"My old bank wouldn't deal with me, even though I offered them a payment plan to get back on track with my mortgage," said Greenshields, 55. "The credit union looked at who I am and how I pay my bills, and decided I was worth the risk.

"That made all the difference," he added.

As the U.S. economy weakens and the country suffers its worst housing crisis since the Great Depression, big "money center" banks -- after years of reckless lending before the housing bubble burst -- have cut back drastically on loans.

But lending by credit unions is steadily rising. Credit unions are nonprofit cooperatives owned by their depositors, or "members." Credit unions are as a rule much smaller than commercial banks, with average assets of $93 million in the United States in 2007 according to the Credit Union National Association (CUNA), compared to $1.53 billion for banks.

According to CUNA, there are more than 8,000 credit unions in the country.

"There has been a lending freeze in most of the banks in Cleveland," said Rita Haynes, chief executive of the Faith Community United Credit Union in Cleveland, which has 6,500 members. "So more people are coming to us."

Jim Greenshields spent 20 years as an engineer working for Ford Motor Co (F.N) and was laid off three years ago, like many thousands of others in the struggling U.S. auto industry.

It took him until this summer to find a new job with the U.S. Department of Defense, at which point he had been in default on his mortgage since late 2007. Greenshields' proposed payment plan was rejected because he had been in default for so long, so he handed over the keys to his home in August.

"I was ready to pay back every penny I owed," he said, shaking his head. "It shows the poor business sense of the big banks when they won't even work with their customers."

Less than three months later, Greenshields said, Community Financial Credit Union, which has 40,000 members and deposits of around $420 million, had given him a car loan and a mortgage to buy his former home back from his old bank for $250,000 -- compared to the $450,000 he paid the first time round.

"Most banks now will not consider lending to someone just out of foreclosure," said Eric Esser, vice president of mortgage services at Community Financial.

But because in good times Greenshields paid his bills promptly, his wife has a solid job, and because he -- a veteran wounded in Vietnam -- works for the Department of Defense, Community Financial decided he was worth the risk.

"We look at each person individually to see if they can pay us back," Esser said.

CREDIT UNIONS FIND THEIR GROOVE

The U.S. housing crisis continues, awash in grim news for the major mortgage lenders and home owners alike.

On November 5, the U.S. Mortgage Bankers Association said its seasonally adjusted mortgage applications index fell in the week ending October 31 to its lowest level since December, 2000.

Analysts have said that with the jobless rate at a 14-year high, plus excess unsold homes pushing prices down, there is little sign of a housing turnaround on the horizon.

Tight credit conditions -- after a recent panic in world credit markets froze out even the largest banks from funds -- have also made banks more reluctant to issue loans.

But credit unions, which already often offered better rates and lower fees than commercial banks, are booming.

Community Financial chief executive Bill Lawton said auto loans have doubled this year and mortgages are up strongly.

"Credit unions are lending at a record pace this year," said Jay Johnson, executive vice president of credit union-focused research firm Callahan & Associates.

Johnson said first-mortgage lending by U.S. credit unions was up 40 percent in first half 2008, while the overall market was down 17 percent. Their delinquency rates also typically run at a quarter of that of major banks, he said.

"Credit unions have not historically been seen as the first place to go for a mortgage," said Cliff Rosenthal, chief executive of the National Federation of Community Development Credit Unions, which represents 225 credit unions around the country. "But that has begun to change."

Credit unions typically lend carefully from their own balance sheets and stay away from the secondary mortgage market, a problem that exacerbated the housing bubble for commercial banks.

But that does not mean credit unions are insulated from the problems of the imploding economy and rising job losses.

"Are our members struggling? Sure they are," said Hal Coxon, vice president of Consumers Credit Union, which is owned and controlled by its 50,000 members in Illinois and Wisconsin. "Employers are cutting back on overtime, and food and gas prices are still high."

But credit unions say the individual approach they use in lending also helps when their members end up in trouble.

"If one of our members has a problem paying their mortgage, we try to work something out with them," Faith Community's Haynes said. "They are members of our community, so we do whatever we can to keep them in their homes."

(Editing by Peter Bohan and Tim Dobbyn)