“We hold our mortgages, so when our members get in trouble we sit down and work with them,” says San Diego Metropolitan CEO Joe Schroeder. (photo/lambertphoto.com)

Credit unions were founded during the Depression of the 1930s because there were too few options for credit-hungry consumers. This winter, credit unions are returning to their “neighbor helping neighbor” roots, but in an ironic twist, they are being called upon to rescue consumers suffering from the excesses of credit in an environment suddenly indifferent to best-case scenarios.

“Members in need” is only the latest in a series of hurdles credit unions will need to surmount in 2008. Low interest rates produce flat yield curves while the reduction in housing values has removed the “home equity line of credit ATM” from most members’ budgets. As consumers try to rein in discretionary spending, the percentage of take-home they’re spending on essentials continues to rise in the form of adjustable rate mortgages, credit card payments and gasoline.

To keep up, consumers still want to borrow, but offer little in the way of deposits that credit unions need to make loans. With some members falling behind on payments, credit unions are considering making adjustments on loans, rather than see members’ fortunes spiral into defaults, foreclosures, or bankruptcy.

“We’ve done about 115 loan modifications representing about $2 million in loans so far this year,” says Marla Shepard, CEO of First Future Credit Union, with about $900 million in shares. “We’ll probably be doing more of it in 2008.”

The form of the loan modification depends on the borrower’s circumstances. “We’re doing lots of things, depending on the members’ situation,” Shepard says. “Sometimes we can put a missed payment at the back end of the loan, or they can pay interest only for three months. Sometimes they just need temporary help.” From those seeking help, Shepard says she’s seen mortgage payments as high as $6,000 per month.

Although San Diego unemployment held steady over 2007, Shepard is unsure how 2008 will unfold. Large layoffs are a concern, she says, pointing to a recent one at Abbott Pharmaceuticals in Temecula that resulted in the loss of about 700 jobs. “We serve that employee group, so now we have 700 members without a job,” she explains.

Other CU chief executives fret about how consumers’ high fixed costs — rising with their adjustable rate mortgages — have eroded consumer confidence and put the brakes on spending.

“The consumer’s monthly operating expenses are going up because of high monthly payments on these real estate products,” says Joe Schroeder, CEO of the San Diego Metropolitan Credit Union with about $300 million in shares. “That makes it more difficult to pay credit cards bills, car loans and everything else. On the deposit side, consumers can’t save because more of their monthly income goes to paying off debt, and we haven’t even talked about the cost of gasoline and other things.”

With some consumers hitting the wall, the credit union is helping out. “We have modified more than $5 million of loans this year,” Schroeder says. “We hold our mortgages, so when our members get in trouble we sit down and work with them. We think it’s not only good business, but fits in with what a credit union is all about, to reach out and help members who are owners of the CU. We need to be there in tough times.”

Schroeder says it doesn’t take long for consumers to get in over their heads. “Say you have a $3,000 mortgage payment and it’s 60 days delinquent and you have one coming due, that’s about 10 grand,” he explains. “So in modifying the loan, we might start all over, or put the missed payments on the end of it which helps consumers protect their credit scores.”

Gene Roberts, CEO of the Financial 21 Credit Union with about $140 million in shares, says he hasn’t had to do any real estate loan modifications caused by subprimes or adjustables. “So far, we’ve been pretty fortunate,” he adds. “There are a couple bouncing on and off our delinquency list.”

But, Roberts adds, his CU has always had an open door for members in trouble. “We’ve always made an effort to work with members if they can’t make the payments,” he says.

“Sometimes they just need temporary help,” says Marla Shepard of First Future’s work with credit-challenged members.

A mortgage rate freeze that would give some consumers as much as five years’ relief was welcomed by CEOs, with reservations. “It’s a good thing for the consumer, and will help the economy,” Shepard says.

Investors will ultimately bear the brunt of losses on frozen loans which have already been sold on Wall Street with the adjustable rate income figured in. “Wall Street would rather have the loan frozen than have it go bad,” Shepard says.

“It won’t be completely fair,” Schroeder says. “One could ask why are we taking care of people who have FICO scores of under 650 — a person could say ‘I worked hard all my life to manage my credit and I have an adjustable mortgage, and it’s going to adjust up and I’ll have to tighten my belt but people with bad FICO scores don’t have to do the same things.’”

Still, the bulk of each credit union’s membership roster is in good financial shape. For those folks, the lenders are stocking up on new offerings to kick off the year.

Shepard says First Future will be rolling out a new checking and savings plan to reel in deposits, though she declined to share the details prior to rollout. “I think loan demand will be about the same, maybe slightly better,” she adds. “We haven’t done much real estate lending, and there might be less competition, so we’re going to increase our real estate loan portfolio, because we think there might be an opportunity there.”

Financial 21’s Roberts says his CU is looking for a bump in business development with traditional member groups such as Sempra and SDG&E, and an auto loan refinance program. “We know there are a lot of consumers who bought cars from dealers and didn’t get the zero or 2.9 percent,” Roberts says. “So we’re looking for members or nonmembers who we can refinance and reduce their interest rate and monthly payment.”

Schroeder is hopeful the government’s mortgage rate freeze plan will help stabilize rattled financial markets. He says executives who run financial institutions will return to more realistic expectations of the market and due diligence. “You become a better executive, and you learn why you need a large equity and reserve ratio,” he says, “because stuff like this you can’t forecast.”