REQUIRED READING: In his capacity as president of the American Credit Union Mortgage Association (ACUMA), Bob Dorsa is eager to see credit unions move forward in the residential lending sector. However, he admits that his industry has been engaged in a case of one-step-forward/two-steps-back.
‘Last year, we nearly had six percent market share,’ he says. ‘But in the first quarter of this year, we were back to 3.5 percent. We are just still unable to get any kind of traction.’
However, Dorsa believes that residential lending is the future avenue for credit union growth – if not by design, by default.
‘Where else can credit unions go but to home lending?’ he asks. ‘Credit cards are a tough area, and auto lending has its issues.’
Steve Rick, senior economist with the Credit Union National Association (CUNA), notes that the industry is making progress, albeit slowly.
‘We used to be two percent of market share,’ he observes. ‘We've gained ground due to banks' pulling back significantly.’
Rick adds that credit unions are trying to make up for lost time.
‘Credit unions traditionally just did consumer loans,’ he continues. ‘But we are moving further and further. As of December 2009, 59 percent of credit unions offered first mortgages. In the first quarter of 2010, the only loan category growing at credit unions was first mortgages. All other loan categories were shrinking.’
For Scott Stern, CEO of the St. Louis-based Lenders One Mortgage Cooperative and chairman of Community Mortgage Lenders of America, credit union involvement in residential lending is a logical business choice, considering the industry's reputation for strong customer service.
‘Yes, it is a good space for them to be in, especially when a dedication to constituency is in their DNA,’ he says. ‘They're a perfect entity to be involved in mortgage banking. The important rules for mortgage lending going forward are know your customers, know your customers and know your customers.’
‘Credit unions pride themselves on member service,’ says Doyle L. Province, vice president of mortgage lending at Weokie Credit Union in Oklahoma City and president of the Oklahoma Mortgage Bankers Association. ‘The smaller credit unions do their own servicing, which is part of their way of delivering more personal service to members. When someone calls up, they talk to a live person and do not get a recording.’
Dr. Tun A. Wai, director of research and chief economist for the National Association of Federal Credit Unions (NAFCU), comments that the retention of servicing rights is a crucial element in encouraging the growth of the industry's presence in mortgage banking.
‘That is how you maintain a relationship with members,’ he says. ‘It is very important to credit unions.’
For credit unions that double as community development financial institutions (CDFIs), residential lending is also a crucial product. David Beck, director of policy and media at Self-Help Credit Union in Durham, N.C., notes that the typical CDFI customer is having a rougher time in today's economic climate.
‘The core part of our mission is providing homeownership opportunities for those having difficulty getting mortgages,’ he says. ‘Our borrowers don't have the financial cushion to weather hard times.’
Yet Beck adds that mortgage origination is a crucial step in helping these customers improve their economic health. ‘Homeownership is one of the best ways for low-income families to move up the economic ladder,’ he says.
Cliff Rosenthal, president and CEO of the National Federation of Community Development Credit Unions, adds that credit unions that serve as CDFIs have experienced more inquiries since the economic meltdown began.
‘At the community development credit unions, deposits are up and lending is up,’ he says. ‘Credit union origination of mortgages has been up, while for banks, it is down in many markets.’
The GSE question
Also on the rise is secondary-market outreach. ‘Last year, $51 billion in mortgages were sold by credit unions in the secondary market,’ says NAFCU's Wai. ‘A person at one of the government-sponsored enterprises (GSEs) told me that credit unions were among the only ones selling something!’
Yet Wai points out that the uncertainty over GSE reform might give the industry some jitters.
‘The status of the GSE is very important,’ he adds. ‘We rely heavily on loans sold to the GSEs. Having the ability to take loans off the books and put them into the secondary market is important for running our institutions.’
CUNA's Rick concurs. ‘Credit unions sell over 50% of their mortgages to Fannie and Freddie,’ he says.
Yet some credit unions are managing to bypass Fannie Mae and Freddie Mac completely in their secondary marketing.
‘We don't do a direct sale,’ says Beck, noting that his institution sells its loans to a sister organization, the Self-Help Ventures Fund. This nonprofit loan fund buys loans from CDFIs and then sells them to Fannie Mae. The Self-Help Ventures Fund also helps credit unions and banks that serve as CDFIs through a pair of programs: a flow program for conforming loans without mortgage insurance, and a portfolio program for nonconforming loans from lenders that meet the program's underwriting guidelines.
But not every credit union is active in secondary marketing.
‘We sell to different investors, and we run 50 percent to 60 percent in the portfolio,’ says Shirley Branson, senior vice president of Hope Community Credit Union, based in Biloxi, Miss. ‘Our average loan size is about $100,000, and the average household income for our market is below $40,000.’
According to Alan Branson, Hope Community Credit Union's chief operating officer, the credit union maintains a high quality of origination by manually underwriting nearly all of its files.
‘Performance has been really good,’ he says. ‘The portfolio has never had a loss of over one percent.’
Looking forward
So what will it take to push credit unions further along in the sector? For Province, online technology has helped his credit union reach borrowers on a 24/7 basis.
‘We've had an online origination system for six years,’ he says. ‘It is like having an extra loan officer. We've seen applications coming in at all times. It is not uncommon to see one coming in at two in the morning.’
ACUMA's Dorsa predicts that credit unions will expand their residential lending if they strengthen their relations with Realtors.
‘Many Realtors are credit union members, but they perceive credit unions as being a place to go for a cheap car loan,’ he says. ‘When I ask Realtors if they would bring a client to a credit union, I get the deer-in-the-headlights look.’
Dorsa also believes that credit unions should consider offering reverse mortgages.
‘That has been one of my passions for the past decade,’ he explains. ‘Credit unions have aging borrowers and what's left of the World War II generation. Credit unions have the most assets of that age group.’
For CUNA's Rick, the industry will move forward by being competitive in its pricing – a strategy that is close to home for him.
‘Origination fees and points are typically a lot lower at credit unions,’ he says. ‘I am buying a house and spending $300 to $400 on origination fees with no points (with a credit union mortgage). Other places charge one to two points and $1,000 in origination fees.’
Rick adds that credit unions will continue to make inroads in this area. ‘With banks pulling back and the tightening of underwriting standards, credit unions are stepping into the void,’ he says.
