While the mortgage banking industry continues to experience noisy convulsions resonating from the 2008 financial crash, credit unions have quietly become one of the biggest beneficiaries of the residential mortgage bust.
Based on loan volume, the credit union share of the residential mortgage origination market jumped from 2.3% in 2005 to an estimated 6.1% in 2011, according to SMR Research Corp., based in Hackettstown, N.J. In actual dollar terms, credit union originations have gone from $60.4 billion in 2005 to $82.5 billion in 2011, an increase of 37% – which is no mean feat, as the total market has dropped 57% during this period. In terms of the number of loans, the credit union market share is even bigger, rising from 3.3% in 2005 to 7.8% in 2011, SMR says.
First-mortgage originations at credit unions totaled $26 billion in the first quarter of this year, the highest dollar volume of such mortgages originated in first-quarter history. That puts credit unions on a pace to originate more than $100 billion this year, the first time in their history. That's up from more than $90 billion in each of the past two years, according to Bob Dorsa, president of the American Credit Union Mortgage Association.
‘I've been in the credit union business for the past 40 years,’ says Dorsa. ‘The first 35 were pretty lackluster, but now it's starting to kick in.’
Quite clearly, credit unions have benefited from the withdrawal from the market of big commercial banks and mortgage brokers. At the same time, most credit unions emerged relatively unscathed from the credit crisis, so they have continued producing mortgages at a fairly consistent pace.
‘We're doing the same thing we did 30 years ago,’ explains Dorsa. ‘The banking system still has a lack of trust. Credit unions have maintained that trust, and now that resonates more. Consumers are becoming more financially literate and looking more closely at credit unions. It's taken us a decade to monetize our advantages. The evolution of the market has created more opportunities for credit unions.’
Michael Palladino, president and CEO of First New England FCU, based in East Hartford, Conn., believes that credit unions have also benefited from slower response times for mortgage refinances at banks.
‘When response times bog down at banks, more people come to us,’ he says.
If anything, credit unions could increase their share even more in the coming years. According to the National Credit Union Administration, credit unions had 1.4 billion potential members in 2010. Since there were 90.5 million credit union members at the end of 2010, the member-to-potential-membership rate was just 6.6%. Most Americans are eligible to join more than one credit union by the mere fact of living or working in a given city, county or state. But most people don't know that.
Moreover, seven out of eight existing members don't know that credit unions ‘provide a progressive, competitive mortgage product,’ Dorsa says.
Indeed, Palladino blames the ‘awareness factor’ as being one of the biggest challenges that credit unions face.
‘I'd be surprised if half of our members know they can get a mortgage from us,’ he says. ‘It's not from lack of advertising. It will take a long time to break down that barrier that says if you need a mortgage, you go to a bank or a broker.’
Credit unions enjoy a few advantages over competition among banks and thrifts. For starters, credit unions have nonprofit status and are exempt from federal income taxes. Many banks have complained over the years that nonprofit status gives credit unions an unfair advantage in offering higher rates on savings and lower rates on loans. Furthermore, credit unions are not subject to the Community Reinvestment Act – banks and thrifts are still required to be compliant with that controversial 1977 legislation.
But credit unions also face many of the problems that bedevil other mortgage lenders. One of the biggest challenges is dealing with buyback requests from Fannie Mae and Freddie Mac, which have plagued the big commercial banks during the past few years. This is surprising, since credit unions have generally been given high marks for careful underwriting, especially compared to banks and brokers.
According to Palladino – who is also CEO of the Mortgage Markets Credit Union Services Organization, which provides mortgage services to about 20 credit unions – things started to change about three years ago, when Fannie Mae and Freddie Mac were taken over by the federal government. Before then, ‘we had been one of their cleanest originators,’ he says, adding that ‘all that went out the window’ after the government-sponsored enterprises were placed in federal conservatorship and efforts were made to make originators repurchase loans for the slightest defect. Fortunately, he says, his group can show that the ‘vast majority’ of loans do not need to be put back.
Credit unions are also under the oversight of the Consumer Financial Protection Bureau (CFPB) and subject to the Dodd-Frank Act regulations. This has created new burdens for credit unions, and they are trying to address this with all due speed.
In a July 11 letter to Rep. Shelley Moore Capito, R-W.Va., chairwoman of the House Subcommittee on Financial Institutions and Consumer Credit, the Credit Union National Association (CUNA) sought congressional intervention to have the CFPB ‘exercise its authority as broadly as possible to protect credit unions from burdensome over-regulation, which ultimately affects consumers.’
‘Credit unions were not the cause of the financial and mortgage crisis that prompted Congress to enact legislative remedies to prevent such a calamity from happening again,’ says CUNA President and CEO Bill Cheney. ‘However, the rules to fix the mortgage market and protect consumers do not solely impact the bad actors – they affect those that acted responsibly as well, such as credit unions.’
Despite this regulatory burden, Dorsa believes that credit unions are ready to move to the next level of competition.
‘If we're going to compete against other lenders, we should be held to the same standards,’ Dorsa says. ‘Credit unions are not worried about new regulations, as long as we know what the rules are. We have always been extremely compliant, almost to a fault.’
George Yacik is a financial journalist based in Stratford, Conn.