Build a Solid Mortgage Foundation
Tumult in the mortgage market creates opportunities for stable CUs.
Who really knows what to believe regarding the size of the mortgage market in 2011? One agency says it will look the same as in 2010; another predicts a 30% decline in mortgage originations.
Despite tumult in the mortgage market, mortgage services vendors see opportunities for credit unions—ones the big banks and mortgage brokers let slip away after getting stung by the housing market’s recent setbacks.
“The mortgage lending opportunity has opened greatly for credit unions,” says Barry Malone, vice president of sales at FICS. “In many areas of the country, credit unions are dominating the mortgage lending space. The origination volume is so high they can barely handle it.”
Malone says a great credit union strength is that they can use other staff, such as call center and consumer loan employees, to pitch in and handle high mortgage demand until it slackens.
Mortgage bankers tend to hire and then lay off staff depending on mortgage demand and volume.
Still, he says, what keeps many credit unions from entering the mortgage market is lack of trained staff and the fear of possible consequences.
Linda Clampitt, senior vice president at CU Members Mortgage, agrees that lack of staff expertise can hamper credit unions’ entry into the market. “There was an extraordinary volume of mortgage originations coming to credit unions in the late spring and early summer of 2009. But that market share has since fallen.
“I’m not sure why,” she continues, “although I think one factor is that credit unions have been slow to hire and train staff that can accommodate the volume. So rather than waiting for a loan decision from a credit union, some home buyers go elsewhere.”
If credit unions have the right staff and technology, says Malone, they can enter a market where the competition has decreased significantly over the past three years. “They can do well provided they maintain their traditionally strict lending criteria and use technology to stay in 100% compliance.”
But, he adds, doing well may involve going beyond just holding portfolio loans or selling them off, servicing released. “Many credit unions act like brokers, originating mortgages and then selling them on the secondary market. But credit unions’ niche is service. Many don’t like keeping 30-year loans on the books so they sell them off, servicing released.
“But you can’t grow doing that,” Malone adds. “It’s important to have other avenues to keep your 30-year loans. Selling loans to Fannie Mae, Freddie Mac, or a Federal Home Loan Bank lets a credit union originate an unlimited number of loans, retain the servicing their members desire, and earn servicing fee income.”
Malone cites a credit union in Ohio that has amassed a huge secondary market mortgage portfolio. “Servicing these loans generates about $1.3 million per year in service fees, and the program requires only 1.5 employees to administer.”
While keeping mortgages in portfolio may generate income, Clampitt says the practice isn’t without risks. “There still are lot of defaults and high unemployment,” and keeping low-rate loans in-house may not be a good long-range strategy.
Malone agrees that declining home prices can create problems for existing portfolio loans. “But if a credit union mitigated its risk with a mix of portfolioed and secondary market loans, the risk is significantly smaller.”
Credit unions also have high-quality mortgages, by and large. “Credit unions didn’t get caught up in subprime lending,” he says. “A few years ago, if you breathed, you got a loan. Now there are more stringent approval requirements.”
Malone says the practice of selling loans on the secondary market saved many credit unions a lot of distress later on when borrowers defaulted or, due to falling values, owed more on their houses than they were worth.
Credit Union National Association member credit unions can receive significant cost benefits from the two primary secondary mortgage market providers, Fannie Mae and Freddie Mac.
Next: A compliance burden
A compliance burden
The mechanics of mortgage originations aren’t what concern credit unions most, says Tom Pisapia, executive vice president at QR Lending Inc. Their greatest worry is keeping up with compliance mandates.
“We’ve seen six new regulations in 2009,” he says, “and an additional four in 2010, and there have been continuous changes in [secondary market] and private investor underwriting and appraisal requirements. This has been one of the most complex, far-reaching periods of compliance change in the history of mortgage lending.
“The penalties for noncompliance,” Pisapia continues, “can range from having unsalable loans, consumer refunds, and reputational risk to audit and examination issues.”
To overcome compliance challenges, credit unions can hire people in-house who have the right mix of expertise, he says, or they can team up with a partner that can alleviate the burden.
Technology is also key in the implementation and monitoring of compliance changes, Pisapia adds. “It’s impossible to manually perform all of the steps that are necessary to remain in compliance throughout the mortgage process, from origination to closing to servicing.”
Still, mortgage service providers have developed systems for quickly integrating credit unions into the market. “We start by analyzing a client,” says Clampitt. “How much risk tolerance does it have? How much staffing does it have and at what level of expertise? We don’t try to fit credit unions into our peg; we meet their needs.”
CU Members Mortgage offers a soup-to-nuts approach to clients, she adds. “We have a B2B site that includes start-to-finish services, including regulatory compliance, auto-decisioning apparatus, fraud guard, and more. We can help clients originate loans or increase staff expertise.
“Education has become a huge component of what we do,” Clampitt continues. “Credit unions are clamoring for information, especially regarding the regulatory environment. We offer many webinars and online sessions.”
Pisapia says most of QR Lending’s credit union clients prefer to use its wholesale channel, where the company supplies the loan technology, vendor integration, credit scoring, and underwriting.
“We’ll work with credit unions in any capacity,” he says. “Some credit unions come to us with no expertise but recognize that providing mortgages is an essential part of serving members.
“Others have a mortgage operation in place but are overburdened by compliance and investor changes. Either way, we’ll tailor a set of services that fit their needs.”
The FICS suite of mortgage origination and servicing software includes rules-driven apps that allow credit unions to scrutinize a loan’s viability to make sure it qualifies to be held in-house or sold on the secondary market, and to make sure it’s in compliance.
Malone is optimistic about credit unions’ mortgage prospects. “Collectively,” he says, “given the opportunity, I think credit unions can do extremely well in the mortgage arena and continue to grow their share of the mortgage market.”