Once a small sliver of the market, credit unions are expanding their role in mortgage origination, filling the demand for more mortgage credit and enabling more first-time homebuyers to purchase a home.
By Robert Stowe England
Over the last seven years, the competitive landscape has shifted and created a window of opportunity for America’s 6,795 credit unions to take a bigger role in mortgage originations. Credit unions, which historically originated only about 2 percent of mortgages, have for several years now been taking advantage of new opportunities and expanding their role as mortgage originators.
In the second quarter of 2014, the $30 billion in originations by credit unions crossed a watershed when its share of originations rose to 10.17 percent of overall origination volume, according to Inside Mortgage Finance.
These gains are “eye-popping,” according to Mike Schenk, chief credit economist at the Credit Union National Association (CUNA), Madison, Wisconsin, the national trade association for state and federally chartered credit unions in the United States.
It marks the first time credit unions have taken a 10 percent share of the mortgage market.
This gives the nonprofit credit union sector a real foothold in the mortgage industry, and the industry is looking to hold on to that share or possibly even expand it.
A little history
It’s been a slow and steady rise. The credit union’s share of mortgage production, which edged up to 3 percent in the period from 2003 to 2005, rose to 4 percent in 2007, then jumped to 6.75 percent in 2008--where it remained on a plateau between 6 percent and 7 percent until 2013, when it rose to 7.47 percent, according to Inside Mortgage Finance.
The most recent gains in market share for credit unions have come as the overall mortgage industry’s origination volume has declined from $2.1 trillion in 2012 to $1.89 trillion in 2013, with forecasts for only $1.1 trillion in 2014.
Credit unions, which historically were more likely to refinance mortgages, are gaining market share mostly because they are making inroads into home purchase originations. They are gaining ground with innovative new products that are attracting more borrowers, especially the critical first-time homebuyer, a segment of market demand that has remained weak.
Credit unions are gaining ground also because they’ve greatly expanded their membership.
“Both in percentage terms and in absolute terms, the number of people who have been joining credit unions over the course of the last several years has been at 15- to 20-year highs. We just surpassed 100 million members nationwide--that’s roughly a third of the U.S. population,” says Schenk.
By contrast, in 2007 membership was at 89 million. Credit unions have $1.08 trillion in assets, $930 billion in savings, $659 billion in loans and $113 billion in reserves, according to CUNA.
Consumers in the past were more likely to turn to credit unions for an auto loan, a market where credit unions hold a 15 percent share. Today, however, consumers are starting to turn to credit unions for mortgages.
“Credit unions worked hard to get the word out that they do mortgage loans,” says Jay Johnson, executive vice president at Callahan & Associates Inc., a Washington, D.C., consulting firm that covers the credit union industry.
Competitive playing field
The gains by credit unions have come in the wake of a shift in the playing field that has removed a lot of disadvantages that credit unions have traditionally faced in the mortgage market, according to Guy Cecala, president of Inside Mortgage Finance.
“Historically--and that’s going back as recently as six or seven years--credit unions have not been major players in the mortgage markets, and that’s been for a variety of reasons,” says Cecala.
For one thing, the small size of many credit unions made it relatively difficult to originate mortgages and hold mortgages in their portfolios because “mortgages eat up so much more dollar amount of your deposits than something like a car loan,” Cecala explains. This is one reason that historically credit unions preferred to be active in the car loan business and less active in the mortgage business.
It was also a challenge to originate mortgages and sell them into the secondary market. “The selling of loans in the secondary market demands a certain amount of resources, if not expertise, and many credit unions, which are volunteer organizations, lack that capacity,” says Cecala. “If you want to deal with Fannie Mae or Freddie Mac or even FHA [the Federal Housing Administration] and Ginnie Mae, you have to get licenses, be registered and a whole lot of other things, which made it problematic for credit unions.”
The credit crisis in 2008, however, was a “watershed for smaller lenders, including credit unions, for getting into the market,” says Cecala.
With the 2008 crisis, the secondary market for non-agency loans died overnight and jumbo loans became and remain largely a portfolio loan product. Larger financial institutions were unsure how much mortgage lending they wanted to do in portfolio loans for the non-agency market. This provided an opening for credit unions and smaller banks to enter, and some of them did.
“So, suddenly small community banks and credit unions found people knocking on their door asking, ‘Would you make a jumbo mortgage?,’” Cecala explains.
In the aftermath of the financial crisis, depository institutions, including credit unions, received a surge of money into deposit accounts. Savings at credit unions, for example, grew from $653 billion in 2008 to $804 billion by 2010 and to $930 billion by 2013.
“As a result, credit unions were looking for new ways to make loans, and they had enough deposit base to start making mortgages--even ones they hold on their books,” says Cecala.
Credit unions also benefited from changes that came after Fannie Mae and Freddie Mac were placed into conservatorship in September 2008 under the oversight of the Federal Housing Finance Agency (FHFA). Before then, “A Countrywide [Financial Corporation], for example, could have a 10-basis-point guarantee fee while an Acme Mortgage or a small lender who dealt directly with Fannie and Freddie would be charged 25 or 30 basis points. As a result, they couldn’t be that competitive when it came to lending,” says Cecala.
In August 2012, the FHFA announced in a press release that it had directed Fannie and Freddie to raise guarantee fees and that the increase in fees “will make more uniform the g-fees that Fannie Mae and Freddie Mac charges lenders who deliver large volumes of loans, as compared to those deliver smaller volumes.” As Fannie and Freddie have reduced the differential in guarantee fees under direction from the FHFA since 2012, it has tended to level the playing field, according to Cecala. “Acme Credit Union now pays the same guarantee fees as Wells Fargo. So, in point of fact, there is no reason a small credit union cannot offer the same rate and terms as Wells Fargo,” he says.
Theoretically the large lenders, such as Wells Fargo Home Mortgage or Quicken Loans, can cut into profit margin when setting rates and terms, according to Cecala, but “so far we’ve seen little evidence of that.”
Lenders want to remain profitable, so they are not originating at a loss and there is not a lot of competition in terms of mortgage pricing, he adds. “As a result, once again, it puts credit unions in a good position because they’re effectively cooperatives and nonprofits, and they don’t have the same investor demands on returns that a Wells Fargo, a JPMorgan Chase or anyone else does. So, as a practical matter now, you can probably get as good or better deal at a credit union than you can with a large national lender,” says Cecala.
All these changing competitive fundamentals in the markets have allowed credit unions to incrementally increase market share, he concludes.
Credit unions are also benefiting from an increasing awareness of credit unions and what they can offer, according to CUNA’s Schenk.
“It’s clear consumers are recognizing the credit union difference, what credit unions are, and recognizing the fact that they can more than likely be a member of a credit union,” he says.
“And when they understand what credit unions are, they quickly realize that they’re pretty consumer-friendly operations,” he adds. “Because they’re not-for-profit financial cooperatives owned by the depositors, they don’t have stockholders demanding a market rate of return on their investment. So, what would go to stockholders in the form of a dividends is essentially routed back to the depositors in terms of lower interest rates on loans and higher yields on savings accounts and fewer and lower fees,” explains Schenk.
The public may be turning to credit unions because “some believe they were badly treated by the banking sector in the buildup of the housing bubble and then subsequent to that, the downturn,” according to Schenk.
“There’s been a pretty big backlash, especially against the large banks, as a consequence of that and so there’s been more of a focus on sort of smaller, community-based institutions. And credit unions are certainly benefiting from that, we believe,” he explains.
While credit unions can offer interest rates similar to those offered by banks, they are beginning to do closings for slightly less, according to Schenk. “We periodically engage Informa Research Services [Calabasas, California]--that’s an outside third-party research firm that tracks pricing at financial institutions--and according to the last survey by Informa Research Services, the average mortgage origination fee at credit unions is lower than it is at banks,” says Schenk.
Informa Research reports it surveyed 1,138 lenders in April 2014 across multiple markets on behalf of CUNA and found that the average mortgage origination fee at credit unions was $1,264.47. That is $92.51 lower than the $1,356.98 average at banks.
(sh) Expanded lending
In addition to being a way to grow the lending business, mortgages also hold another attraction for credit unions—the mortgages help the credit unions grow the member relationship, according to Callahan & Associates’ Johnson. “Obviously a home purchase is probably the most significant financial decision most families make. Credit unions really see that as the cornerstone of a relationship,” he says.
“Many credit unions will go well beyond the credit score,” says Johnson. “For most credit unions, if there is an automatic turndown because of a credit score, they are doing another review to make sure there aren’t other circumstances that are affecting the credit score for someone who would otherwise be a good borrower and a good member to lend to,” says Johnson.
“So, while they are conservative and conscientious, I think they are very thoughtful in being sure they want to get a member a loan if they can and be sure they can get them in the right kind of loan as well,” he adds.
For most credit union members, their first loan with the credit union is a car loan. Credit unions have a 15 percent share of the auto loan business, according to Callahan & Associates. When you look at loan portfolios for credit unions today, more than half is real estate-secured and 40 percent is in first mortgages.
“Really, [real estate loans] have become the primary type of lending when you look at the industry’s profile,” says Johnson. The larger credit unions are doing most of the mortgage lending, while smaller credit unions do more auto loans and an occasional mortgage, he says.
Borrowers appear to be turning to credit unions because credit unions often can take more time and care when they evaluate applications, according to Schenk. This approach is appealing at a time when many borrowers find it a challenge to qualify for mortgage. “It’s certainly true that smaller institutions--not just in the mortgage arena, but in terms of lending generally--smaller, local institutions are more likely to listen to your story and to have flexibility in their underwriting,” says Schenk. “Because of that, we find that consumers are more likely to actually get into a loan than they used to be,” he adds.
While fixed-rate mortgages (FRMs) make up 15 percent of loans on the books of credit unions, the majority of portfolio mortgages are adjustable-rate mortgages (ARMs) and hybrid ARMs, representing 25 percent of loans in the portfolio of all loans. The ARMs and hybrids better protect credit unions from interest-rate risk. And while credit unions are flexible in their underwriting, they remain overall conservative, as revealed by the performance of their loans made during the housing bubble, according to Johnson.
“Credit unions in the Sand States with real estate exposure couldn’t avoid taking some hits,” Johnson says. “On the other side, the quality of the portfolio overall has remained strong throughout the downturn, with the first-mortgage delinquency rate for credit unions at about one-fifth of where the banks were.”
Credit unions also fared better because they avoided no-doc loans, for example.
Credit unions continued lending throughout the downturn and since that time, according to Johnson. “Credit unions are in some ways steady as she goes,” he says, even as big players have been pulling back from the market and ceding some ground to non-bank mortgage lenders.
Credit unions continue to limit the level of fixed-rate mortgages in their portfolios to limit their exposure to interest-rate risk, according to Johnson. “Certainly credit unions are very aware of not wanting to take on that type of risk. Most are very focused on their asset liability management and making sure they have that balanced,” says Johnson.
The credit union regulator, the National Credit Union Administration (NCUA), Alexandria, Virginia, is conducting examinations to make sure credit unions are paying close attention to interest-rate risk and credit risk, according to Johnson, who talks with credit unions about the exams they have been through with the regulator.
Credit unions have been on the forefront of product innovation in a time overwhelmingly dominated by plain-vanilla mortgages. They are also more willing to offer non-Qualified Mortgage (non-QM) mortgage products, according to Cecala.
“They, perhaps more than banks, have been looking for ways to distinguish themselves from competitors and looking at different ways to make mortgages they can hold on their books,” he says. “And one of them is doing no-down-payment mortgages, which is really unheard of in the conventional market,” says Cecala. “There’s no bank that’s willing to do that, but some credit unions feel confident enough with their underwriting standards and their membership base that they feel they can do that.”
Navy Federal Credit Union, Vienna, Virginia, for example, offers a number of no-down-payment mortgages, including the standard Department of Veterans Affairs (VA) loans. The no-down-payment mortgages provide a way for first-time homebuyers who are members of credit unions to get a mortgage to purchase their first home, according Katie Miller, vice president for mortgage lending at Navy Federal.
“The majority of our volume is VA--almost 50 percent of our volume,” says Miller. In July 2014, purchase mortgages represented 55 percent of all originations for Navy Federal, a month in which the credit union had its highest purchase origination volume on record, according to Miller.
Navy Federal’s origination volume for home purchase mortgages rose 24 percent in the first six months of 2014 as the company’s mortgage products scored with its members. In general, the best deal for a borrower is usually the VA 100 percent loan-to-value ratio (LTV) mortgage, according to Miller. However, Navy Federal also offers portfolio loan products that also allow borrowers up to 100 percent of the value of the home. One is the 5/5 ARM, which offers a low initial interest rate and adjusts every five years.
The 5/5 ARM has a cap of 2 percent on each interest-rate adjustment every five years and does not require private mortgage insurance. In August, Navy Federal was offering 5/5 ARMs with an interest rate of 3.5 percent for the no-down-payment mortgage and 2.5 percent if the borrower puts down 20 percent. The low initial rate and the 2 percent cap combine to make the product very attractive for borrowers who expect to move within 10 years, since the maximum interest rate during the first 10 years is 5.5 percent for the no-money-down mortgage and 4.5 percent for the 20 percent down mortgage.
Navy Federal developed the 5/5 no-down-payment mortgage to help first-time homebuyers in its biggest markets--the Washington, D.C., metro area, Virginia and California. “I say all the time there aren’t that many 27-year-olds who have $60,000 lying around to put down on a down payment on homes here in the D.C. metro area and in California,” says Miller. She points out that it would take $60,000 to buy a $300,000 condo in those markets--just about the entry price level.
Navy Federal also offers the HomeBuyers Choice, a 100 percent LTV, 30-year fixed-rate mortgage that it holds on its books and which does not require private mortgage insurance. The interest rate in August for this loan product was 5.125, according to Miller. If a borrower puts down 20 percent, Navy Federal places him or her instead in a Fannie Mae or Freddie Mac mortgage because it would offer a lower rate, Miller says.
Navy Federal membership was originally limited to Navy enlisted personnel, retirees and their relatives. In 2008, however, Navy Federal expanded its members to all active-duty members and civilians and their relatives in all branches of service--the Air Force, Army, Navy, Marines, National Guard, Coast Guard and employees of firms that do work for the Department of Defense.
Now its membership is 5 million, making it among the largest of credit unions.
To help its expansion into the purchase-money lending market, Navy Federal is offering up to $1,500 toward closing on a purchase mortgage. The credit union also offers a free float-down, meaning that if interest rates fall after the loan is locked, the borrower gets the lower rate at the time of closing.
Navy Federal, which originated $11.1 billion in mortgages in 2013, expects to have lower origination volume in 2014 because refinancing volume is lower this year than last. It is such a large player that it represents about 10 percent of all credit union originations.
Serving the wider community
Formerly called the Boeing Employees Credit Union—now known as BECU—based in Tukwila, Washington, a Seattle suburb, the credit union has expanded its membership in recent years as it also expanded its mortgage lending. Since 2002 the credit union has been open to current and former Boeing employees anywhere in the world and anyone who works, lives or attends school in the state of Washington. Its membership now stands at 865,000 and it has 42 branches in the Puget Sound area.
The credit union has three main financial centers where members can meet with one of 12 mortgage specialists. Another 12 mortgage specialists also visit four or five neighborhood centers a week to be available for in-person applications for a mortgage. In addition, BECU takes mortgage applications online.
The focus on expanding mortgage lending came in response to what members were asking BECU to do, according to Lorraine Stewart, BECU’s vice president of mortgage lending. “We’ve developed programs that are portfolio and some that are salable [into the secondary market], and which are what our members really want,” she says.
Innovative new products have boosted mortgage lending at BECU, as they have for other credit unions. BECU’s 12-year, no-fee refinance mortgage was introduced after listening to its members describe what they would like to see. The 12-year mortgage has been a hit with people who want to refinance their home so they can pay off their mortgage before retirement, according to Stewart.
In August 2014, the interest rate on this mortgage was 3.5 percent. Borrowers typically come in to apply for the 12-year mortgage to refinance their existing mortgage to a lower rate and often a shorter term in order to have it paid in full by retirement age. The average age of the borrower for this loan is 55, says Stewart.
The credit union also offers a 5/5 ARM portfolio product with financing up to 97 percent of LTV. BECU has partnered with private mortgage insurance companies to offer this product. With a 20 percent down payment, the rate in August on the 5/5 ARM was 3.125 percent, with a 1 percent origination fee.
BECU is also expanding its relationship with the real estate community, which Stewart expects to lead to increases in the volume of purchase mortgages.
BECU is also willing to offer non-QM loans. “Credit unions and lenders in general are rethinking their underwriting strategy and what we can do under new regulations. That’s one of the reasons we will originate non-QM loans,” Stewart says. “We’re going about that very carefully and very thoughtfully,” she adds. BECU is developing a strategy that looks to determine what risks are right for the credit union and what exposures are appropriate for its portfolio, according to Stewart.
More and more of BECU’s newly originated mortgages are going into its portfolio. In the first seven months of last year, for example, almost 28 percent of overall originations were portfolio loans. This year, for the first seven months, 66 percent of all new originations went into the credit union’s portfolio.
BECU has been able to expand its lending so much that it now claims to be the number one mortgage originator in the Seattle area, according to Stewart.
Credit union aggregator
The Wright-Patt Credit Union, based in Dayton, Ohio, has 280,000 members and $2.8 billion in deposits. While being originally associated with the nearby Wright-Patterson Air Force Base, the credit union now considers itself a community credit union and membership is open to anyone who lives in an 11-county area surrounding Dayton.
Like other credit unions, Wright-Patt has decided to “grow our market share on the purchase side,” says Tim Mislansky, senior vice president and chief lending officer at the credit union.
The credit union sees the purchase market as attractive because it is stable over time. Wright-Patt saw its purchase money business surge 40 percent in 2013, and it has remained at that higher level in 2014.
While acknowledging that the first quarter of 2014 was slower because of the bad winter weather, production was up 15 percent year-over-year in the 90 days from May 1 through July 31, 2014.
“Our market is Dayton, but Dayton is not a growing market. There are not any huge population inflows. What that means is we’re taking market share from other lenders,” Mislansky says.
Wright-Patt has 20 mortgage originators, compared with 15 last year. The use of mortgage specialists is a departure from the past, when credit unions relied on branch personnel to originate mortgages. While the old way works well in a refi boom, its does not work very well in the purchase mortgage market, according to Mislansky.
“If you want to be purchase lenders, you have to go out and develop relationships will builders and realtors and be a little more aggressive and accessible,” he says. That requires hiring full-time mortgage specialists.
Wright-Patt’s willingness to do portfolio lending, including non-QM loans, has helped it gain market share. “We’ve made a conscious decision that we’re going to continue our mission, part of which is to help members with homeownership,” Mislansky says. “So, if it means making from time to time a non-QM loan, we’re still going to do it.”
Wright-Patt offers a 5/5 ARM that has been quite popular in recent months, hitting 30 percent of production dollars over May, June and July. This is the first year the 5/5 ARM product was offered by the credit union. In prior years, Wright-Patt’s portfolio lending was quite modest and consisted of 15-year and 30-year fixed-rate mortgages only, according to Mislansky.
“The 5/5 ARM is our most significant effort to date as a lender to have a borrower-friendly ARM product, as opposed to a 5/1 ARM,” says Mislansky. It has a 2 percent cap when it adjusts to a higher rate after five years. Many borrowers who expect to be in their home only 10 years will be better off in a 5/5 ARM than in a 30-year fixed, even if they stay in the home through the first rate adjustment, according to Mislansky.
As it has been with members of other credit unions, the 5/5 ARM has been very popular with first-time homebuyers in the Dayton area because it only requires a 5 percent down payment.
“Our belief is that if we build the program to be able to effectively serve first-time homebuyers, we’ll be able to serve other homebuyers as well,” Mislansky says. The 5/5 ARM has helped make it possible for Wright-Patt to make 60 percent of its home purchase mortgage originations to first-time homebuyers.
Wright-Patt does a lot of work with local nonprofits that specialize in housing counseling. The credit union also conducts its own education seminars.
The Wright-Patt Credit Union also has a wholly owned subsidiary, myCUmortgage LLC, which makes it loan products available to 190 other credit unions around the country. The participating credit unions originate the loan and Wright-Patt does the back-office work. If Wright-Patt does not keep the loan for its portfolio, it will sell the loan into the secondary market.
With steady incremental gains under its belt, the credit union industry is growing more confident about its expanded role in the mortgage market. Once boxed in and unable to break out of their limited role, credit unions increasingly believe they now have a number of competitive advantages as mortgage lenders.
Just ask Mislansky at Wright-Patt. “I’m very optimistic about the opportunity credit unions have. They are locally owned and operated, and the underwriting decisions are decided locally. They are more a part of the community than larger big-box banks. There’s a higher level of trust in credit unions than larger banks,” says Mislanksy. “Potentially I think credit unions can grow their market share.” MB