JUL 15, 2013

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What We're Hearing

Where 100% LTV Overdues Beat Prime Mortgages

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WE’RE HEARING at the height of the mortgage crisis Navy Federal Credit Union found that the delinquency rate on one of its special mortgage products remained below the industry’s overall delinquency rate on prime credit quality loans.

But get this, that product was Navy Federal’s 100% loan-to-value product.

Katie Miller, vice president of mortgage products at Navy Federal, said the primary reason that Navy Federal’s portfolio had significantly lower delinquency rates than the industry norm was the relationship the credit union has with its members, who are all active or retired military personnel and their families. Many have been banking with Navy Federal for 10 or 20 years. And because Navy Federal is a mutual credit union, its members—depositors and borrowers—are also owners of the institution.

“The biggest difference between credit unions and banks is that we are able to offer these products confidently because we know our members,” Miller said.

Though Navy Federal sells most of its loans to secondary market agencies such as Fannie Mae and Freddie Mac, it retains the servicing rights to all of the loans it originates, she noted. Retaining 100% of servicing rights “is huge to us” because it means Navy Federal remains in control of customer service, Miller said.

That means that throughout the crisis, the credit union had the opportunity to adapt and innovate with its loss mitigation and default management activities to try to keep borrowers in their homes.

“We work with all of our members to work out whatever is going on in their life and with their mortgage loan,” she said. “Our 100% product performed better than industry prime loans.”

While Navy Federal effectively suspended the 100% financing Homebuyers Choice program during the crisis, the credit union reintroduced it earlier this year, at a time when few other lenders are offering any kind of 100% financing option. Miller said the program is popular with first-time homebuyers, who account for 70% of the Homebuyers Choice program’s loans. Providing attractive financing to borrowers who might not otherwise be able to afford homeownership is an important aspect of serving members needs and maintaining mutual respect between Navy Federal and its members. For the last few years, the credit union has been looking for ways to broaden its loan offerings to serve more homeowners, she said.

“We believe in taking a certain calculated risk,” Miller said. “We know our members. We never want to put a member into a loan that they cannot afford.

“And so since the recession I’m not aware of very many lenders that do 100% financing but we do. For us that is serving our members and servicing first-time homebuyers.”

The program is designed to mirror the Department of Veterans Affairs 100% financing loan program, and is popular with members who may have used up their eligibility for the VA program. For instance, a member being transferred from one state to another may already have a VA loan tied up with the home they are selling even as they purchase a new home in another area. (The VA, by the way, recently reminded servicers that they can sometimes reduce loan principal when modifying loans for borrowers who have run into financial trouble.)

That effort to support more affordable home purchase options could pay off as interest rates rise and refinancing volume winds down. Miller said that Navy Federal closed a record number of home loans in June, with home purchase volume accounting for 48% of the total.

“I can absolutely tell you the increase in interest rates and home prices coming back has created a sense of urgency among buyers. We are seeing record home purchases, both in incoming loan applications and in closings.”

While the housing market may be gaining strength, Navy Federal is struggling along with the rest of the industry to adapt to a changing regulatory environment.

Michele Townes, senior public relations specialist at Navy Federal, said the heightened pace of regulatory change is “really staggering” and has required the credit union to create a new internal infrastructure to manage the change.

Historically, Navy Federal spent 10% of its mortgage staff hours managing changes, she said. Today, managing change takes up 30% of the lender’s manpower.

“That takes time away from the job we want to do,” she said.

Ted Cornwell has covered the mortgage markets since 1990. He is a former editor of both Mortgage Servicing News and Mortgage Technology.

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