Unlocking Opportunity in Mortgage Lending Arena
In Las Vegas where the housing market has experienced breathtaking highs and lows in the last decade, one issue at the American Credit Union Mortgage Association's recent annual conference here seemed especially relevant:
When it comes to mortgages, where do credit unions go from here?
Credit Union Journal sat down with three lenders who have reported success booking mortgages despite the many industry headwinds: Bob McKay, EVP/chief operating officer for $1.8 billion Baxter Credit Union, Vernon Hills, Ill.; Nader Moghaddam, president and CEO of $807 million Financial Partners CU, Downey, Calif.; and Mark Wilburn, SVP and chief lending officer for $685 million Truity CU, Bartlesville, Okla.
We asked for their thoughts on four topics: the need to switch to purchase mortgages as interest rates rise, dealing with compliance, the current status of underwriting standards, and the possibilities outsourcing can bring to all areas of mortgages. Here's what we found.
The No. 1 focus for credit unions should be on the purchase mortgage business, Baxter CU's McKay said bluntly. He suggested CUs start by setting "reasonable" expectations, both in volume and dollars.
"The reality is you will not replace every refi you lose with a purchase mortgage," he said, noting about 70% of his CU's mortgage business in recent years was refis. "Staffing needs to be at the right place, then [you can] execute a purchase strategy."
For most credit unions, a good purchase strategy means strong relationships with real estate agents, McKay continued. Baxter partners with CU Realty to raise awareness of its mortgages among its members. It has raised its marketing efforts "a lot" this year and will do more next year.
"We also put a lot of emphasis on our branch strategy, which includes branch managers actively taking applications," he said. "About 30% of our total production comes from our branches."
Baxter CU will do approximately $700 million in mortgage originations this year, about the same as 2012, according to McKay. "We are budgeting about a 30% drop in 2014. That is an expected 70% drop in refinance volume with a 25% increase in purchases."
Mass layoffs by bank mortgage departments are a "big opportunity to hire good talent," said Financial Partners CU's Moghaddam.
"Sometimes large companies are indiscriminate when they downsize, so there are people out there that credit unions should be looking at," he said. "As credit unions retool from refis to targeting the purchase segment, this is an opportunity to pick up talent."
According to Moghaddam, CUs should be looking to expand their mortgage market share at this time-for a number of reasons.
"At our credit union, 8% of members have their mortgage with us. I would like to triple that," he said. "Our mortgage members have an average of more than five account relationships. They truly are our best members in terms of participation."
If a credit union is not involved in mortgages, "it needs to be," Moghaddam continued. "If all a credit union does is book mortgages through a third party, that means an off-balance sheet income stream and it takes care of its members. The members learn if they have a need, they should go to the credit union. We do not want to say 'no.' If small credit unions do not want to have mortgages on their portfolio, they can use third parties. There are even some large credit unions that are not involved in mortgage banking, which is an opportunity left on the table."
Creating more purchase mortgages is a "mindset," said Wilburn, who described Truity CU as a "strong purchase money shop."
"I have had a business development person for 12 years now, and now I have three," he said. "We helped write a lending white paper. We have a lot of expertise."
During the refinance boom, Truity ran two tracks for mortgages: purchase money loans and business solicited from Realtors.
"If it took 60 or 70 days to close a refinance, that was OK," said Wilburn. "On the purchase side we hit all the contract dates."
Asked why some CUs are still reluctant to write home loans despite the success of many of their peers, and the need for interest income, Wilburn said some CUs look at the mortgage business and think of Realtors as a "distraction" or "the enemy."
"We look at Realtors as our partners," he said. "What it really takes is to be dedicated. It certainly takes resources to do mortgages, but there are so many different ways. Smaller credit unions can work with a real estate CUSO or a third-party originator. You can grow into the business, but the important thing is delivering loans to your members. You do not have to have a full-fledged operation inside your shop."
"The rules keep changing, so in some sense we become numb to it," said Baxter CU's McKay when asked about compliance challenges. "Everybody has to do it, so even the big banks are struggling. It definitely adds to the cost."
According to McKay, most credit unions do not know exactly what they will do with the CFPB's pending qualified mortgage rule, which takes effect in January, but he believes CUs will use as a starting point a desire to "do what is right" for their members.
"There is a fear of borrowers seizing on the QM rule to avoid foreclosure," he said. "Beyond QM, all the servicing changes [also mandated by the CFPB] are big. We use Cenlar/Prime Alliance. With them we get a company that all it does is mortgage services, which is a bit of a comfort. But there are a lot of credit unions struggling with servicing changes if they do it in-house."
Financial Partners' Moghaddam said CUs know they are operating in a time when there are a "significant amount" of changes that have occurred and will be occurring on the compliance front.
"They need to make sure they have the internal resources, and if they do not, look at external options," he said. "Otherwise, the consequences will be tremendous."