As Mortgage Demand Declines, Some CUs Lower Lending Standards
The reduction in mortgage demand has some credit unions reaching down to slightly lower credit scores.
Experian data shows that credit unions over the past year have increased their attention on near prime borrowers.
Some experts say the move is a justified easing of mortgage lending standards that became too tight during the recession, especially as delinquencies steadily improve.
Others contend, though, the shift is happening to fill a mortgage lending pipeline that is drying up with the refi boon passing and rates rising.
The latest NCUA data found that credit unions' mortgage originations fell by almost 60% in the first quarter of the year. CUs originated an annualized $42.6 billion in fixed-rate real estate loans in the first three months of 2014, compared with $102.9 billion during the same period last year.
"When we came out of the recession and everyone was burned by the housing market, lenders just cleaned up their portfolios and then only took in top-quality borrowers," said Alan Ikemura, Experian product manager. "Things got way too tight. I think credit unions are coming back to a more conservative norm now."
Experian data shows that in in the first quarter of 2013, 15% of CU mortgage originations (in dollar volume) were near prime; in the first three months of 2014 this business represented 21% of the mix.
"A 6% jump," said Ikemura. "In the first quarter of 2013 82% of credit union mortgage originations were super prime and prime, now that pie is 75%."
Ikemura, while recognizing the bottom-line impact on CUs of the drop in mortgage business, said the improving economy is also responsible for the shift.
"Credit unions are still fairly conservative, and the needle in CU subprime borrowing has not moved much," he said. "But credit unions are dipping their toes into the near prime group simply because the economy is better and they are seeing lower delinquencies."
A recent Credit Union Journal online poll found that the reduction in mortgage business is having an effect on underwriting at some CUs. When asked if their credit union is reaching out to members with lower credit scores to keep the mortgage pipeline flowing, 19% of respondents said yes.
American Banker, an affiliate of Credit Union Journal, recently reported that the loan shortage is also pushing mortgage firms to accept lower credit scores, reaching to FICOs below 600.
In the report, Ken Richey, managing partner of Richey May, a provider of technology, audit, tax and business consulting services for small to medium sized banks in Englewood, Colo., said it's difficult to keep production levels up, so "banks are trying a lot of different things. Lending to borrowers with lower FICO scores is just one of them."
Bill Vogeney, EVP/CLO at the $3.8 billion Ent FCU in Colorado Springs, Colo., said with refi business declining, lenders may be pressed to do "funny things. A lot of credit unions, banks and mortgage companies invested heavily in bringing on people from late 2008 to 2013 to handle the mortgage demand."
The chair of CUNA's Lending Council said he has learned that the mortgage market "tends to not want to go down without a fight. So it did not surprise me to see companies like Quicken Loans start to ramp up their variable-rate mortgage advertising. I have seen that happen before, after a refi boom—a lot of these companies just don't care about the borrower's best interests. Forget that the person has a low fixed rate and talk them into a lower-rate variable loan. It's all about generating additional refinances at all costs."
Vogeney said Ent has not adjusted its mortgage underwriting and cautioned credit unions about the risk of dropping their lending standards and holding more loans in their portfolios—especially those without private mortgage insurance.
"Not particularly wise for the simple fact that while the real estate market has improved, how much of that is due to the Fed buying mortgage-backed securities?" he added.
But some economists question whether credit unions are really dropping their lending standards.
Looking at the number of mortgage loans credit unions kept on the books last year, CUs are not adjusting their lending criteria, according to Bill Hampel, CUNA SVP of research and policy analysis and chief economist.
"Credit unions were selling about half of their mortgage loans last year," said Hampel, who will take over June 11 as CUNA interim president.
According to CUNA data, credit unions sold 58% of their mortgage loans in the first quarter of 2013, compared with 33% in the same period this year.
"There is a decline," Hampel said, noting that CUs sold 51% of their mortgages in the second quarter of last year, 48% in 3Q and 46% in the final quarter of 2013.
"If they were loosening their credit standards we would expect to see credit unions keeping more of their loans on their books, more than this slight decline shows," he added.
Mike Schenk, CUNA VP of economics and statistics agreed.
"This does represent a drop-off," said Schenk. "As Bill [Hampel] mentioned, a decline in sales could be a sign that underwriting has changed. However, one quarter doesn't make a trend and there are other reasons—other than underwriting changes—that you might see a decline in sales."
"For example a big decline in originations might produce a decline in sales as CUs strive to maintain overall loan growth targets," he noted. "In fact on an annualized basis credit union first mortgage originations declined by 24% compared to full-year 2013 results."
CUNA Mutual Group Chief Economist Dave Colby said a change in underwriting standards would be based on the likelihood of collateral appreciation, with some markets seeing home values rise significantly.
"Clearly, volumes of first mortgage originations are dropping due to the lack of refinance volumes," Colby said. "But, I believe large changes in underwriting standards at credit unions are about as likely as CUs marketing their product by schmoozing Realtors. Besides, what about the QM rule and the NCUA not wanting credit unions to hold first mortgages, especially ones that aren't easily marketable?"
Some industry experts note that reaching down to slightly lower credit scores for mortgage loans is necessary in this post-recession environment.
Bill Handel, VP of research at Raddon Financial Group, Lombard, Ill., described some financial institutions' belt tightening as an "overreaction"
"You can manage too hard and too far following a crisis," Handel said, adding that broadening the member FICO score range is warranted, as well as returning to some "old-time" mortgage lending practices.
"You look at the quality of the borrower as much as you do the score," he said. "We know many good borrowers' credit suffered in the last several years. You don't want to go too far the other way, just find a happy medium."