Despite Overall Decline, Credit Union Mortgage Lending Grows

It's not been a stellar year for mortgage lending, with national origination volumes expected to end 2014 down by one-third or more. But one niche, credit unions, has seen a big jump in its home loan portfolios year over year, and its originations market share is increasing.

It begs the question: What are credit unions doing that banks and nondepository lenders aren't?

For starters, CUs have taken to slightly lowering their credit standards, as well as put an emphasis on portfolio-friendly products like adjustable-rate mortgages and non-qualified mortgages (and therefore, not selling as many mortgages in the secondary market) are some factors industry observers note.

Even doughnuts may be coming into play, as credit unions are now increasingly targeting real estate agents for referrals — a tactic usually associated with mortgage brokers, who've long been known to woo real estate agents with doughnuts, a gift small enough not to run afoul of the Real Estate Settlement Procedures Act.

Credit unions posted a 10% year-over-year increase in first-mortgage portfolios at the end of the second quarter of 2014, according to Washington-based research firm Callahan & Associates, as well as increasing their originations share of the market to 8.4%.

That originations share has tripled since the recession started.

"It's been a long-term buildup," said Jay Johnson, Callahan executive vice president, with the credit union share of mortgage originations tripling since the start of the recession. Johnson said the CU sector has benefitted from more favorable press from financial media than other niches have received. Plus, credit unions are now doing more to work with real estate agents to build business.

"We see more credit unions working with Realtors in their markets," he said. "They are getting those types of relationships in place." For their part, real estate agents like working with credit unions because they use their local orientation to stay on top of their markets, he added.

Product mix comes into play as well, with 40% of origination volume this year consisting of adjustable-rate mortgages or hybrids, Johnson said.

Johnson pointed to NASA Federal Credit Union, based in Washington, as an example of a credit union with member-friendly mortgage products, particularly for first-time homebuyers. "Parents can be a cosigner, but don't have to live in the home," he said. "The parents can then step out after five years."

Non-QM lending has also contributed. Credit unions have shown flexibility on non-QM loans, Johnson said. "If it's a good member, they know it's a good credit and they'll make the loan."

Credit unions have been dropping their FICO thresholds, though not by a lot, to get more lending done, after a falloff in originations volume in the first quarter.

"Credit unions originated $124 billion in first mortgages in 2012, $121 billion in 2013 and over $41 billion in the first half of 2014. The 2012 total was a record level — representing a 50% increase over 2011 totals and a 30% increase over the previous (2009) record when credit union first mortgage originations totaled $95 billion," Mike Schenk, vice president of economics for Madison, Wis.-based trade group Credit Union National Association, noted in his latest industry update.

Schenk also noted that in 2012, 83% of CU originations were fixed-rate loans. That has dropped to 61%, while balloon/hybrids accounted for 22% and ARMs made up 16% of the total. "First mortgages now account for 41% of credit union loans (or 25% of total assets) — up from 25% of total loans (or 18% of total assets) in 2000," he wrote.

However, secondary market mortgage sales are off considerably. "In the first half of 2014, 32% of first mortgages granted at credit unions were sold into the secondary market; 68% were held in portfolio. In 2013, 46% of first mortgages were sold into the secondary market."

For July 2014, CUNA estimates that CU ARMs outstanding grew by a hefty 2.7%, well above home equity portfolios, which were up 80 basis points, and nine times the increase in fixed-rate mortgages outstanding, which were up 30 basis points in the month.

FRMs in July were 28.8% of a $701 billion total portfolio in CU lending, ARMs were at 12.1%, and home equity loans were 6%, according to CUNA. That would come to $202 billion in FRMs, $85 billion in ARMs and $42 billion in home equity loans outstanding.

Adjustable-rate first mortgages increased 12% in the year ended June 2014, their fastest growth since 2007, according to CUNA's midyear report. Total growth in all mortgages was 7.6% — well above the 1.2% shrinkage recorded in one- to four-family mortgages at FDIC-insured commercial banks, according to CUNA.

Though it may be apples to oranges, some are now comparing credit unions to the big players in mortgage lending — at least in aggregate. Callahan blogger  Rebecca Wessler wrote about the second quarter results: "Credit unions are second only to Wells Fargo, and inched out Chase, when it comes to mortgage originations."

For servicing, a first-mortgage portfolio aggregate of $287 billion would place credit unions seventh in the country, just behind US Bank Home Mortgage, according to MortgageStats.com.

Mark Fogarty, Editor at Large for National Mortgage News, brings more than 30 years of mortgage coverage to his industry analyses.