If banks finally start loosening up mortgage lending standards, will credit unions' hard-won market share take a hit?
According to a recent report by the Urban Institute's Housing Policy Finance Center, banks could originate 300,000 more home loans per quarter and face only a slightly higher risk of default.
Indeed, Laurie Goodman, the director of the Housing Policy Finance Center, and co-author of the report, estimated that banks and mortgage lenders would need to boost lending by as much as 50% just to return to normal, pre-crisis levels.
"Banks are lending more narrowly than they have ever done before," said Goodman.
And that narrowing at banks has widened the opportunity for credit unions.
But if banks commence issuing housing loans en masse again — as advocated by the Housing Policy Finance report — it would be hard to predict the impact of that shift upon the credit union mortgage business.
"It's possible the banks could cut into the inroads that credit unions have made in the mortgage business in recent years," said Curt Long, senior economist at NAFCU.
Similarly, with the refinance boom likely coming to an end with the prospects of higher mortgage rates, credit unions' growth in the mortgage business may slow down a bit for a couple of years, according to Dennis Dollar of Dollar Associates in Alabama.
Still, he asserted, credit unions have established a foothold in the mortgage market "that is helping them become even more valuable to their members as a primary financial institution."
Indeed, CUNA VP of Economics and Statistics Mike Schenk explained that credit unions offer attractive mortgages for borrowers.
"In the wake of the financial crisis, more [borrowers] recognize credit unions as consumer-friendly, member-owned financial cooperatives — and they trust credit unions," Schenk said, citing the Chicago Booth/Kellogg School Financial TrustIndex which shows banks with an index value of 30% and credit unions with a corresponding value of 60%.
"Consumers also recognize they can save a bundle financing at a credit union," he added. "Of course, mortgage interest rate differences between credit unions and banks are quite small because pricing is determined by the secondary market."
In fact, Schenk added, the most recent Informa Research Services survey of mortgage lenders revealed that the average first mortgage origination fee is roughly $100 lower at the country's credit unions versus the average at banks. Specifically, the study found that the lender fee at credit unions now clocks in at an average of $1,265 versus $1,357 for banks.
But it took a crisis to drag credit unions into the limelight.
Since the financial crisis of 2007-2008, credit unions have gained a larger slice of the overall home mortgage business pie. Long told Credit Union Journal that prior to the crisis, credit unions accounted for about 3% of all mortgage originations in the country — now, that figure is up to at least 8% (almost tripling in just six years).
"It's been a pretty dramatic increase in only a few years," Long said.
Dollar agreed, noting that in the wake of the economic meltdown, the credit union industry "took up a lot of the slack left behind by a hesitant TARP-bailed out banking industry" over the past six years. He indicated that the credit unions' share of the mortgage market is now closing in on 10% and growing.
Long further noted that mortgages issued by credit unions boast high asset quality. "Even better than banks," he commented. "Credit unions are pretty prudential lenders, and they were very well positioned for the mortgage business as the economy slipped into the crisis."
According to CUNA, as of June 2014, about 75% of all credit unions offered mortgages. Credit unions that offer first mortgages tend to be large institutions — which means that almost all, or more than 98%, of all credit union members have access to first mortgage loans at their credit union, said Schenk.
Credit unions originated $124 billion in first mortgages in 2012, then $121 billion in 2013 and more than $41 billion in the first half of 2014, CUNA stated. The 2012 figure marked a record level — representing a 50% jump over 2011 totals and a 30% increase over the previous record from 2009 when credit union first mortgage originations totaled about $95 billion.
"Don't be surprised to see a seasonal slowing in originations in the fourth quarter. But expectations of a 10% increase in activity in 2015 seem reasonable," Schenk offered. "Still-low interest rates, only modestly rising prices and a tremendous volume of pent-up demand should help to push more buyers off the sideline and into the marketplace."
CUNA further noted that credit unions now account for a bigger piece of the mortgage pie even though overall origination activity has actually declined.
The climate of higher interest rates has shifted originations from fixed-rate to hybrid and variable rate paper. In 2012, CUNA noted, 83% of originations carried fixed-rates. "More recently that dropped to 61%, while balloon/hybrids accounted for 22% and adjustable-rate loans accounted for 16% of the total," Schenk said.
