Credit unions that make and hold mortgages are more profitable and grow more quickly than those that don’t, says a study from the Filene Research Institute.
And that could be the difference between surviving and failing over the next few years, says the head of the credit union industry’s mortgage lending trade group.
“Averaged over the past three decades, individual credit unions that had more of their assets in mortgages had slightly higher returns on assets and higher inflation-adjusted asset growth,” says the Filene report, entitled “Mortgages and Credit Union Performance: 1980-2011.”
“Having larger mortgage shares has detectable, but not large, effects on credit unions’ performances.”
The study was conducted by Luis G. Dopico, a consultant for Macrometrix in High Point, N.C., and James A. Wilcox, a professor at the Haas School of Business at the University of California, Berkeley. Filene is the credit union industry think tank.
On average, from 1980 to 2011, credit unions that boosted their mortgage share by 10%, meaning from 15% to 25% of assets, raised their ROAs by one basis point, the paper says. More recently, however, the positive effect has been more dramatic. Beginning in 2000, a 10% increase in mortgage share raised ROAs by about six basis points, or from 0.89% to 0.95%.
While that doesn’t sound like a lot, “credit unions that did not respond to the stronger incentives with more mortgage holdings would have shortchanged their members in two ways,” the report says. “First, they would not have met their members’ product demands. Second, they would not have produced appropriate financial returns, in the forms of borrowing, lending, and earnings rates.”
“Credit unions that respond to the associated challenges and opportunities will perform better,” the report concludes.
The report notes that over shorter periods, troubles in real estate markets and the overall economy hurt credit unions that hold more mortgages. Even over the longer term, mortgage lending is associated with somewhat higher costs, slightly more troubled loans and with slightly more volatile earnings.
“Nonetheless, we estimated that, over the longer term, credit unions with larger mortgage shares exhibit slightly higher ROAs and higher inflation- adjusted asset growth,” the paper says.
Mortgages’ share of credit union assets has risen sharply over the past three decades, from 5% in 1980 to 24% in 2011, the Filene paper notes.
In dollar terms, mortgage assets have jumped from $3 billion in 1980 to $236 billion, for an annual growth rate of 14%.
Likewise, the percentage of all credit unions that held any mortgages rose from 17% to 61% over that time period, as the number of smaller credit unions shrank and the remaining ones grew in size.
In terms of originations, credit unions increased their share of the overall mortgage market to more than 7% last year from less than 3% in 2007.
The Filene study is “exactly spot on," says Bob Dorsa, president of the American Credit Union Mortgage Association. "This may be one of the first papers of its kind from an independent source to show that if you’re making mortgages, you’re more profitable.”
The paper “validates why we formed our trade group 18 years ago,” says Dorsa. According to its website, ACUMA is “dedicated to the simple principle that credit unions have both an obligation and a competitive need to become a premier provider of home loans for their membership.”
Indeed, Dorsa says that credit unions that don’t embrace home mortgage lending risk going out of business within the next three years.
“When we started ACUMA 18 years ago there were about 18,000 credit unions,” he says. “We’re down to less than 7,000. Where did they all go? They lost their relevancy. They were the ones saying no’ to all those homeowners and borrowers that were calling about a home loan.”
“It’s the writing on the wall,” he says of the Filene report. “At the end of the day you either wake up and keep pace or fall behind and go away.”
Dorsa said that as long as 10 years ago his group found that members that had a real estate loan with their credit union had at least three or four additional products, “and hence more profitable and better relationships.”
“With the right mortgage products, home loans can significantly boost a credit union's bottom line,” agrees Richard Whitman, vice president of residential lending at Texas Trust Credit Union in Mansfield, which serves the Dallas area. “Having the right mix of products, combined with a strong marketing effort and the ability to spot and react to trends, can significantly increase loan volume and income.”
Since 2006, Texas Trust has seen its mortgage portfolio triple to more than $180 million and its mortgage penetration rate among its members grow from 2% to 15%. In 2012, annual mortgage interest income surpassed $7 million and fee income was more than $1 million.
George Yacik has been covering the residential mortgage business for more than 20 years and writes frequently for industry publications. He can be reached at gyacik@yahoo.com.
