Mortgages may be a vital growth product for credit unions, but are not a sector of the financial services market to be entered into lightly.
That's the message Tracy Ashfield—president of Ashfield and Associates, a CU consulting firm in Madison, Wis.—wants CU executives who are considering offering mortgage products to know.
"A credit union has to have a plan to be in the mortgage business," Ashfield told Credit Union Journal. "They have to sit down, think strategically, and ask, 'Where do we want to be in 2014 and 2015?' Many CUs will say they have had a wonderful run in writing refis, and some may want to expand their purchase business, but they cannot do so without some soul searching. It will take more than being in the right place at the right time moving forward. It will take commitment to get into the purchase business."
For CUs that have never written a mortgage before or those that have only dipped in a toe via refis or loan participations, there are three ways to proceed: join a mortgage CUSO, partner with a third-party vendor, or build an internal team.
For CUs that build their own teams, Ashfield noted there is talent on the market thanks to big banks eliminating thousands of jobs in their mortgage departments. She cautioned, however, that most of those who received pink slips are not the candidates most CUs should hire.
"The massive layoffs by big banks first hit support staff and operations," she said, noting most CUs don't need an influx of processors. "Credit unions that are in the mortgage business have good mortgage infrastructure. Although we do want top talent, we cannot assume the market is being flooded by loan officers and loan originators. Are there some great senior operational folks who could be effective working out of a branch? Maybe a few, but the banks are not releasing their top producers."
To increase purchase mortgages, Ashfield recommends CUs take their existing teams that have worked on the refinance market and decide who can be part of an outbound effort.
"There are a lot of Realtors, but the bulk of sales are being done by a small number of Realtors, so those are the people credit unions need to be talking to," she noted.
The key questions to ask, Ashfield continued, are: Who on the credit union's team will do outreach? Who can communicate better than the competition? And, What is the CU's differentiator
"Every credit union has to know what its story is. The top producer going forward might not be the person who has been at the top of the heap for the past three years because that has been refis."
Two additional concepts Ashfield said are important to for CUs to remember when building a high-producing mortgage department are: Consumers want to be stress free as they go through the home loan process; and they want lots of communication from their lender along the way.
"They want an Amazon-like customer service experience. This is not easy, so credit unions need to know if they want to get into mortgages they have to put their running shoes on and really get into it."
Though the Consumer Financial Protection Bureau has created "a lot of rule-making" as a result of the Dodd-Frank Act, Ashfield said most the rules are "good business" that credit unions should have been doing anyway. "We cannot use this increased regulatory environment as a crutch. If we shift our focus entirely to compliance, there will not be a loan in the pipeline. There needs to be a return on investment."
And though many mortgage lenders are directing their concerns toward the ability to repay and
"The challenge is needing someone at the credit union who is focused on vendor readiness, and knowing what to do if vendors are not ready," she said. "QM and ability to repay are about standards. There needs to be strategic decision making going on. No one says all loans have to be qualified mortgages. The trick is, when we make good loans we used to be fine. Now, credit unions must have clear policies on when they will do a QM, when they will not, which are QMs, and which are not. Credit unions need to have processes and systems in place to show to regulators. They need to build a forensic mindset because documentation will be needed."
For example-the debt ratio for a CU's member is outside the qualified mortgage standards, meaning if the credit union makes the loan it gives up its safe harbor. Ashfield said in such a case the CU has to document all parts of the decision so three years later when someone picks up file, it will be clear the exact reason why that member was given a loan.
"There is a lot of work to be done, but it is about changing processes," she assessed. "Any change of behavior is difficult, but it is not impossible."
Change is inevitable, she said, because the crackdown is not coming solely from the CFPB-Fannie Mae and Freddie Mac have demanded increased underwriting standards, and some investors are asking lenders to buy back loans. But given credit standards have tightened considerably and having sufficient cash on hand for a downpayment has always been a barrier to homeownership, Ashfield said some CUs should look at the new regs as an opportunity to enter the high loan-to-value market, as long as they are "extremely judicious."
Ashfield said she continues to feel "strongly" that small and medium-sized CUs that cannot build an internal mortgage department for various reasons still should offer home loans to their members by working with partners.
"I am a fan of CUSOs," she said, adding working with a third party does not absolve CUs of liability. "They must do due diligence in selecting a partner as well as ongoing. Even if a credit union has been working with a partner for years, if it is moving into real estate and it is not a core competency, they must keep up. Regulators are not going to accept as an excuse that the credit union is working with a third party."
Credit unions frequently ask Ashfield for her recommendations on mortgage CUSOs, but she said there is no one answer to the "top three" because the needs of each organization are different. The "right" CUSO for a credit union depends on types of loans, selling mortgages on the secondary market versus keeping on portfolio, and many other factors. "Look for alignment in business strategy, and note many of the top mortgage CUSOs are members of ACUMA [American Credit Union Mortgage Association].”
Finally, when CUs decide they want to be "in the game" with mortgages, they can't slow down, Ashfield emphasized. "They also need to know there will be months and quarters where the mortgage P&L is not strong, but they have to stick with it," she said. "One bad month or one bad quarter is not a time to retrench, they have to invest for the long haul. Get the right products to the marketplace, get technology solutions in place, and get a good, strong staff."
