Mortgage originations today contain many of the same risk characteristics as found in years past, but Teresa Halleck said there is one important difference.
Halleck, president and CEO of $5.4-billion San Diego County Credit Union, said the "heightened" focus on mortgage-related risks, especially by state and federal regulators, is the most noticeable change, most especially the evolution in interest-rate risk.
Halleck, who believes that with good risk and enterprise management that there is "good opportunity" in the current mortgage market, noted there are now a "lengthy list of risk factors CUs writing mortgages need to weigh, especially in a boom-and-bust state such as California.
She said that real estate lending in the current environment needs to be considered in the "broad context" of interest rate risk, credit risk, collateral risk and concentration risk.
Halleck said interest rate risk is different from years past, asserting that fixed-rate mortgages originated with today's low rates could reasonably be expected to have a longer average life than those originated three to five years ago, even though rates at that time were considered historically low.
"In the current low-rate environment, the average life of a mortgage loan originated now may be as long as 12 to 15 years," she said.
Likewise, credit risk "must be considered by a prudent lender," Halleck continued, pointing out that local economic issues can vary widely in California.
"Collateral risk has been a major factor related to mortgage lending risk in California, as demonstrated by the sounds of crashing home values during the past five years," she said. "While some may view this risk as substantially reduced, given mortgages being originated at this time are based on what may be perceived as depressed home values, the reality is home market values in California are not anticipated to rise with the same ferocity as that with which they fell."
Market Projections
San Diego County CU is projecting slow home value appreciation in the state, again affected by local conditions.
Last, but not least, she said, concentration risk should be considered and lenders should also include measures to avoid adding increased strategic default risk, which still exists even in today's market.
San Diego County CU has "maintained a conservative approach" to its mortgage loan originations over the years, and Halleck said that general approach has not wavered. The CU's mortgage loans are generally underwritten to meet Fannie Mae standards, making them saleable in the market for ALM purposes.
"As Fannie Mae's guidelines for participating lenders have changed over the past few years due to market conditions, our underwriting standards have likewise evolved," she said.
Halleck said SDCCU is seeing good credit quality among applicants, but it continues to vigorously verify income.
As is the case with other credit unions in California and Nevada contacted for this special report, Halleck said market value declines over the past few years mean the real estate comps SDCCU is seeing are "conservative in nature." She reported local real estate values are "fairly firm" overall, with certain areas continuing to experience relative weakness while others remain steadier.
Evolving Process
Halleck said SDCCU's mortgage lending process has evolved to include increased loan portfolio measurements coupled with stronger quality control oversight.
"We want to ensure our mortgage portfolio remains well managed and appropriately monitored," she said. "Several changes set forth by Fannie Mae have been the primary driver of changes related to our mortgage originations and the related process. Fortunately, our mortgage portfolio has been a historically strong performer with prudent underwriting practices already in place. Because of these practices, the credit union did not experience the significant loan defaults experienced by lenders that offered exotic mortgage products and/or took on elevated credit risk during the mid-2000s when home values were skyrocketing."
In 2011 San Diego County CU posted $66.4 million in net income after paying $10.7 million to the Corporate Stabilization Fund. Its net worth ratio was 11.93% ("well capitalized").
