Coronavirus mortgage boom could wind up a bust for credit unions
This story is part of Credit Union Journal's ongoing coronavirus coverage, as well as the special report on mortgages, which will appear throughout April.
The Federal Reserve’s coronavirus-fueled interest rate cuts are kicking credit union mortgage departments into high gear.
At United Nations Federal Credit Union, a $6 billion-asset institution based in New York, mortgage loan volumes doubled in February compared to the same period last year. And mortgage applications – primarily from existing members – were up by 400% during March, according to Chief Lending Officer Eric Darmanin.
“These are extraordinary times, but a considerable amount of seasonality and cyclicality is not unusual in the mortgage business,” he said.
The Fed’s emergency rate cuts have sent some lenders on a hiring spree, but many credit unions are sticking with the staff they have on hand while bracing for turmoil ahead. Hiring is on hold at many institutions – though some have made exceptions for mortgage staff and tech support employees – some trade groups have said the country is already in a recession and most observers expect COVID-19 to dampen the economic outlook for some time before things begin to improve.
UNFCU expects to be busy for the next six months as it attempts to manage the boom in mortgage applications while working those through the pipeline, and has brought on more processors to help keep things moving. Other shops, however, are reallocating their staff as branches close and training frontline employees to work in other departments.
Pentagon Federal Credit Union saw mortgage loan volumes spike 365% from January to February, with 40% of that coming from new members. In addition to a historic amount of applications, demand for rate lock and refinance also soared, said Mark Garces, PenFed’s VP of secondary marketing.
Besides prioritizing purchase transactions and resetting member expectations regarding closing timelines, which may extend from 45 days to 75 days, PenFed also shifted resources from home equity to mortgage loans, said Tom Wood, senior VP for real estate production and orientation at PenFed.
“A lot of our members and doing cash-out and not doing home equity lines,” he said. “We are shifting resources from that product line into helping out the mortgage piece.”
Not all credit unions are embracing the drop in rates.
Meridian Trust FCU in Cheyenne, Wyo. has elected not to bring on additional staff out of a belief that the mortgage boom could eventually bite back if deposit rates rise and interest rates bounce back sooner than expected.
“The low-rate environment may stick with us for three to four months and then we could start seeing inflation creep back in and the first-hand results of a real recession,” CEO Kim Withers said. “When that occurs, interest rates will start to rise. It just doesn’t make sense for us to have a 2.5% mortgage on our books for 30 years.”
While the credit union keeps some mortgages on the books, its current strategy is to sell off all incoming mortgages to the secondary market in order to keep in-house volumes under control, Withers said.
“One of our greatest fears, besides a fixed rate, is that we will not able to honor an interest rate lock because appraisers and title insurance companies will be so slammed with high volumes that they cannot meet the conditions of the interest rate lock,” she added.
Bringing on additional staff to support new business amid a boom driven by rate cuts could also pose real risks, said Brett Martinez, CEO of Redwood Credit Union.
“There is also the existing loan portfolio that you want to maintain and protect,” he said. “If your pipeline continues to grow and you don’t have the ability to process it, that has an impact on your brand and service level.”
As investors flock to U.S. Treasury Bonds – generally considered one of the safest available investments – interest rates could stay low for a year or more, said Frank Nothaft, chief economist at CoreLogic, who predicted a significant increase in interest rates isn’t likely to take place between now and the end of 2021.
“The Fed has promised to pump a lot of liquidity into the financial system with very low short-term interest rates, meaning lending rates that are offered by credit unions will be probably back at record lows,” he said. “If mortgage rates remain low, then for those homeowners who continue to have their jobs and earn income, it’s a great opportunity for them to come in and refinance.”
Nothaft added that because the fallout from COVID-19 may lead to further economic contractions, that could have an impact on the housing market, leading applications to dry up.
Credit unions and other lenders should be wary of that possibility, he said.
“I could see home prices flat or decline over the course of the next few months,” added Nothaft. “If the value of your home declines, some of the home equity that you have is evaporated, making it difficult for credit unions to offer home equity loans to those who have limited home equity wealth.”