DENVER-With uncertainty surrounding the future of Fannie Mae and Freddie Mac, one CUSO is developing a capital markets alternative credit unions can use.
The challenge of doing so is difficult, according to Judy Sandberg, president of Mortgage Liquidity Solutions, LLC, but "we are making huge progress. We are pulling loans together to do a transaction. The goal will be to execute a capital markets transaction outside of Fannie and Freddie with credit union-originated, servicing-retained first mortgage loans in 2013. We are cautiously optimistic this is the year."
Sandberg noted that Fannie and Freddie have been increasing their fees, and each of the secondary market giants has been adjusting how much they will pay a credit union for a loan depending on the loan's attributes, which is making it "really hard" for CUs to structure a loan to a member.
"I think credit unions are looking for a simpler alternative," she said. "We would like more folks to know we are out there as an alternative for selling their loans."
Sandberg said that Mortgage Liquidity Solutions, LLC, which was formed in 2011 with a goal of building a solution for CUs to sell their first mortgage production beyond Fannie and Freddie, is also focused in two other areas: providing funding/warehouse lines of credit for CUs or CUSOs that need to hold loans before they are sold; and getting actively involved in helping sell non-conforming loans, including participation loans
Market Is Ripe
Because of the uncertainty around Fannie and Freddie and what the secondary market will look like going forward, Sandberg said private market sources are "getting serious" about purchasing mortgages. Many of these investors have not bought credit union loans before. Mortgage Liquidity Solutions has taken pools of loans from credit unions and shared them with those parties to allow them to ask questions and determine the best way to pull both tabs of the transaction together.
"The important part is opening options for credit unions so they can properly manage their mortgage operations and their balance sheets," she said. "We want to find investors that will be an ongoing source for credit unions, which would allow them to confidently originate loans knowing they have an outlet beyond Fannie and Freddie. Credit unions always want to have options."
Investors are cautiously looking at mortgages as real estate values have regained their footing.
"Capital markets folks want to get in early once they feel markets have hit bottom, because they want to ride the positive wave up," she said. "They see a financial opportunity, which is creating a window of opportunity for credit unions. They want to get this done before interest rates go up, and credit unions want this option created early. Once interest rates start going up, everybody is going to want to sell. This is why we are so focused on 2013."
The next step for Mortgage Liquidity Solutions is to identify a small group of credit unions that is interested in doing the first group of transactions that will open this market, Sandberg continued. She said anything that is difficult or complex is easier to do with a small group.
"Once we get the channel open it will be able to be used by credit unions of all sizes, but for this first one we think we need credit unions whose mortgage lines are a core part of their business and are a strategic focus for the organization."
For those CUs interested in selling loans, Sandberg said they can reach out to MLS and let the CUSO know what their mortgage operations look like, what the loans they might want to sell look like, and the two parties can work through what MLS can do to help. "We pull information together about a credit union and its loans, identify a target pool of loans a credit union wants to sell, then we go out and market loans on its behalf," she said. "Maybe it has too much of one type of loan, maybe it needs to manage interest rate risk, or is worried about asset liability management, or it might not have the capacity to hold a particular loan on its balance sheet."
In the wake of a long mortgage refi boom, a surplus of long-term, fixed-rate mortgage assets are prompting CUs to take action, she said. Most credit unions only hold a limited amount of 30-year, fixed loans on their books-and those are the loans many members want because rates have been so low.
In addition, some CUs have created products to help members get their mortgage paid off when they retire, including 10- or 12-year fixed-rate loans, that do not exactly conform to the Fannie or Freddie standard.
"If it cannot be sold to Fannie or Freddie, it ends up on the credit union's portfolio. If one has too many, we can help move those," she said. "It is about understanding the credit union's needs and how we can help them."
On the buyer's side, MLS has credit unions that are interested in diversifying. Sandberg said they are looking for good-quality loans, originated by credit unions, that can help their balance sheets.
"We are trying to facilitate the exchange between buyers and sellers," she said. "One thing we do that is unique-and there are companies that serve a loan brokerage capacity-is we stay with the transaction throughout its entire term. We provide support to both buyers and sellers, monthly reports to investors, answering questions for both sides. We make sure all parties have the information they need on an ongoing basis. For most brokerages, once the transaction is done they go away. We stay and play a role during the full term of the loan."