LAS VEGAS-In this city where the housing market has experienced breathtaking highs and lows in the last decade, one issue at the the American Credit Union Mortgage Association's recent annual conference here seemed especially relevant:
When it comes to mortgages, where do credit unions go from here?
Credit Union Journal sat down with three lenders who have reported success booking mortgages despite the many industry headwinds: Bob McKay, EVP/chief operating officer for $1.8 billion Baxter Credit Union, Vernon Hills, Ill.; Nader Moghaddam, president and CEO of $807 million Financial Partners CU, Downey, Calif.; and Mark Wilburn, SVP and chief lending officer for $685 million Truity CU, Bartlesville, Okla.
We asked for their thoughts on four topics: the need to switch to purchase mortgages as interest rates rise, dealing with compliance, the current status of underwriting standards, and the possibilities outsourcing can bring to all areas of mortgages. Here's what we found.
Bye Bye Refi
The No. 1 focus for credit unions should be on the purchase mortgage business, Baxter CU's McKay said bluntly. He suggested CUs start by setting "reasonable" expectations, both in volume and dollars.
"The reality is you will not replace every refi you lose with a purchase mortgage," he said, noting about 70% of his CU's mortgage business in recent years was refis. "Staffing needs to be at the right place, then [you can] execute a purchase strategy."
For most credit unions, a good purchase strategy means strong relationships with real estate agents, McKay continued. Baxter partners with CU Realty to raise awareness of its mortgages among its members. It has raised its marketing efforts "a lot" this year and will do more next year.
"We also put a lot of emphasis on our branch strategy, which includes branch managers actively taking applications," he said. "About 30% of our total production comes from our branches."
Baxter CU will do approximately $700 million in mortgage originations this year, about the same as 2012, according to McKay. "We are budgeting about a 30% drop in 2014. That is an expected 70% drop in refinance volume with a 25% increase in purchases."
Mass layoffs by bank mortgage departments are a "big opportunity to hire good talent," said Financial Partners CU's Moghaddam.
"Sometimes large companies are indiscriminate when they downsize, so there are people out there that credit unions should be looking at," he said. "As credit unions retool from refis to targeting the purchase segment, this is an opportunity to pick up talent."
According to Moghaddam, CUs should be looking to expand their mortgage market share at this time-for a number of reasons.
"At our credit union, 8% of members have their mortgage with us. I would like to triple that," he said. "Our mortgage members have an average of more than five account relationships. They truly are our best members in terms of participation."
If a credit union is not involved in mortgages, "it needs to be," Moghaddam continued. "If all a credit union does is book mortgages through a third party, that means an off-balance sheet income stream and it takes care of its members. The members learn if they have a need, they should go to the credit union. We do not want to say 'no.' If small credit unions do not want to have mortgages on their portfolio, they can use third parties. There are even some large credit unions that are not involved in mortgage banking, which is an opportunity left on the table."
Creating more purchase mortgages is a "mindset," said Wilburn, who described Truity CU as a "strong purchase money shop."
"I have had a business development person for 12 years now, and now I have three," he said. "We helped write a lending white paper. We have a lot of expertise."
During the refinance boom, Truity ran two tracks for mortgages: purchase money loans and business solicited from Realtors.
"If it took 60 or 70 days to close a refinance, that was okay," said Wilburn. "On the purchase side we hit all the contract dates."
Asked why some CUs are still reluctant to write home loans despite the success of many of their peers, and the need for interest income, Wilburn said some CUs look at the mortgage business and think of Realtors as a "distraction" or "the enemy."
"We look at Realtors as our partners," he said. "What it really takes is to be dedicated. It certainly takes resources to do mortgages, but there are so many different ways. Smaller credit unions can work with a real estate CUSO or a third-party originator. You can grow into the business, but the important thing is delivering loans to your members. You do not have to have a full-fledged operation inside your shop."
"The rules keep changing, so in some sense we become numb to it," said Baxter CU's McKay when asked about compliance challenges. "Everybody has to do it, so even the big banks are struggling. It definitely adds to the cost."
According to McKay, most credit unions do not know exactly what they will do with the CFPB's pending Qualified Mortgage rule, which takes effect in January, but he believes CUs will use as a starting point a desire to "do what is right" for their members.
"There is a fear of borrowers seizing on the QM rule to avoid foreclosure," he said. "Beyond QM, all the servicing changes [also mandated by the CFPB] are big. We use Cenlar/Prime Alliance. With them we get a company that all it does is mortgage services, which is a bit of a comfort. But there are a lot of credit unions struggling with servicing changes if they do it in-house."
Financial Partners' Moghaddam said CUs know they are operating in a time when there are a "significant amount" of changes that have occurred and will be occurring on the compliance front.
"They need to make sure they have the internal resources, and if they do not, look at external options," he said. "Otherwise, the consequences will be tremendous."
Financial Partners CU already has dedicated significant internal resources to compliance, and Moghaddam said it is expanding these efforts. "We are looking to double- and triple-check to make sure we have everything lined up. Fixing a problem takes more effort than getting it right the first time.
Financial Partners has brought in a third party to assist on the compliance front: Bankers Compliance Group, which works with banks and credit unions on training, document and form review, and processing.
Moghaddam insisted the Qualified Mortgage rule is "not a big deal to our credit union" due to the above-average financial position of its membership.
"Every credit union will have to answer what it does with QM, but our loan-to-value on first mortgages is about 56%, while our FICO scores are A or A-plus. I wish we were a more liberal lender because we would do a lot more volume, but because of the quality of our membership it is not a problem at this time. We are merging, so our membership base is going to diversify. We will have to be welcoming."
Truity CU's Wilburn said credit unions need to keep in mind there still are more rules coming.
"Compliance takes a bigger and bigger piece," he said. "We have a separate compliance officer who is making sure we hit all the January dates, and we are working as a group. We are prepared, and we have in place what we are going to do. Our software for statements is ready."
Wilburn said he often wonders how small credit unions have the resources to stay on top of the many new rules.
"Go back five years, managers probably spent 40 hours per year keeping up with compliance. Now, our mortgage manger spends 25% of his time per week."
A well-documented factor that led to the housing crisis last decade was many lenders ignoring underwriting standards in an effort to make more loans. After the collapse underwriting standards snapped back, to the point many consumers complained they could not find a loan.
So where are standards today?
Truity's Wilburn said the easy answer at his CU is, "we have not changed how we loan money in 20 years."
"We have had basically the same credit standards," he said. "One limitation is Freddie Mac and Fannie Mae have tightened their standards, so in some cases we cannot sell the loan to a GSE, but if we think the loan should be made we will make the loan. It might not be a 30-year fixed loan, but we will put the member is something that makes sense for them and for us."
According to Wilburn, the statistics show credit unions have performed much better than the rest of the market, which tells him CUs have done a "better job" of underwriting standards.
"Many of my friends in the credit union business have behaved much like we have," he said. "We stayed away from higher-risk products because we knew they were bogus."
Similarly, Baxter CU's McKay said credit unions did not see a "big whiplash" because "for the most part they were not doing crazy things."
"That is why credit unions did large volumes of loans during the recession," he said. "Credit union loan performance has done better, and that is due to us being consistent. At Baxter we have loosened up some, but we did not get that tight. We are used to doing a lot of loans, and we sell about 75% of first mortgages to Fannie. What happens to the GSEs is a big question for us."
Moghaddam said the "obvious reaction" to the crisis was to tighten up, but he believes in the last year standards have become "more reasonable"-and not just in mortgages but in all lending.
"Credit unions have done a better job recently of marketing to segments that we might not have wooed before," he said. "The standards today probably are as reasonable as regulations allow."
Financial Partners CU originates mortgages in multiple states, according to Moghaddam. That means when it looks outside its home base of Southern California, it looks toward outsourcing.
"I would not dream of bringing loan servicing in house," he said. "We have to work with our sub-service to minimize service breakdowns."
On the compliance side, Moghaddam said if a credit union does not have the resources to keep up it needs to outsource.
"Same with operations," he added. "The key is, 'know thyself.' Some credit unions look at outsourcing as taboo, but it just needs due diligence. If you get a tutor for your kid, you cannot just say, 'now the tutor is responsible.' You still have to take care of your kid."
For Truity's Wilburn, compliance with regulations or changes Fannie and Freddie have made are "good reasons" for outsourcing, as are needs the credit union does not have the skills to meet.
"Last year we originated loans in 32 states," he said. "If I was building a mortgage department today and had to do 32 states, I probably would use outsourcing. We started in Oklahoma in 1992, then added Kansas, then Texas. A couple years later it was a big deal to make our first loan in Colorado. Then we started making loans all over the country. We have developed a structure that allows us to do that, but we did so over time."
According to Wilburn, credit unions should look for help in finding outsourcing partners from ACUMA, CUNA Lending Council, their state leagues and their personal network.
"There are many outsourcing options available," he said.
McKay said Baxter's "evolution" of mortgage lending started with using a partner.
"Over time we brought more and more in house," he recalled. "We want to increase penetration of mortgages among our members. We now outsource all servicing because we are in all 50 states, but origination we do in house."
McKay also noted there are "so many" resources available to credit unions that are not in mortgages today, and urged them to take advantage.
"The opportunities for relationship building are great," he added. "If someone has a mortgage with their credit union, they probably have six, seven or eight other products."