Unravel Interest Rate Risk and Still Offer Jumbo Mortgages

The credit union mortgage lending community is being flooded by refinancing and is discovering a new market segment that previously hasn't received much attention. As housing prices increase and consumers feel safer investing in their homes than in the stock market - the need for mortgages over $300,700 is climbing. Credit union members needing jumbo mortgage loans are a growing segment of the mortgage market. As credit unions begin to focus on this affluent segment, they are realizing the benefits that come along with being a member's primary financial institution. One of those benefits includes additional yield generated from other credit union products that members are using. But along with the benefits come risks. If kept on the balance sheet, the inherent size of jumbo mortgage loans quickly increases not only the loan portfolio, but also the corresponding interest rate risk. Many credit unions are turning to the Network Liquidity Acceptance Company LLC, (NLAC) to help clear their balance sheets of these jumbo loans. The benefits of selling to NLAC will be discussed later in this article.

 

By My Credit Union

 

Jim McClintick is the director of national accounts for the Network Liquidity Acceptance Company LLC, (NLAC).
NLAC is a CUSO and wholly owned subsidiary of U.S. Central Credit Union. (888) 872-0440, ext. 6153.

The credit union mortgage lending community is being flooded by refinancing and is discovering a new market segment that previously hasn't received much attention. As housing prices increase and consumers feel safer investing in their homes than in the stock market - the need for mortgages over $300,700 is climbing. Credit union members needing jumbo mortgage loans are a growing segment of the mortgage market. As credit unions begin to focus on this affluent segment, they are realizing the benefits that come along with being a member's primary financial institution. One of those benefits includes additional yield generated from other credit union products that members are using. But along with the benefits come risks. If kept on the balance sheet, the inherent size of jumbo mortgage loans quickly increases not only the loan portfolio, but also the corresponding interest rate risk. Many credit unions are turning to the Network Liquidity Acceptance Company LLC, (NLAC) to help clear their balance sheets of these jumbo loans. The benefits of selling to NLAC will be discussed later in this article.

Interest rate risk is a concern because of the falling interest rate environment over the last 24 months plus the increased demand for 15 and 30 year fixed-rate jumbo mortgages from members who take advantage of those lower interest rates. Many credit unions are comfortable keeping short term fixed-rate or adjustable-rate jumbos on their books, but recently had to factor the mix of longer-term fixed-rate loan products into their portfolio in an effort to meet the needs of their members.

Such large holdings of jumbo mortgages can expose the credit union's net economic value, and ultimately its capital, to interest rate risk. At today's low interest rates, the gain in the value of these loans from an additional 50 basis points decline in rates pales in comparison to the loss in value for a corresponding rise in rates. Additionally, as rates rise, the average life of a portfolio of jumbo mortgages increases because mortgagors have little or no incentive to refinance. Instead they make only the required monthly payment, diminishing the cash flow that can be used by the credit union to make new loans or investments at existing higher yields.

In order to manage the corresponding risks with this type of product, credit unions should consider selling their jumbo mortgage loans as they are originated. This would allow the credit union to move the loan off its balance sheet at current market value and be less exposed to interest rate risk.

Finding the right partner is imperative to preserve the relationship with members. This relationship is particularly important with members who have a greater potential for using more products. Credit unions should keep in mind the following factors when looking for a purchaser of its jumbo loans:

  • Does the purchaser guarantee that the natural-person member will not be cross-sold?
  • Is the purchaser committed to providing the same level of excellent credit union service as the credit union? ·
  • Does the purchaser allow the credit union to retain the servicing or act as the sub-servicer in a servicing-released transaction?
  • Does the purchaser provide private-label options in a servicing-released transaction?
  • Does the purchaser allow the credit union to continue to solicit its members with other credit union products?
  • Does the purchaser understand out of the box lending where credit unions have a proven loan performance track record?
  • Does the purchaser tailor its program to fit established operational processes already in place at the credit union?

As options are examined, NLAC is a credit union solution provided by the Corporate Credit Union Network. As a corporate CUSO, NLAC's services are offered through corporate credit unions. That means NLAC understands and shares the same philosophy that guides credit unions in their relationships with their members. It also means as credit unions are making comparisons, they can have confidence in finding an outlet that meets their critical needs.

This sponsored content article is provided to the credit union community for shared insights and knowledge from a recognized solutions provider in the industry. Please note that the views and opinions offered here do not reflect those of Callahan & Associates, and Callahan does not endorse vendors or the solutions they offer.

If you are interested in contributing an article on CreditUnions.com, please contact our Callahan Media team at ads@creditunions.com or 1-800-446-7453.

 

Dec. 5, 2002


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