Days on market hit an all-time low for U.S. houses, whereas median list pricing hit an all-time high in 2018.
Despite remaining near historic lows, rising rates are already affecting refinance transactions.
Bob Dorsa, Co-Founder and President, American Credit Union Mortgage Association
Homes for sale sat on the market for only 54 days in June 2018 — an all-time low according to data and analysis from realtor.com.
For lenders hoping to recapture that lightning in a jar, Bob Dorsa, co-founder and president of the American Credit Union Mortgage Association (ACUMA), says the 2019 homebuying season might be different.
“The glass is half full, not half empty,” Dorsa says. “But things will be more difficult.”
Several economic factors will weigh heavy upon credit unions that offer mortgages — which was approximately 57% of the industry at third quarter 2018, per 5300 Call Report data — including the potential for additional rate hikes, a lack of housing supply, and a continued war for talent.
Yet, despite these factors, many credit unions are bullish on the upcoming housing season, having established strategies and programs they believe will benefit their business. Here are four factors credit unions should watch for in the upcoming homebuying season.
No. 1: Rates
CU QUICK FACTS
Digital Credit Union
HQ: Marlborough, MA
Data as of 09.30.18
12-MO SHARE GROWTH: 5.5%
12-MO LOAN GROWTH: 6.2%
In December 2015, the Federal Reserve increased the federal funds rate for the first time since June 2006, from 0.0 - 0.25% to 0.25 - 0.50%. Since then, the Fed has increased the rate eight times, most recently in December 2018, to its current range of 2.25 - 2.50%. In late January 2019, the central bank voted unanimously to hold its policy rate at this range, citing the necessity for a more “patient” approach to future adjustments.
While the federal funds rate has increased 250 basis points in four years, the 10-Year Treasury note — typically a barometer for setting 30-year fixed mortgage rates — has increased just 40 basis points. On the shorter-end of the yield curve, rates for the 2-Year and 5-Year Treasury notes have increased 119 and 73 basis points, respectively. What does this mean?
“Mortgage rates haven’t gone all the way up,” says Dorsa.
Caleb Cook, Vice President of Mortgages, Digital Credit Union
This is especially clear when comparing mortgages rates to other products credit union’s offer.
Caleb Cook, vice president of mortgages at Digital Credit Union ($8.5B, Marlborough, MA) agrees.
“Mortgage rates are still near historic lows,” he says.
And with the Fed’s recent comments, mortgage rates might hold steady for the next several months.
“We are likely to see a pause from interest rate hikes at least for the first half of the year,” says Darren McNannay, director of real estate at STCU ($3.0B, Liberty Lake, WA). “That said, there are many other outside factors that can influence interest rates.”
CU QUICK FACTS
HQ: Liberty Lake, WA
Data as of 09.30.18
12-MO SHARE GROWTH: 9.0%
12-MO LOAN GROWTH: 9.0%
Despite remaining near historic lows, rising rates are already affecting refinance transactions. Both McNannay at STCU and Cook at Digital say refinance activity has dropped at their institutions, and Dorsa says rising rates is one of the largest challenges credit union mortgage lenders will face in the coming years.
The shift to a purchase mortgage market is already underway across the industry. According to its 2019 forecast, the Mortgage Bankers Association expects a 4.2% increase in purchase mortgage originations in 2019 and a 12.4% decrease in refinance originations.
However, a shortage in housing stock (see below) will require lenders to fight over a generally smaller purchase market. STCU and Digital have found success in home equity loans, and in Rhode Island, Navigant Credit Union ($2.1B, Smithfield, RI) offers a rehab/renovation loan.
“Most people have already financed to lower rates,” says Cook at Digital. “And rather than cash out their equity for a down payment on a larger home, they’re turning that into home equity loans.”
Darren McNannay, Director of Real Estate, STCU
McNannay reports the same thing is happening in STCU’s market of Spokane, WA.
“We’re seeing borrowers using the equity in their home to take cash out to remodel,” he says. “This is due to the lack of inventory and affordability in our markets.”
No. 2: Inventory
When it comes to mortgage lending in 2019, inventory weighs heavy on the minds of lenders.
“The elephant in the room is inventory and the shortage of quality move-in ready homes on the market,” says David DeCubellis, vice president of residential mortgage at Navigant.
According to a January 2019 housing report, the market has hit a record low in terms of available homes per sale. And although the median listing price in the United states grew 7% year-over-year to $289,300 as of January, the number of homes priced at $750,000 or more increased 12%, whereas the number of homes priced at $200,000 or lower declined 6%.
CU QUICK FACTS
Navigant Credit Union
HQ: Smithfield, RI
Data as of 09.30.18
12-MO SHARE GROWTH: 16.1%
12-MO LOAN GROWTH: 16.2%
Cook at Digital says the proliferation of high-priced housing is partially the result of builder incentives.
“The money is in higher-end homes,” he says. “They would rather build a $600,000 home and make $200,000 than build three $200,000 homes and only make $50,000 on each. That’s where the banks are lending, and it’s less risky.”
But for a first-time homebuyer that wants to break into the market, a $600,000 home can be out of their reach, even with incentives such as discounted closing costs and down payment assistance.
Affordable and available housing stock will have to come from existing housing stock, Cook says. Although even that might not solve the problem entirely.
“Boomers are finally starting to move out of their house,” Cook says. “It’s not brand new, and it’s not 5,000 square feet, but it’s a nice house. That churn will help, but in no way will it solve things. We have an issue in this country where we need to create incentives to build affordable housing.”
David DeCubellis, Vice President Of Residential Mortgage, Navigant Credit Union
DeCubellis from Navigant agrees.
“Inventory might improve slightly, but we can expect even greater competition among potential buyers and all lending institutions as we fight for a share of a smaller purchase market,” he says. “It is a time when brand recognition will matter more than ever.
No. 3: Reputation
For DeCubellis, competition, brand loyalty, and market conditions will define 2019, with well-known branding and well-built relationships across the industry reigning as a competitive differentiator.
“For those of us with strong brand and identity in the industry, we will lean on our many years of competitive loan programs, exceptional member service, and convenience to separate us from our rivals,” DeCubellis says. “We must place emphasis on what we do well.”
And what Navigant does well is consider its relationships — both with industry players and its members.
Three years ago, the credit union launched a first-time homebuyer seminar, which provides not only an avenue for homeownership education and an interest rate reduction but also a platform for local realtors to extend their business. It’s a relationship that pays dividends, too, as it has helped the Rhode Island-based cooperative add more than $500 million to its first mortgage portfolio over the past five years.
CU QUICK FACTS
HQ: Vienna, VA
Data as of 09.30.18
12-MO SHARE GROWTH: 12.6%
12-MO LOAN GROWTH: 13.1%
“As advocates for our members, we have a responsibility to educate,” DeCubellis says. “In a shrinking purchase market, the relationships we have with realtors and attorneys are important, as well.”
Some credit unions, like Navigant and Navy Federal Credit Union ($95.3B, Vienna, VA), offer construction loans, which give the lenders access to oft-forgotten players in the homebuying process: the builders and the contractors.
“It’s important to build trusted relationships will all of those involved in the homebuying process,” says Kevin Torres, Navy’s mortgage product strategist who oversees the credit union’s builder liaison program. “Connecting with builders is important because it helps our members, especially those first-time homebuyers, find a house they can really make their home.”
Navy has teams that process only new construction loans, says Torres. Additionally, the credit union has employees who serve as liaisons between builders and members with construction loans.
Kevin Torres, Mortgage Product Strategist, Navy FCU
“Our liaisons ensure there are no delays or issues with the process and that’s it’s a great experience for all involved,” Torres says. “Our goal is to do the right thing, and that goes both for builders and our members. That builds trust on both sides and helps everyone achieve their goal.”
According to DeCubellis, Navigant’s borrowers can incorporate a land purchase into a traditional loan, whether stick-built or modular, with rates that mirror the credit union’s conventional rates and allows for a minimal down payment.
“It offers local appeal and allows us to develop strong relationships with local contractors,” the vice president says.
In Spokane, to position itself to accommodate a new purchase market, STCU has built external teams to focus on the realtor and builder business, McNannay says. These teams give STCU boots-on-the-ground representatives for one-on-one relationship building and provide realtors and builders points of contact for business that needs to be conducted outside of traditional hours.
McNannay says there are no silver bullets when it comes to building relationships with realtors, but he does have two pieces of advice. First, communicate frequently with the real estate agent and always meet closing dates. Second, make sure that the partnership is a good fit for both parties.
“So often I hear of ‘partnerships’ that are strained and not working for either party,” McNannay says. “My advice is to get a deal from them and see how it goes, then give a deal and see how that goes. There needs to be a level of reciprocity where both parties benefit.”
It’s important to build trusted relationships will all of those involved in the homebuying process. Connecting with builders is important because it helps our members find a house they can really make their home.
No. 4: Talent
In November 2018, the U.S. unemployment rate hit a 49-year low of 3.7%. In December, unemployment ticked up to 3.9%. For credit union lenders, this has created a challenging environment to recruit talent.
“We’re coming off the refinance boom of the past three years, but back in those days every mortgage lender was so busy it was hard to find qualified people,” says Cook at Digital. “People were getting poached by non-bank lenders and getting sign-on bonuses and significant raises.”
As the refinance market cools, many lenders without non-mortgage asset classes to rely on are starting to lay off qualified lenders — a positive for credit unions looking for talent. It’s just not the type of lender Digital is looking for, Cook says.
“Our recruitment strategy does not involve traditional or commissioned loan officers,” he says. “I don’t want them. They are hard to un-train from their ways.”
Instead, Cook looks for green applicants, those who have never touched a mortgage. He didn’t have a mortgage background when he started in credit unions two decades ago and believes there are enough free and paid training opportunities to turn these greenies into seasoned vets. That approach is more appealing than expecting a type-A sales person to unlearn habits learned in a commissioned sales structure.
“Our model is not focused on individual contributions but a collective team approach throughout the credit union,” he says.
Digital does not offer individual incentives. Rather, at the end of each year, it rewards employees from a shared bonus pool known as Success Sharing that pays out depending on whether the credit union hit a number of key objectives, including member, checking, savings, and loan growth.
When hiring new loan officers, Digital focuses on personality first and foremost — people who have positive, outgoing personalities and care about customer service and exhibit high levels of empathy. Phone experience is important, too.
“If you are a loan officer, you can’t be afraid to pick up the phone,” Cook says. Perhaps unsurprisingly, he’s found call center employees make excellent candidates.
Because employees are green, Digital offers leeway when they make mistakes in the beginning, even when those mistakes add up to a few thousand dollars. Allowing new hires to work through challenges and mistakes helps them in their careers, whether that’s in processing or underwriting or as a loan officer. Plus, it helps Digital hire younger employees and establish a bridge to the future.
“We’re struggling to attract the next generation of our industry,” Cook says. “I’m 40. I’m an old guy. This industry is not getting carried forward by me. We need the people who can and will see it through the next 50 years.”
Watch Out For These 4 Factors
It takes minutes to compare various aspects of your mortgage portfolio to look out for these factors using MortgageAnalyzer. Let us walk you through your numbers with a custom performance audit.
Want more credit union strategies? Sign up for the CreditUnions.com free newsletter.