From the beginning, credit unions have understood the value of member bonds. As indicated by the annual American Banker/Gallup Consumer Survey, credit unions have ranked well above other financial institutions on quality and satisfaction levels for the past 21 years. And, while maintaining strong member relationships is a driving force behind most products credit unions offer, it becomes a little trickier with real estate loans, especially when selling the loans to the secondary market. There are many factors to consider – factors beyond dollars and cents.
A member who has a mortgage with his/her credit union typically uses four to six additional products at the credit union. As a result, the value of offering real estate loans goes a long way in positioning that credit union as the member’s primary financial institution. But offering a comprehensive mortgage program also incurs additional costs, complex operations, regulatory requirements and the personnel necessary to oversee the various aspects of the servicing process. These include receiving mortgage payments, managing escrow accounts and monitoring delinquencies. When you factor in the inherent risks of keeping mortgage loans on the books, it isn’t surprising that the benefits of selling mortgage loans become very attractive.
Servicing options in the secondary market
Selling loans to the secondary market makes a lot of sense for many credit unions. Selling your loans can create room for new loans, which increases your market share. It also helps alleviate the interest-rate, credit and liquidity risks associated with having long-term, high-dollar loans on your balance sheet. And, whether they are conforming or non-conforming mortgage loans, some investors will purchase both types on a loan-by-loan basis, or in bulk. Additionally, selling loans to the secondary market can result in additional revenues through servicing premiums.
However, be cautious when working with the secondary market – not all investors are the same. Some will purchase mortgage loans servicing-released, in which your credit union sells its loans and all servicing operations to an investor for a servicing-released premium (SRP). In the short-term, this arrangement and the SRP look great. But consider the relationship cost of this transaction. By releasing all servicing to the investor, the door is open for them to cross-sell other products to your members. There’s a distinct possibility that you will lose these members and your status as their primary financial institution.
Other secondary market outlets understand the value credit unions place on member relationships. These investors offer you different servicing options for selling your conforming and non-conforming mortgage loans and, most important, for keeping your member relationships. For example, Charlie Mac is a CUSO and a credit union-only secondary market investor with servicing options that keep the member relationship where it belongs – at the credit union.
This program allows a credit union to sell the loan and keep the servicing. Not only will the member relationship be preserved, but also the credit union will book a servicing asset and “strip” out an industry standard 25 basis points as compensation for servicing the loan. Such an arrangement is a true win-win for the credit union.
Selling servicing-released allows a credit union to capture the SRP up front and eliminates the cost of servicing the loan, but comes with the opportunity cost of the 25 basis point servicing strip that is retained by the investor. Most investors who buy a loan released, however, will cross-sell the member in an attempt to supplant the credit union as the member’s primary financial institution. Charlie Mac will buy loans servicing-released, but then private labels the servicing in the name of the credit union, so the member still can make payments directly to the credit union. Furthermore, Charlie Mac will not solicit the member for any purpose.
Charlie Mac created a truly innovative option for credit unions that contains some of the benefits of both programs. When a credit union sells servicing-maintained, it relinquishes the servicing asset and collects the SRP up front. Charlie Mac, however, has the credit union service the loan as a “sub-servicer” and even will pay the credit union a flat fee per loan, per year, to act in that capacity. A program like this allows a credit union to service the loan, capture an SRP and keep its most valuable asset – its member – safe at the credit union.
Putting a value on servicing rights
Before your credit union decides to sell its real estate loans or determines which servicing arrangement will be used, it’s important to understand the value of your servicing rights and the impact of retaining or releasing them.
According to ALM First Financial Advisors, an SEC-registered investment advisor working with credit unions nationwide, more credit unions are selling mortgage loans servicing-retained, which increases the need to value and account for the servicing asset.
“In today’s environment, it’s important that credit unions not only meet their regulatory requirements as mortgage servicers, but also stay current with market changes that impact their balance sheets,” says David Montgomery, ALM Manager at ALM First. The company offers credit unions a mortgage-servicing rights-valuation service tailored specifically to credit unions.
Programs like those offered by ALM First can be invaluable to credit unions, offering the sophisticated tools and experts required to determine the value of the income stream from servicing mortgage loans, as well as the ability to test for impairment over time.
Valuing the member relationship
While each credit union’s situation regarding the servicing of mortgage loans is different, one constant remains – the high value placed on member relationships. Whether a credit union chooses to act as a comprehensive lender or to sell its mortgage loans servicing-released or retained, restrictions related to cross-selling opportunities and interactions with credit union members should be negotiated with secondary market investors.
Remember, a mortgage is the biggest investment a member will make – and offering a great mortgage interest rate is only half of the equation. The real benefit to be gained comes with the servicing relationship – and retaining your members.
Charlie Mac is a corporate credit union-owned CUSO organized to serve credit unions exclusively. The company serves as a secondary market investor that purchases jumbo mortgage and auto loans originated by credit unions. Contact your corporate investment representative for more information.