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The nation’s housing market has changed tremendously since the credit crisis of 2008 and 2009, but the change is not over. Three of the largest lenders – Countrywide, Washington Mutual and IndyMac – are gone. Bank of America is retreating from the mortgage market, and Citi has significantly tightened its correspondent channel. The future of Fannie Mae and Freddie Mac is uncertain – if they survive, they are likely to look starkly different. Meanwhile, credit union market share of the nation’s first mortgages has risen from 2% to an all-time high of more than 8%.
Credit union momentum comes as the nation is struggling with housing finance policy. November’s national elections will stimulate proposals from both political parties that might aim to appease voters rather than create sustainable, long-term policy. The nation needs an informed discussion on housing finance reform. Credit unions have the chance to play a role in this discussion and help shape policy. The industry’s record lending, including mortgage lending, since 2007 validates the important role cooperatives play in local economies. Given the uncertainty surrounding the future of mortgage finance, credit unions have the opportunity to assert their place at the table.
Credit unions need to be a strong voice in this discussion for many reasons. Credit unions are resolute in their communities. Collectively they form a tapestry of insight and action that is woven into their communities. They are not a network imposed from a home office in San Francisco, New York, or Charlotte. This locally informed approach is the antithesis of the nationwide banks’, who manage from a remote board room. Credit unions choose bettering communities and members’ lives over simple profit and cash flow. And they’re winning with this strategy, emerging as a leader in the national mortgage market while quadrupling their market share in only five years. It’s an extraordinary gain that makes the case for our active participation in a thoughtful discussion of a new national housing finance strategy.
Market Share: Present And Future
In 2006, when credit unions held just 2% of the mortgage market, the CU Housing Roundtable devised an ambitious BHAG (Big, Hairy, Audacious Goal) to achieve 10% by 2016, termed “2 to 10 in 10.” The 8.2% share in the first quarter of 2012 is close to the 10% goal, which is imminently attainable given the market dynamics. Credit unions taken together are the third-largest mortgage lender after Wells Fargo, which has more than one-third of the market, and JPMorgan Chase.
It’s time to raise our ambitions. Perhaps the goal should now be “8-20-20,” meaning we should aspire to move from 8% market share to 20% by 2020. Is it possible? In 17 metropolitan statistical areas credit unions already originate in excess of 20% of all mortgages.
Now for the tougher questions: Is that goal desirable? Will meeting it make a difference to American families? If so, how can we achieve it?
Finding Positives In A Crisis
First, achieving 8-20-20 is possible. Credit unions’ rise in mortgage market share has a number of sources. In the late 2000’s, Bank of America and JPMorgan Chase absorbed Countrywide and Washington Mutual. Digesting these mortgage giants proved problematic for both institutions, which have since been reducing mortgage lending because of balance sheet constraints, legal liabilities, and delinquencies. Mortgage brokers went out of business. Some community banks and S&Ls suffered from lofty delinquency, liquidity issues, and a changing regulatory landscape. Their reaction – like that of the megabanks – has been to write fewer mortgages.
All the while credit unions have pressed ahead. They’re serving their communities by educating, advising, and providing sensible mortgages to responsible borrowers. This ethos is reflected in a mortgage delinquency rate that peaked at 2.3% in 2010, one-fifth of the 10.6% peak for FDIC-insured institutions.
Although the mortgage market turmoil that played a role in credit unions’ 8% market share has eased, the market is still in flux and more change is on the way, including continuing aftershocks from the 2008 economic calamity, unpredictable Congressional action, uncertain regulatory direction, and struggling megabanks.
But these are not the only changes in the mortgage market. Americans are increasingly discontent with banks and are moving to credit unions. The missteps of banks and the relative clean operation of credit unions have raised credit unions’ reputations and visibility to new heights. Credit union membership growth is accelerating as a result, with more than 1.1 million members added in the past two quarters.
If credit unions do nothing, likely increases in mortgage market share will correspond with membership growth – but nothing more. If they seize the moment, however, credit unions can ensure mortgages uplift families rather than weigh them down. But it’s going to take imagination, industry collaboration, and significant sacrifice before credit unions achieve that meaty 20% market share.
Change Is Underway
Many facets of mortgage lending are uncertain, including the long-term roles of Fannie and Freddie. We can say with fair confidence, however, that the GSEs’ role in the national mortgage market will be significantly diminished, if not terminated, in the coming years. Some in the public dialog have called for the unwinding of Fannie and Freddie, which would likely end the 30-year mortgage in this country. Others call for a redesign that limits the government role to insuring a tightly targeted segment of FHA, USDA and VA borrowers only and to providing general assurance only for catastrophic losses. Such insurance would sit behind a massive infusion of private capital that creditors would claim ahead of any government intervention.
The GSEs’ role and support in the mortgage market will change. They will likely reduce their current 90+% market share to a more historic norm in the 60% range. The question is: What will fill the void?
If new non-agency alternatives do not emerge, the remainder of the nation’s mortgages is likely to go to an effective oligopoly of the largest banks. Interest rate risk concerns at credit unions and NCUA would likely quash the option of retaining mortgages on the underwriters’ balance sheets, especially for fixed rate, 30-year loans. The large banks will likely demand, and secure, the servicing. If credit unions lose this piece, will service released be service denied to credit union members?
Or maybe a new mechanism will arise for a secondary market and securitization, with one or more options rooted in the cooperative model. With competitors holding back and with more people turning to credit unions, now is the time to vigorously seize the market opportunity, starting with intra-industry mortgage sales. Credit unions have the capacity and liquidity right now to buy and sell mortgages among themselves. However, if they want to write 20%, or even 30%, of the nation’s mortgages, they must eventually develop an outlet to outside investors.
Moving in that direction is going to take an industry-wide, conscious, cooperative effort. Growing market share organically and in traditional ways will likely leave credit unions short of an ambitious 20% market share goal.
Credit Union Advantages
Credit unions can reach 20% market share by 2020 – believe it!
Credit unions have a great story to tell. Aside from the growing discontent with banks, increasing credit union membership, rising market share, and strong balance sheets, potential investors will find several good qualities in credit union mortgages. They will like the strong relationship members have with their credit unions, the solid credit quality of credit union members, the low rate of credit union delinquencies and charge-offs, the reputation of credit unions for innovative products, and the ability of credit unions to sustain their communities such as through effective modification programs.
With regard to superior credit quality, rating agencies have lately been conducting 100% loan inspections in the wake of the subprime debacle and investors are following suit. More scrutiny will work to credit unions’ advantage as the private secondary market is rebuilt from scratch, one loan at a time.
The Cooperative Response
What steps can credit unions take and what questions can they ask to get to 8-20-20? Here are a few starting points:
Track market share in local communities as well as nationally. Where are credit unions succeeding? How can others replicate their marketplace success? What can we learn from the 17 communities in the U.S. where credit unions already originate at least 20% of mortgages?
Understand how individual credit unions have successfully raised their profile in the mortgage market since 2008. Conclusions might lead to better courting realtors, being more aggressive in pursuit of purchase mortgages, and partnering with mortgage CUSOs and the like.
In the first quarter, 4.4% (by number) of credit unions processed 80% of the industry’s first mortgage originations. Which small credit unions have had success in mortgage lending? How can smaller institutions get involved with mortgage lending?
Are there product innovations that are both balance sheet- and member-friendly that credit unions can develop? Are there lessons the industry can learn from markets outside the U.S.?
What role will demographics play in the coming years? Housing affordability – tied to interest rates, home prices, and median income – is near its peak. Developing strong first-time homebuyer programs will not only capture a larger share of the purchase market but attract younger members.
Begin a dialogue with potential outside investors such as insurance companies, pension funds, and Wall Street firms.
Evaluate options such as participations, securitizations, credit union mutual funds, and credit union real estate investment trusts.
Look at involving NCUA. For example, could NCUA guarantee mortgages the way it is now guaranteeing bonds? Spur NCUA to stimulate a national policy debate on housing finance.
Follow, and influence if possible, changes in the structures of the secondary market through legislation and regulation.
This list sounds ambitious, but undertaking just a few of these moves will jump-start the industry. The window of opportunity is not going to stay open indefinitely. We should set our minds to our new goal and take the first steps now.