Changing Dynamics In The Mortgage Market

The Refi Boom is over. Now, credit unions must start looking at the purchase market to increase market share in 2010.


A recession seemed like an odd time to see a boom anywhere, let alone in real estate lending. Unemployment was climbing, equity in homes was disappearing, and many financial institutions were closing their doors. Nevertheless, it happened, and the question for credit unions is, “What will it mean for the industry when it stops happening?”

Refi Boom, We Hardly Knew Ye

By the end of March 2009, the downward trickle of mortgage rates finally pulled the average 30-year fixed rate mortgage below 5%.  While that final fraction of a percent meant little from a practical standpoint, the announcement sent a clear message to home owners: rates can’t go much lower.

Expectations that housing prices would continue to fall were sufficient to keep purchase activity at bay, but refinance applications flooded banks and credit unions alike.  The Mortgage Bankers Association (MBA) reported that the average weekly refinance volume in early April was more than triple the level of the same time the previous year, almost reaching the refinance application volume of 2003.  This extraordinary volume persisted throughout April, May, and early June, although many credit unions anecdotally report experiencing above average application volume throughout the remainder of 2009.

Quarterly Refinance Volume Projected To Level As Purchases Slowly Recover

Source: Mortgage Bankers Association

However, it now appears that the refinance market will go back to sleep.  At this point, most consumers seeking to refinance have received a decision.  Further, the continued erosion of equity, paired with still tightening underwriting standards at most financial institutions, has helped abbreviate the Refi Boom despite the fact that mortgage rates bottomed again the first week of December at 4.71% (the lowest recorded point in the past half century).

Note: There are two observations which have significant implications for the credit union industry, explored in the second half of this article. First, the peak quarterly volume of refinance activity during the Refi Boom was only slightly above the 2006 peak of the housing bubble, and only for one quarter.  Second, purchases are projected to overtake refinances in second quarter of 2010 according to the MBA.

Credit Unions To Enter The Purchase Market

Initial estimates from the MBA, paired with finalized aggregated data on credit union mortgage lending activity, formed a picture of steadily rising credit union mortgage market share, with a spike during the refinance boom. Simultaneously, credit unions reported significant refinance activity, and a narrative emerged of credit unions increasing their market share by taking a larger piece of the “refi-pie.”

Later, the MBA revised their estimates, and the story of credit unions and the Refi Boom became clouded. Several inconsistencies challenged this narrative: Why didn’t credit unions experience higher market share during the swell in refinance in 2006? Why did credit union market share fall in 2Q 2009 as refinance volume surged?

Quarterly First Mortgage Originations And Market Share For Credit Unions

Source: Callahan's Peer-to-Peer Software, MBA

In reality, credit union mortgage lending during the Refi Boom is actually not a story about the Refi Boom at all. It’s about the emergence of the credit unions during the recession. A unique set of circumstances brought about by the recession pushed credit unions to the forefront as sources of credit to deserving home-buyers and home-owners.  General avoidance of subprime lending enhanced the image of the industry and favorable press coverage was abundant.  However, it would be overly simplistic to attribute recent credit union success solely to external conditions.

Recessionary trends awakened dormant advantages of the credit union model in the mortgage space. A previous article discusses the idea of a “new normal.” While the new normal was originally coined to describe a shift in macroeconomic trends, the term has both theoretical and practical use for credit unions.  Prevailing trends in the financial sector (tighter margins, deleveraging, stricter underwriting standards) play into the natural strengths of the credit union model in general, and mortgage lending model in particular.  With the collapse of securitized markets, mortgage lenders are being pushed back toward conservative, balance sheet-based lending practices. They are now playing in credit union territory, and credit unions have the home field advantage.

If the past two quarters of declining market share are any indication however, the credit union industry would be remiss to rely on new normal trends to continue to push credit union mortgage market share upward. Credit unions achieved this success by seizing the opportunities presented by these trends, and credit unions find themselves in a position to seize new opportunities in the evolving real estate market. However, they must leverage superior strategy: prepare for a shift to purchase mortgages, forge relationships with community partners, and continue to increase awareness of their mortgage programs.

Will there be a new normal for credit unions in the mortgage market, or will the industry return to the familiar territory of 2% market share?  Can 5% be the new 2%? It has taken monumental changes in the industry, the economy, and the nation to move the needle. Credit unions can grow market share in 2010; they will if they properly leverage their competitive advantage in light of these trends.