One consequence of the housing boom in the first decade of the 21st century was the development of credit unions as significant players in America’s housing markets.
In 2009-10, credit unions originated a total of $180 billion in first mortgage loans. The cooperative financial sector is well on its way to a 10% market share, a goal set by the Credit Union Housing Roundtable over five years ago.
In 2010 alone, over 3,500 credit unions originated first mortgage loans to 510,000 members. This $84.5 billion total does not include loans originated by credit union service organizations (CUSOs) or correspondent and referral programs, all of which would add billions more to the total funded from the balance sheet.
A Member-First Approach to the Mortgage Market
The credit union presence is more than a product extension or diversification to a new lending asset class. Credit union volume is also driven by the intent of helping members take advantage of the lowest mortgage rates ever. Low interest rates, falling home prices, and stable median household income have led the home affordability index to one of the highest levels ever.
Providing members access to these record low rates created much of the $84.5 billion volume in 2010. These refinancings reduced members’ debt burdens and put cash back in homeowners’ pockets, savings that is mostly spent locally.
In assisting members to overcome the “transaction friction” burden of a refinance, credit unions were able to increase market share even though overall national mortgage financing declined 24.6% from 2009.
This member-first orientation has propelled credit unions’ total volume and market share from 2% to the 5.4% over the past five years.
In states where the state charted system had mortgage lending authority before the federal credit union change in 1978, market share is even higher.
Rhode Island credit unions captured 12.8% of the state’s 2010 first mortgage volume. Iowa, Maine, and Wisconsin also all post market share rates above 7%.
A Diversified Balance Sheet
Credit unions’ portfolio of first mortgages reached $226.6 billion at year-end 2010, a growth of $62 billion over the past five years.
These first mortgages are a mix of fixed and adjustable-rate products, as well as short and longer-term assets. This composition closely follows the originations in 2010, in which 78% were fixed-rate products, the majority of which were sold on the secondary market.
Even with the growth, the percentage of fixed-rate mortgages to total assets has remained relatively constant over the past five years. With the loan-to-share ratio at 69.0% at March 31, 2011, there is still plenty of room for credit unions to write additional mortgages that fit their individual ALM policy guidelines.
The Growing Secondary Market Activity
As credit union mortgage lending activity has grown, so has credit union use of secondary markets in both total dollars and the percentage of originations sold. During the past two years, over half of first mortgage originations have been sold in the secondary market.
Today most of the sales are to Fannie and Freddie, with some increased use of FHA for low-money-down mortgages. In addition, there are credit unions that sell or refer the bulk of their applications to third-party correspondent banks or mortgage companies.
To continue to grow and serve more members, credit unions will rely, as do most other mortgage lenders, on access to secondary markets for both liquidity and managing interest rate risk.
Consistent, Stable Lending Practices Lead to Strong Asset Quality
Credit unions have not only built an increasing mortgage lending role but have also demonstrated their ability to do so with above-average asset quality.
At year-end 2010, average credit union delinquency and net charge-off ratios were one-third to one-quarter the same ratios at FDIC-insured institutions. This difference is even more noteworthy when noting that bank delinquency is reported when a loan is 90 days or more past due while credit unions report at 60 days past due.
First Mortgage delinquency for FDIC-insured institutions reached 9.6% at year-end 2010 compared to just 2.2% for credit unions. Credit union net charge-offs were .40% at the end of the first quarter, compared to 1.52% for bank first mortgages.
And if a loan is past due, credit unions are taking action to help members. Through December 31, 2010, credit unions had modified $7.7 billion in first mortgages, helping 32,000 members remain in their homes.
The Capacity to Create a Cooperative Secondary Market Solution
The data above all support the feasibility of credit unions creating their own secondary market solution that could lead to even greater value for members. The trends show that:
• Credit unions have sufficient volume;
• Credit unions have the consistent flow to remain active in the market in all cycles
• Credit unions have significantly higher asset quality than is found at FDIC-insured institutions, reflecting both their member orientation and local underwriting focus;
• And credit unions retain servicing on the vast majority of loans sold because they want to have a member relationship for the long term, not just turn over assets. This approach is an advantage in situations where loan modifications are necessary.
Today more than 500 credit unions originate, sell, and service first mortgages — that is, manage the full mortgage financing value chain. But to be able to realize the advantages of their first mortgage record and their cooperative approach to member relationships, credit unions will need to create their own secondary market solution. The record is there and so is the need. Now the challenge is to mobilize the collaborative spirit that is the ultimate advantage credit unions bring to any market.
Read more exclusive credit union industry coverage in this month's edition of the The Callahan Report.