Desert Schools Federal Credit Union ($3B, Phoenix, AZ) serves anyone who lives, works, worships, or attends school in Gila, Maricopa, or Pinal counties in Arizona. It has slightly more than $3.0 billion in assets, 320,000 members, and 50 branches. Although it sells the majority of the first mortgages it originates to Fannie Mae, it retains loan servicing. Here, Jeff Meshey, executive vice president, and Gary Sneed, chief lending officer, discuss the credit union’s plans for mortgage lending in 2013.
What will Desert Schools be doing with real estate lending in 2013?
JM&GS: We saw HARP2 as a tremendous opportunity and planned for it. We did something we don’t normally do, which was double our staff in the mortgage processing area but not the retail sales staff. We began this expansion in March 2012 and took about four months to complete the hiring. We felt otherwise we could not do a good job dealing with the volume of loans we expected to attract. Indeed, we have seen a huge increase in mortgage lending. In 2011, we were closing first mortgage loans at a rate of about $20 million a month, but that’s currently expanded to more like $50-$60 million a month. In order to do this, we have to process a lot more units. Before the market decline in home prices our average mortgage loan amount was $200,000-$240,000; now it is more like $145,000.
Describe your new loans.
JM&GS: We are seeing an approximate 50-50 split between refis for our own mortgages and those made by competitor lenders. Principally these are the big three banks in our market area: Wells Fargo, Chase, and Bank of America. We have been quite successful at bringing these mortgages over to Desert Schools and are happy to write mortgages for these families, many of whom who are members of Desert Schools but do not have their mortgages here. HARP2 is scheduled to end in 2013, and we need to take advantage of the opportunities that it has brought us.
How do borrowers find out about your mortgage program?
JM&GS: Mainly through word-of-mouth and our website, where we post information about our HARP program. We have not done much outward-facing marketing. We also post rates in the branches, which attract interest. In addition, we encourage our retail staff to discuss the program with members and prospective members — there is good retail awareness at the branches.
What’s your competitive environment like?
JM&GS: The big three banks have a large presence here and most of the market. The rest of the market is fragmented among Desert Schools, the other financial institutions, and the independent mortgage bankers and brokers.
How do you compete?
JM&GS: The big three were relatively slow at underwriting — taking 120 to 180 days to close a loan — and Bank of America had even suspended new mortgage applications for a period of time. We were closing refinanced mortgages in 60 to 90 days, so speed has been a competitive advantage for us.
Are you offering better rates?
JM&GS:: Not necessarily. We generally don’t have the best rate, but we never have the worst rate. We try to stay in the best half for rates. Mortgage rates have become commoditized, most with no more than an eighth of a point difference between them on any given day.
So you are competing on …
JM&GS: Speed and service for the most part. We are known for taking care of members on their other loans — especially auto loans — and members believe we can take good care of them with their mortgages. We retain the servicing for our mortgages, something we feel is important to the member in building and maintaining relationships.
You are also doing some non-HARP lending?
JM&GS: Yes, though most of our lending right now is HARP2, which is scheduled to sunset at the end of 2013. There might be some sort of extension, some sort of HARP3, but that is just conjecture at this point.
How is your market doing?
JM&GS: We were beneficiaries during the real estate boom and one of the early victims of the bust. But as we expected, values are coming back quicker here than in other places — Phoenix is currently the No. 1 MSA [metropolitan statistical area] in market appreciation according to Case Schiller reports over the past 12 months.
You doubled your processing staff in anticipation of HARP activity. What happens when HARP ends?
JM&GS: We had to plan for it, and we have. HARP one day will go away; interest rates will rise; and most mortgage holders who could have refinanced will have done so. We want to be ahead of the curve for keeping and properly using the people we have hired. Our goal is to create demand for the purchase mortgage business. We plan to do this through the realtor community, and we will ramp up our outward-facing traditional marketing with television and the Internet. We are looking to hire more sales people this year, namely mortgage loan officers like the mortgage companies have who are on the street and can solicit business from real estate agents and the general public. We think we can attract the right sales people to join our team and assist us with this strategy.
Describe the back-office group that comprised the bulk of your expansion.
JM&GS: It is a centralized processing group in our main office. The sales staff takes applications over the Internet, by phone, and in person. The system is tied to Fannie Mae’s desktop underwriting system and gives us our loan decisioning. Once we have an approval, central processing assembles the documentation to verify the application information and present it to Fannie Mae. It’s a detail-intensive process and where the bulk of the operating costs lie. There are now more questions and more paperwork than three years ago. Some people complain about it, but to be conforming we have to go through more than we used to — Fannie Mae is pickier and wants more information. As a lender we have to be careful, too. Fannie will make lenders repurchase a mortgage in default if they didn’t properly underwrite the loan, even if an “i” wasn’t dotted or a “t” crossed. You undo a lot of profitable months fast if you end up with some repurchases.
So we caution others: Do your research. Make sure you are doing everything to the letter — this is no area to be trying for shortcuts.
How do you deal with member annoyance?
JM&GS: We work with the sales team to help it prepare members for what they are going to face. We tell members we don’t ask for anything more than is required.
Describe the structure of your lending operation.
JM: Previously, we had segregated the sales side from the processing side. The sales team reported up through retail, which reported to the vice president managing all the branches. Since Gary joined us three years ago, we have brought the sales and processing functions together and both report to him. This has been successful. Under the old system, each group looked to its own goals. Under the combined system, though, there is greater accountability and teamwork. We’ve had sales people help the processing staff when there is a backlog. The quality of loans is also better, which is a critical part of the business these days.
How do you see your future unfolding?
JM&GS: With such a small percentage of the mortgage market, we have a tremendous opportunity. The challenge is how to get people to think of us as a mortgage lender, not just an auto lender. The big three banks have done a good job here. They have put a lot of effort into mortgage lending, but we feel we can successfully compete with them. So much comes down to service, and we have an advantage there. We believe we will expand market share at the expense of the independents as well as a bit of the big three.
The anxiety people feel over where their mortgage will end up is an advantage for us. We tell them right away that Fannie will own the mortgage but Desert Schools will always do the servicing.
Do you have advice for other credit unions?
JM&GS: Prepare for volume before it comes. Beef up staff before volume because the last thing you want to do is bring in business you cannot handle. Close loans in a timely manner or you’ll turn people off.
If you are going to significantly ramp up for extra volume, examine your other segments to make sure they are ready also. Servicing, secondary marketing, and quality review are areas that might be stressed; be ready in advance. If you are ready, you can contribute to your bottom line and gain market share.