Business has been brisk for new home loans and refinanced mortgages – a welcome change of pace for the embattled financial services industry. With record-low interest rates, first-time-homebuyer incentives and government-backed programs to help homeowners renegotiate loan terms, loan departments across the country are gaining steam.
For many credit unions – where the best investment is still making loans to members – mortgage-loan production is brisk. But consider the current market conditions. Yes, they heavily favor member homeowners who lock into today’s low-coupon, fixed-rate mortgages. But they can also bring significant risk to credit unions in the coming years due to these historically low market rates.
It may be a good time for your credit union to seek out opportunities … but tread cautiously. Pay close attention not only to meeting regulatory requirements for mortgage programs, but also to current market changes that affect your balance sheet.
For credit unions that manage the servicing of their members' mortgages – and many do – valuing those servicing rights is significant to a successful mortgage program. Consider the following:
Due to potential extension risk, conducting prepayment "what-ifs" can determine true exposure to mortgage portfolios and whether selling loans would be beneficial.
Mortgage servicing rights derived from relatively low-coupon mortgages, like those originated today, are likely to retain their value given that interest rates are expected to increase.
Mortgage servicing rights valuations are designed to be two-fold: to help you determine the value of your credit union's income stream from servicing mortgage loans and to fulfill GAAP requirements. Valuations of serviced mortgages can be conducted in house or through a third-party provider. Inputs to the valuation include loan payment characteristics, servicing fees, ancillary income and servicing costs, as well as prepayment speed and discount rate assumptions. Fair value is calculated as the present value of projected net-servicing income. Periodically, fair value is compared with book value to determine if an adjustment to book value is necessary. It is recommended that credit unions discuss with their auditors the appropriate accounting methodology for mortgage servicing rights. The selection of accounting methodology depends at least in part on the materiality of mortgage servicing rights to the balance sheet as a whole, the cost of implementation, and the credit union's tolerance for earnings volatility.
While there are no precise requirements for credit unions about the frequency of valuations, the bottom line is this: Regardless of the accounting method your credit union uses, GAAP requires that credit unions' mortgage servicing rights be valued on a regular basis.
With making member loans key to your credit union's success, there's no time like now to make sure you are properly valuing your mortgage servicing rights.