In 2000, BECU of Seattle, Washington, formed a CUSO called Prime Alliance Solutions, Inc. The goal was to solve a strategic and operational issue for BECU, namely mortgage lending. The new CUSO was based on the idea that credit unions -- not banks, mortgage banks, or Wall Street investors -- should control how credit unions finance homes for members. Our driving principle was increasing member value by lowering the cost of home ownership.
Once Prime Alliance had gone into operation, other credit unions learned of our vision, thought the idea had merit, and encouraged us to share our solution with them. Thus Prime Alliance came to be more than a single credit union's operation.
Two goals drove every decision Prime Alliance made. First, we chose to do only those things that lowered the cost of home ownership while still improving an individual's housing finance experience. Second, everything we undertook had to make our CUSO's customers - - exclusively credit unions - - more efficient.
From 1 to 1,400 in Six Years
Achieving cost effectiveness, or “CUSO viability,” requires quickly reaching sufficient scale. The reason is market leverage, which is needed for the kind of buying power more typical of the nation's largest financial institutions. In the several-trillion-dollar mortgage market, total credit union originations reach only 2-3% market share in their best years. Moreover, over 80% of this activity is concentrated in the top 200 credit union lenders. The remaining 8,500 credit unions, should they all operate on their own, are mere fly-specks in the market. Small size leads to high costs and an inability to create real member value.
Prime Alliance has achieved the scale and volume needed to be competitive, growing to a customer base of over 1,400 credit unions by midyear 2006. We did this not by using a single model but two. First, we worked directly with credit unions. There is no magic here. Our “direct model” is the same approach used by CO-OP Financial Services, Credit Union Direct Lending, PSCU Financial Services and other large CUSOs. These all have direct member-owners who work within a single organizational structure. Today we have almost 200 direct owners.
But we reasoned that this would not be enough. So we also worked with other CUSOs and mortgage companies that serve credit unions. This is the “indirect model.” We realized our lending platform and related solutions could help every credit union lower the cost of home ownership for their members. And we also realized credit unions have many different models for mortgage lending, models supported or enabled by other CUSOs and mortgage companies. We reached out to them.
The direct model benefits credit unions with the resources and wherewithal to handle all mortgage-related functions in-house. These credit unions typically service significant real estate loan portfolios and actively use the secondary market. The indirect model enables credit unions with fewer in-house resources to cost-effectively employ the same solution used by the nation's largest credit union lenders. These “indirect-model” credit unions perform the mortgage functions they are most comfortable with, turning over the rest to our CUSO and other partners. The result: Credit unions combine their volumes to achieve competitive advantage.
The Benefits of Scale
After just six years, Prime Alliance credit unions' volume makes it the 11 th largest retail mortgage lender in the United States . This aggregated market position translates into market leverage. The credit unions working with Prime Alliance enjoy lower costs for settlement services, improved mortgage sale execution, reduced quality control requirements and lower technology expenses.
The large Prime Alliance scale, and thus the market leverage, benefits members in the form of lower closing costs and lower mortgage rates. One of our credit unions regularly compares its mortgage offerings with those of the largest lenders in its community, names on the “top 11 retail lender” list mentioned earlier. This credit union consistently beats each of these major players by at least $2,000 in closing costs on every loan.
There are other benefits as well. By reducing costs and therefore the fees and rates paid by credit union borrower-members, access to home ownership is expanded. In addition, Prime Alliance has developed creative mortgage loan options so that credit unions have more choices to offer their members. For the last several years our focus has been affordability and first-time homebuyer products. Scale matters here because we can participate in product design with secondary market investors and quickly make new products available to both direct and indirect credit unions.
The Reason to ‘Stick Together'
Lowering the cost of homeownership is why credit unions should work together to build, own and manage an “in-industry” mortgage lending solution.
By cooperating with other mortgage CUSOs, Prime Alliance has been able to reach more credit unions and their members in a shorter development time than previous models were able to do. We have been successful -- during a period when other organizations have left this market -- by partnering with all levels of the credit union system. By thus leveraging the CUSO system, Prime Alliance has helped credit unions become more efficient and effective mortgage lenders—an activity that will only increase in the future.