Over the past year, the credit union loan portfolio grew $31.7B, or 5.91%. While nearly all of the other loan categories, including other real estate, used auto, credit cards, and member business, contributed to this growth, 70% came from 1st mortgages. Mortgages grew $22.5B, or 11.7%.
What housing crash?
The downturn in the housing market has been devastating for many mortgage lenders, causing some to completely exit the market, while others have scaled back their mortgage programs and significantly tightened their lending standards. For example, FDIC-insured institutions reported a year-over-year decline of $169.9B, or 7.7%, in one-to-four family residential mortgages. Meanwhile, credit unions are leveraging this opportunity to gain record market share, as reflected in the first quarter of 2009.
In just two years, credit unions nearly tripled their market share, a dramatic shift can produced by the two classic forces of economics: supply and demand.
According to the Mortgage Bankers Association, mortgage volume in the first quarter is down 2.2% from $453B, seasonally adjusted, in 2008 to $443B in 2009. Nearly 70% of the origination volume was in refinance activity. While falling mortgage rates caused the demand for purchase mortgages leveled off its gradual decline over the past two years, the average weekly refinance application volume in the first quarter was up 70% over the fourth quarter of 2008, nearly three times the average weekly volume for mid-year 2008 all the way back to 2005.
It was in this gap of soaring demand for mortgages and shrinking supply that credit unions stepped up as mortgage lenders to provide crucial credit in a time of need. First quarter mortgage originations were up at credit unions 38.9% over last year, more than double the first quarter volume of 2005 through 2007.
If the ongoing recession has taught us anything, it is that there is risk everywhere, and responsible institutions must be ever cognizant of wisely managing risk.
As of March 31, 2009, credit unions were carrying $3.1B in delinquent mortgages, with 60% of those delinquent two to six months. The upward trend in delinquency and charge-offs is certainly disconcerting, but mortgages at credit unions tend to be higher quality assets compared to the overall market. Mortgage delinquency at FDIC-insured institutions reached 5.95% in the first quarter, compared to 1.46% at credit unions; the net charge-off rate increased to 1.36%, compared to 0.21% at credit unions.
Credit unions are primarily managing mortgage risk in two ways: selling mortgages on the secondary market and modifying troubled mortgages in their portfolios. Credit union activity in the secondary market has grown rapidly just in the past year. Mortgages sold increased from $5.0B in first quarter of 2008 to $13.9B in 2009, a 176.8% increase. Credit unions have primarily used secondary sales to manage rate risk by moving low-rate mortgages originated in this environment out of the loan portfolio, freeing up much needed capital.
In the first quarter, credit unions were carrying $2.0B in modified mortgages, representing 0.92% of total mortgages outstanding, up 57 bps since third quarter 2008 when credit unions were first required by the NCUA to report mortgage modifications. Combined with traditionally conservative underwriting standards, modifications do appear to be helping to alleviate the stress of delinquency for credit unions.
Top issues for mortgage lenders going forward:
- Maintaining and increasing market share as mortgage lenders reenter market
- Avoiding undue rate risk
- Serving the mortgage needs of members with lower credit scores as underwriting standards tighten
- Curbing rising mortgage delinquency
Reader response: What do you see as the most important issues facing credit unions in the mortgage market?