Corporate America has jumped at the opportunity to refinance its balance sheet (total corporate debt issued, both refinancing and new funds, has been almost $1.0 trillion in each of the last two years), but consumers have refinanced at a much slower pace. This means that the spending ability of members who live paycheck to paycheck is still unchanged. But it is consumer spending, not more debt that fuels a sustainable economic recovery.
Why have consumers not taken advantage of these rates to the extent of corporate America? Refinancing one consumer or mortgage loan at a time is hard. The “transaction costs” of modifying, rewriting, or refinancing debt elsewhere is real. One of the critical facilitators that made the last refi boom in 2003-2004 both easier and so destructive no longer exists. The independent, commissioned brokers that did the “leg work” seeking the best deal for a consumer are largely out of business, regulated much more closely, or employed by the primary source of most refinance today, which is a financial institution.
Is The Opportunity Even There?
According to numerous studies, about two in three mortgage holders would benefit from refinancing according to The New York Times. Even after the “back up” in rates on 30-year fixed-rate first lows of 4%, one mortgage strategist estimated there is $780 billion in “pristine credit quality and relatively low debt-to-value ratios” that have rates of 4.9% to 5.1% and which if refinanced could save borrowers money immediately.
Why isn’t the refi boom broader than just the thrifty or well to do? What are the “frictions” to refinancing? How do credit unions set a “good example” for their members, their communities, and even public policy makers seeking immediate stimulus?
Typical frictions include:
- Consumer uncertainty. Many consumers aren’t sure what the rate on their loan is. Or they may feel they have signed a contract that shouldn’t be broken.
- Consumers must invest time and effort to acquire minimal information to act. What rates are available? What kind of loan do I need (conforming/nonconforming)? Where do I get the information on the costs, let alone the best deal?
- There are difficulties when the servicer or holder of the mortgage is contacted.Today 70% of all servicing is concentrated in four firms. These firms have their hands full with foreclosures, normal purchases, and refi activity. If the servicer does not also own the loan, information can be one step harder to gain.
- In one instance, a credit union member with a 5.6% first mortgage tried to get information, was referred to the credit union’s mortgage representative — not on-site — and told to call that contact. The member then called his current bank servicer, only to be told they did not own the loan, it had been sold, and he would have to wait for someone to call back. Sixty days passed and no call.
- If the loan is performing and on a firm’s books, many institutions are reluctant to encourage internal “disintermediation.” Every firm wants to retain its current paying, good quality, high yielding loans.
- Even with fees, the additional revenue potential is limited for the firm, especially if the loan is sold. Pipelines are busy, with closing dates booked out several months. For the consumer, even with a “rate-lock,” the wait can discourage an applicant looking for relief now. At some point another hundred dollars or two saved — and which might be accumulated in these amounts only far in the future — can seem small versus the upfront effort.
- Finally, it’s harder for both consumers and institutions to process a mortgage today because of new laws, increased secondary market requirements, fluctuating offers, changing underwriting guidelines, and rate volatility. Just managing the “normal” flow is business enough for many firms. Refis can easily be viewed as a secondary priority.
Three Immediate Steps
To determine how relevant and feasible your credit union’s opportunity is, consider these three quick steps:
- Examine your mortgage pipeline. What percentage are refis, and how are members hearing about your offers? Are your rates competitive, and what is your flow capacity?
- Determine which segment of the market you can most readily reach and help. modifications of loans on the books are generally easier and faster (even though modifications reduce yield initially). Discover other segments where your data shows members have loans elsewhere (the credit union has the second) or where your data suggests members may not easily understand their options (a loan taken out years ago).
- Put the message out that you want to help members by looking at their debts to see if you can lower their interest rates and put money in their pockets. Start with a targeted email campaign. Many credit unions are still marketing their very low new loan rates (2.99% auto special, etc.) hoping to grow loans by encouraging new debt. That is certainly a market. The refinance market is rarely touted in ads.
A Unique Credit Union Responsibility
Refis are a win for all involved: the members resetting their debt obligation, the credit union, and the community, which now has people with more discretionary income to spend.
Credit unions are uniquely positioned at the grassroots of the economy. Their knowledge of local real estate values, economic trends, and overall contribution to a community’s financial “eco-system,” permit them to act fast and with specific knowledge.
Refis require no special programs and no unique rules. Refis are merely credit unions bringing their expertise in credit granting at a critical time in America’s recovery. Being “a model for others” (a Business Week term for credit union mortgage lending) is part of the public policy-facing role of the cooperative tax exempt system.
Lending now is also an investment in the system’s political future. When the public or Congress asks what difference cooperatives make, the answer can rightly be: For one member at a time, we make all the difference in the world.