How Credit Unions Are Coping With Surging Mortgage Rates (Part 2)

With the market shifting and buyers becoming choosier about their lenders, credit unions across the country are shifting how they approach mortgage lending.

 
 

Soaring interest rates for home loans have roiled the market, nearing 6% for a 30-year, fixed-rate note at this writing. That follows years of steady decline that saw rates hit record lows and a rapid rise in home prices nationwide to record highs.

Credit unions have seen their mortgage business grow since the recovery that followed the Great Recession, with average first-mortgage originations growing by more than 60% in the past 10 years.

So how are member-owned financial cooperatives, the lender of choice for millions of Americans, handling this sudden sea change as the Fed ratches up interest rates to deal with inflation the likes of which we haven’t seen in four decades?

CreditUnions.com asked eight credit unions to share what they’re seeing and what they’re doing. Here’s what they had to say.

The first half of this feature, which ran on Aug. 1, 2022, can be found here.

One Nevada Credit Union

Tom Ernsperger, EVP/Chief Lending Officer, One Nevada Credit Union

Tom Ernsperger has been with One Nevada Credit Union($1.4B, Las Vegas, NV) since 1999, and as EVP/chief lending officer oversees a $417 million loan portfolio, of which 27.4% are residential first mortgages. The cooperative has seen its real estate loan business grow by about 10.5% in the past year.

How have the interest rate increases affected your mortgage business?
Tom Ernsperger:
Through the first five months of 2022 our new application volume has dropped nearly 40% from the same period a year ago. Mortgage closings have also slowed by about 33% at the same time.

What adjustments are you making in your lending practices and operations as a result?
TE:
During the Great Recession, we didn’t find it necessary to “reach” for loans by sacrificing underwriting quality or product integrity. We won’t be doing that now either.

Lower closing volumes have resulted in reduced gains on those loans we sell. We’re also seeing reduced interest income because of reduced volumes. For now, our approach is to carefully manage operational expenses without sacrificing service levels, while enhancing our product offerings to appeal to a broader audience of potential borrowers.

We’re currently working on such things as a reverse mortgage, an enhanced conventional portfolio mortgage product, and an enhanced jumbo loan.

We’re very careful not to overreact, but I do foresee continued pressure on mortgage operating expenses. Anticipating this circumstance, over the last several months we’ve elected not to fill certain open mortgage lending positions as natural attrition occurs. We’ll also be looking at increased automation to help manage operational efficiency and expenses.

What about home equity loans and lines? How much has that activity changed?
TE:
Conversely, those products have seen a slight uptick over the past several months. In my opinion, part of the reason for this may be that with increased home prices, limited inventory, and rising rates, homeowners are electing to stay put and improve their current residence.

Texas Trust Credit Union

Scott Meigs, AVP/Mortgage Origination, Texas Trust Credit Union

Scott Meigs has been with Texas Trust Credit Union($1.9B, Mansfield, TX) for three years and is assistant vice president for mortgage origination. The Dallas/Fort Worth-area credit union has seen its real estate loans surge by 22% year-over-year, and mortgages total about $500 million of a $1.4 billion loan portfolio.

Texas Trust offersconventional, rate-term refinance, cash-out-home equity, home improvement, and second lien loans.

How have the interest rate increases affected your mortgage business?
Scott Meigs: We had a strong first quarter but we’ve been experiencing a slowdown of around 25% this quarter. Not only has volume decreased, but the current market has created a more competitive situation. Borrowers are shopping more heavily for rates and terms than they did when rates were historically low. There is a lot of buyer uncertainty about making a big purchase right now.

What adjustments are you making in your lending practices and operations as a result?
SM:
Our leadership teambegan planning for this at the end of last year. Historically, people continue to buy homes even when rates rise, albeit at lower volumes than what we’ve experienced in the past few years, so we’re creating new products to capture more of those borrowers.

Starting in July, we’ll offer financing from 95% to 105% percent loan-to-value for homes under the jumbo limit and we won’t be requiring private mortgage insurance, which will save borrowers hundreds of dollars a month. We’ll also be rolling out a 40-year term note.

We’ve also been proactively evaluating and adjusting to how the lending environment will change our staffing demands. We already have a lean team, so we don’t anticipate any major changes.

What about home equity loans and lines? How much has that activity changed?
SM:
This is where the lion’s share of change is happening within our portfolio. We’ve already seen a dramatic drop in volume for home equity loans and are working on a new home equity product that will be like a robust home improvement loan. It’s now in development and we hope to roll it out by year-end.

We do expect that home equity loans will continue to decrease, which is why we’ve focused on developing products aimed at new home borrowers that I mentioned above. That will help us shore up what we are losing from the drop in home equity loans.

Together Credit Union

Doc Dougherty, Chief Lending Officer, Together Credit Union

Doc Dougherty has been chief lending officer at Together Credit Union($2.4B, St. Louis, MO) for the past seven years. Mortgage and home equity loans have grown by about 3% in the past year and now make up 35% of the credit union’s $1.8 billion loan portfolio.

Together Credit Union offers fixed-rate and ARM loans, cash-out refinances, second-home loans, investment property loans, and special programs for first responders, community contributors, first-time homebuyers, and individuals and families on the cusp of retirement.

How have the interest rate increases affected your mortgage business?
Doc Dougherty:
We’ve seen a significant shift in our mortgage activity. In 2020 and 2021, while interest rates were at record lows, we saw a record number of refinances. Year-over-year, for the same period in 2022, refinance volume is down 80%. However, there’s always an offset, and we’ve seen our purchase loans increase nearly 10%, even in this tight housing market. HELOC lending has also increased 220% compared to last year. 

As we were exiting 2021 and going into 2022, we expected rate increases and origination volume would begin to slow down. Although we didn’t expect the rates to increase this quickly, we are seeing the yields on our portfolio beginning to rise, and origination income is slowing down.

We’re also seeing an increase in demand for our adjustable-rate products. However, we’ve always offered low- and no-down payment options and do not require our members with those products to pay for PMI.

What adjustments are you making in your lending practices and operations as a result?
DD:
Our strategy doesn’t rely on adjustments, but on empowerment. Our strength as a lender lies in our employees. We strive to hire locally and offer competitive pay and benefits, as well as professional development opportunities, to retain highly qualified mortgage loan officers.

We retain the servicing on all our mortgage loans, and combined with strong credit quality performance, our servicing income offsets some of the impacts on our origination income, as servicing income is not affected by rising rates. We continue to monitor origination volume, market rates, and competition and are focused on remaining nimble in this rising rate environment. 

Meanwhile, our primary focus is improving members’ experiences, and we’re meeting their mortgage needs in two to three weeks on average. Our staffing has remained constant. We’re using this change in lending as a professional development opportunity to cross-train our staff in other areas of lending and servicing support at the credit union. For example, some of our lending teams are cross-trained on auto and consumer lending products. 

What about home equity loans and lines? How much has that activity changed?DD: A rising rate environment is often a good time for homeowners to consider taking advantage of the equity in existing homes. We’ve experienced a significant increase in second-mortgage lending. Now is an especially good time for homeowners in the St. Louis metropolitan area because housing values have increased an average of 10-15%.

United FCU

Andrew Clarkson, VP/National Mortgage Production, United FCU

Andrew Clarkson joined United FCU($3.9B, St. Joseph, MI) in January as vice president of national mortgage production. Mortgages comprise about 40% of United’s loan portfolio, which has grown by more than 12% in the past year to about $1.5 billion.

The Michigan-based cooperative offers mortgage options that include conventional fixed, ARM, government, vacant land, construction, jumbo, and other specialized portfolio products.

How have the interest rate increases affected your mortgage business?
Andrew Clarkson:
United has seen, as predicted, refinance business slow down significantly. However, our purchase business is positive year over year, which has kept our business tracking towards our annual target.

By leaning in to purchase business, United is in a position to offer quality lending programs and products. There are business models that will see dramatic swings due to interest rate sensitivity, but United’s business model for originating purchase business propels the credit union forward through this somewhat uncertain period.

We are definitely noticing a shift as members look for ways to save and retreat from rising interest rates. United is seeing more ARM activity due to members wanting to combat the rising interest rates on traditional fixed products. We won’t see the immediate income from these that other loan types offer. However, we gain and develop a greater relationship with our members, which is our ultimate goal.

What adjustments are you making in your lending practices and operations as a result?
AC:
United is in growth mode at the moment. Being a national credit union, we’re expanding in various areas and are seeing encouraging growth in various regions of Michigan, Nevada, North Carolina, Arkansas, and Indiana.

Our team regularly communicates on the product needs of those regions. We’ve recently added construction ARM products to our lineup. We’re also evaluating community lending products and down payment assistance programs. All this will create the positive effect of a longer reach to all members.

As a lot of the mortgage industry is closing down, United is unique in that we see the most opportunity for growth of our mortgage business. Continuing to hire experienced, quality individuals within the mortgage industry is going to be our key to success. We’ve recently opened loan production offices in Michigan and Nevada, and we’re anticipating the need to bring on additional support staff as we grow in specific regions across the country.

What about home equity loans and lines? How much has that activity changed?
AC:
We offer both home equity loans and lines. The volume this year is quite extensive since it’s a great option for members accessing a smaller amount of their home’s equity. The interest rates on these products are also attractive in the current rate environment. With national home equity being at an all-time high, this trend will continue for a while.

These interviews were edited and condensed.

 

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