Make The Mortgages Others Miss

A fresh look at the properties, terms, and outreach credit unions are using to keep loans from falling through the cracks.

 
 

Estimates from Freddie Mac indicate that almost 90% of Americans will own a home at some point in their lives. Yet many potential borrowers are stuck in limbo simply because of issues such as a lack of credit history or an affinity for nontraditional properties.

Outstanding first mortgages at credit unions were up 10% annually in the second quarter of 2014, according to Peer-to-Peer Analytics by Callahan & Associates. As a whole, the industry now provides more mortgages than almost any other lender, second only to Wells Fargo.

Growing market share to this degree requires looking beyond strategies that work for the majority of a credit union’s membership to ones that work for the entirety.

The three options outlined below — pulled from the CreditUnions.com archives — show how credit unions can connect with homebuyer holdouts. Although these examples are past best practices, all of the institutions are currently in line with, or far exceeding, peers in terms of real estate loan penetration.

The Right Properties

A concentrated glut of abandoned or bank-owned homes in residential communities has a trickle-down effect on values that — eventually — hurts the pocketbooks of residents and lenders alike.

We’ve had young couples turn these foreclosed homes from absolute wrecks — with tires in the basement and frequent violations from the city — into the gems of the neighborhood.


That’s why Advantis Credit Union ($1.1B, Milwaukie, OR) developed a rehab loan that helps first-time homebuyers use these properties as a low-cost entry point into ownership, provides relief to neighbors suffering from declining property values, and boosts its bottom line.

The loan is available for purchases or refinances and comes bundled with extra funds to complete extensive repairs to the property. Because the loan is designed to cover up to 90% loan-to-value for a home’s post-renovation price tag, borrowers must meet with contractors to estimate costs and gather bids to present to the credit union before closing.

For its part, credit union staff must also be more educated in the nuanced aspects of the renovation process in order to make good financial decisions. But according to Advantis, the return here is abundant both on and off the balance sheet.

“We’ve had young couples turn these foreclosed homes from absolute wrecks — with tires in the basement and frequent violations from the city — into the gems of the neighborhood,” said Darin Walding, the credit union’s former real estate loan manager in a 2012 interview.

Then of course there are those properties that have always been a little unconventional.

Oceanfront hobbit houses and desert mystery castles might take more time and effort to green light compared to a conforming product, but working with these oddball properties and the buyers that love them can provide additional return in terms of things like word-of-mouth publicity.

For example, when a Colorado couple wanted to finance a home built from repurposed recyclables and refuse — including 17,000 old tires — it was Red Rocks Credit Union ($236M, Highlands Ranch, CO) that said yes when others said no, and the cooperative received a wealth of media coverage as a result.

Financing such options typically requires a more aggressive appetite for risk and some operational finessing, explained a representative from the credit union in a 2010 interview.

Even then, Red Rocks advised staying short in these commitments, pricing accordingly, and assessing additional items like land value so the credit union can stay ahead regardless of the property that sits on the lot.

In the case of members who can’t find their dream home despite the wealth of existing properties, there’s always the option of offering a construction loan.

With as little as 5% down, borrowers at Heritage Federal Credit Union ($471M, Newburgh, IN) can do a one-time close on their yet-to-be-built dream home without having to worry about an additional refinance upon completion.


Instead, the borrower signs one time and pays interest while the home is under construction. After that, the credit union amortizes the mortgage over the remaining term at the same rate.

Credit union employees as well as outside appraisers track the progress of construction and keep things in line with agreed upon budgets.

"Usually the builder will send the bill for work done around the tenth of the month, so we try to anticipate that and send an inspector out between the first and the fifth," said John Phipps, the credit union’s chief lending officer in a 2013 interview. "If the construction is 50% complete, we don't want to be giving them 60% or 70% of the funds."

The Right Terms

Consumers don’t always plan out their lives 10, 15, or 30 years at a time, and as such, long-term fixed-rate loans are often just too big a commitment for some borrowers — and even many lenders.

That’s why CitizensFirst Credit Union ($582M,Oshkosh, WI) offers a product with flexible terms it calls the “Retire Your Mortgage” loan.

Although practical for anyone who wants to fast-track homeownership, the product typically targets older members closing in on retirement and allows them to choose any term between five and 12 years. Those who choose to pay their mortgage off faster are also rewarded with a lower loan rate.

Processing these loans through the credit union’s origination system requires extra modification on the back end; however, they also bring the advantage of additional face time and cross-sell opportunities as employees work with the borrower to figure out what is doable without them becoming overleveraged.

“Sometimes we can get it to where having a seven-year payoff is attainable by restructuring other things,” said Ken Buksnes, the credit union’s assistant vice president of mortgage lending in a 2013 interview. “For example, a loan specialists might refinance a car loan or adjust a credit card balance.”

A full 86% of the home loans made at Hope last year went to first-time homebuyers, a large percentage of whom were also minority, female, or low-income individuals.


On the other end of the spectrum, NASA Federal Credit Union ($1.3B,Bowie, MD) allows the parents of young adult borrowers who might not yet have the credit history necessary to get a top-notch deal to temporarily cosign on a mortgage with their child. These individuals don’t need to live in the home and can remove themselves from the loan after five years, once the younger primary borrower establishes a history with the credit union.

A final untapped area of opportunity is to look to those borrowers that others overlook simply because of the additional legwork involved in understanding and rectifying their financial situation.

This strategy is particularly effective when an institution is able to leverage additional support from local and government sources, as is the case at Hope Credit Union ($182M, Jackson, MS).

A full 86% of the home loans made at Hope last year went to first-time homebuyers, a large percentage of whom were also minority, female, or low-income individuals. That achievement wouldn’t be possible without the credit union’s vigilant search for federal and local government assistance.

Slightly more than 41% of the mortgages closed in 2013 — including FHA, VA, and rural-housing loans  — were backed by the government, according to an early 2014 interview with Shirley Bowen, Hope’s senior vice president of mortgage lending.

The credit union also offers an affordable housing product — which sometimes uses grants to lower the LTV ratio and allows borrowers to go as high as 100% financing — for those who have completed enough financial counseling and education to warrant that calculated investment.

The Right Outreach

Mortgages have historically been granted on a signature and a handshake, but today, they’re increasingly taking place via clicks and uploads instead.

In the 2014 Technology Priorities Survey from Callahan & Associates, which polled 72 credit unions ranging from $2.2 million to $12.5 billion in assets, 32% of respondents reported receiving between 10-50% of their mortgage apps via online channels. Another 28% of respondents reported getting 50% or more that way.

Although activity was slower on the mobile side, 21% of respondents still report getting a certain percentage — in some cases up to 25% — of their mortgage applications through that channel.

These usage rates might be surprising to some, but several credit unions have been doing business this way for years, including the almost exclusively virtual PSECU ($4.2B, Harrisburg, PA), which reported in 2012 that it was getting more than 90% of its real estate loans directly through digital channels.

“If you walked into our branch and said you were here for a mortgage, we’d guide you to the PC in the corner,” said the credit union’s CEO Greg Smith at that time. “We’re helping our members understand they don’t need to come here to do these activities. And they eventually figure out that they can take care of everything from home.”

This migration to online lending is natural given that a similar shift is occurring in the way members are shopping for their homes in the first place.

Although 88% of buyers bought their home with the assistance of a realtor in 2013, according to the National Association of Realtors, 90% of homebuyers also searched online during this process.

In June, Tim Mislansky — chief lending officer of Wright-Patt Credit Union ($2.8B, Beavercreek, OH) and president of myCUmortgage — wrote a blog post connecting the dots between the record activity flowing through popular home hunting websites and the untapped opportunity for credit unions to be more engaged in that process.

“With this record number of people in the home buying or selling stage, perhaps we should be looking at being more aggressive in our marketing,” he writes. “Perhaps we should be talking to Zillow or Trulia about a partnership.”

There’s also nothing wrong with a traditional emphasis on in-person interactions, but credit unions must go out and find these opportunities rather than waiting for them to materialize.

Workers’ Credit Union ($1.1B, Fitchburg, MA) places mortgage originators at each of its 15 branches and in the contact center, but it also has a roving team of originators who have divided up its footprint into territories and work closely with the brokers in each of those regions.

For its part, Lake Michigan Credit Union ($3.3B, Grand Rapids, MI) staffs all of its 38 branches with originators as well as maintains a dedicated presence at the offices of five real estate companies and one homebuilder.

The credit union has also found that linking its brand to a famous face in a public place is a huge differentiator when it comes to garnering buyer attention. That’s why in 2013, the credit union tapped HGTV star Carter Oosterhouse — who is also a LMCU member — for a series of commercials, on-site events, and home renovation contests that made the credit union a top of mind mortgage destination.

All Oosterhouse asked in return was for LMCU employees to donate their time and efforts to the Carter’s Kids charity, which takes on local philanthropic activities such as building playgrounds.

 

 

 

Sept. 29, 2014


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