Mortgage Q&A With CFO Francisco Nebot

SchoolsFirst CFO Francisco Nebot discusses the current state of mortgage lending and calls for a credit union owned solution for the secondary mortgage market.


Francisco Nebot is the chief financial officer of SchoolsFirst Federal Credit Union ($9.3B, Santa Ana, CA). The credit union is California’s largest credit union and the fifth largest credit union in the country. It has a membership base of school employees.

Prior to joining SchoolsFirst four years ago, Nebot held various positions at IndyMac Bank, where he served as executive vice president, director of corporate finance, and treasurer. In particular, he focused on the secondary market and investment group. Nebot has also worked at Lehman Brothers in the mortgage division.

“I have quite a lot of experience with mortgages, although everything is changing, so I don’t know how things work anymore,” he quips.  

Here, Nebot discusses the housing market in California, SchoolsFirst’ approach to the housing market, the future of Fannie Mae and Freddie Mac, and how credit unions can support one another.

What’s going on in the California housing market and at SchoolsFirst?

In our area, housing appreciation is growing fast. Whether it’s two-digit or one-digit growth, it’s in the right direction.

Now, the real question is: Is this real, sustainable growth or is it quick appreciation due to low supply? If it’s temporary, then when things normalize the appreciation levels may be less than what we have experienced lately.

Do you own real estate in your portfolio or have investors come in to lower your REOs?

We have very few REOs. As of March 31, I have, like, three REOs in my portfolio. We’ve had no more than nine REOs, and more than 15,000 real estate mortgages. Keep in mind we’re a school employee credit union, and school employees are more conservative. We have done maybe fewer REOs and more short sales. We only do REOs when it’s the only choice.

In terms of mortgage production, what is SchoolsFirst’s approach? Do you portfolio your 10- or 15-year-adjustable product and sell your 30-year loans?

We go back and forth. You have to look at the market conditions, your interest rate risk, and the duration of the instrument. Over the past two or three years, we have primarily kept 10- and 15-year loans.

We have been selling the majority of our 30-year loans, although we make some exceptions for our members. If we retain 30-year loans, we try to be cognizant that we’re taking that interest rate risk. We may keep the next two months of production and then go back and sell it again because we have to keep certain portfolio loans in the books.

Do 10- and 15-year loans match your duration needs, and is their risk easier to manage?

Yes, they’re much easier to manage. The average duration of a 10-year-loan is five years. Borrowers who take a 10- or 15-year loan normally do it with curtailments on their homes or they tend to do an early prepayment on the majority. It’s rare that 10- and 15-year loans are fully amortized to the end. We’re comfortable with that. In today’s market environment, I wouldn’t say the best yield comes from those loans, but it’s a better yield compared to some investments you might have.

What do you do with 30-year products that don’t qualify for Fannie Mae or Freddie Mac?

Our job is to support and be there for our members. We know who pays their loans on time, and if, for whatever reason, that member is not fully qualified for Fannie Mae, we will still make the loan. Even if it’s a 30-year loan. That’s why we have our interest rate risk practices.

Are you keeping jumbo loans on your books?

We keep jumbo loans in our portfolio, normally they bring higher yield. From a liquidity standpoint there will always be somebody who wants to buy jumbo loans, but we’re not pursuing that alternative today.

What do you predict the two housing agencies will look like in the future?

The fact the FHA made the decision to start combining some of the back offices of Fannie Mae and Freddie Mac seems to indicate the two GSEs will become one. It’s just a matter of time. I wouldn’t be surprised if it’s done within five years, and I wouldn’t think it takes more than 10.

But the key question is, will the new entity provide the same type of guarantees to investors that the existing entities do? If you don’t have the government backing on the new entity, the mortgage-treasury spreads will widen and interest rates for mortgage loans could be higher. If the new entity involves the private sector, then any intervention of the private sector will create more uncertainty in investors and higher demands for yields. They will not trade the same way they are trading today.

How do credit unions fit in? Would you like to see a credit union-only agency? Should it be run by the NCUA?

In my opinion, credit unions should not be selling loans outside the credit union movement. We should be able to come together, credit union to credit union.  The problem is there are NCUA regulations that limit what you can do with these kinds of internal transactions.

Before you sell loans to Wall Street, Fannie Mae, or Freddie Mac, the option should be created in the credit union movement first. Now, if there are no takers, then you pursue the other options. When you sell the loans out of the credit union system, they are gone. They can come back if they’re refinanced, but they are out of the system. I’m a believer that the credit union movement should be looking at those opportunities before we give them away.