Picture This

A recent graph expertly presented and artfully delivered all that's transpired in the capital markets over the past two years in one painfully simply, yet poignant representation.


Like you I see a great number of presentations: charts, graphs, bullet points, blah, blah, blah. And probably like you I find most of it dull, uninteresting, irrelevant. Yet one I viewed this week caught my attention. Expertly presented, artfully delivered, it capsulized all that's transpired in the capital markets over the past two years on a single page, in one painfully simply, yet poignant graph.

The graph I refer to is titled 'The Single Family Mortgage Related Securities Market'. It covers just 24 months and displays just four lines: market share positions of Fannie Mae, Freddie Mac, Ginnie Mae and Private Label mortgage backed securities. Beginning in June 2006, before the sub-prime cataclysm began, it shows what we all knew, and what was adversely impacting credit union share of the mortgage market: issuers of private label securities (Wall Street) held a better than 50% share. The mortgage loans backing these securities were largely what we know as Alternative A and Sub-Prime Loans. At that same point in time Fannie and Freddie held a share in the mid-20% range; Ginnie Mae, buyer of FHA loans, held a single digit share of the market, just as it had for some years.

Fast forward to June 2007. June 2006 was, if not the peak of housing market euphoria, it was pretty close. A year later marked the beginning of a new era, one that will in hindsight be remembered as a return to rationality in the housing and mortgage markets. Take another look at the graph. Private label security issuance began a precipitous decline. No more liar, NINJA or NINA loans. Another year later, in June 2008, private label share registered less than 1%. How things change.

We all know what happened and we all know why. Knowing about it and doing something about it are completely different in terms of importance. Obviously what we do with this information is crucial. Our strategic actions throughout this year and for the next few months will determine the role credit unions play in the housing finance market for the coming decade. Now, paraphrasing the old cliche, 'a picture is worth a thousand words', this graph hints at numerous strategies. One that is obvious for credit unions is clearly depicted by Ginnie Mae's rapidly ascendant share. From single digits just a year ago to greater than 20% today, FHA lending is critical to the future success of credit union mortgage lending.

FHA loans, for us old-timers, were the backbone of many, early first-time homebuyer strategies. Low-cost, low down payment, insured, they made it easy for people, especially those with lower to moderate incomes, to purchase their first homes. Sure they were, and are, more complex to originate and they had a relatively low maximum loan amount, yet they were effective in so many ways. One attractive feature for borrowers and lenders alike was that they were and are sustainable. Where the creative financing vehicles of sub-prime hysteria days routinely put borrowers in payment-shock peril, FHA loans do no such thing.

There's another reason FHA Lending is even more attractive than it was even 30 days ago: the Housing Bill signed into law last month perpetuates the higher loan limits established for FHA loans in legislation that was passed earlier this year. Congress, recognizing that housing prices, while declining in many markets, are higher now than they were when the formula that set FHA limits was originally established. For FHA financing to be attractive, loan amounts had to increase.

What's a credit union to do? Offer FHA loans to your members as soon as you can, either directly or through a credit union and member friendly third party. Industry predictions call for FHA loans to become more than 30% of single family loan originations. Need further persuasion? Some originators who made nice livings making loans that were placed into private label securities (read: the subprime guys) are looking at FHA loans as their next lunch ticket. The more this happens, the more members will overpay. The more credit unions get involved, the more affordable housing remains. Don't procrastinate. This is one of the opportunities credit unions cannot afford to let pass by. Members can’t afford for us to let that happen, either.

This graph does hint at many potential strategies for credit union housing finance. Interested in what else I'm thinking about? Visit the 18 Strategies Blog for more strategic insights into capital market dynamics as well as 17 other strategies (one of the 18 is FHA Lending) I think are essential to credit union mortgage lending growth.



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Aug. 18, 2008


  • The "low down payment" of FHA loans should still be a concern. I read on some sites it can be as low as 3%. Although, because they are insured there isn''t a risk to the credit union, there is still a risk to tax payers to which the credit unions serve. When someone buys a house that they haven''t invested much of their own funds into, it makes it easier to just walk-away when things get tough.
    Chris Duncan - Jumbo CD Investments