Selling Loans Keeps Production Engine Running Smoothly

Randy Gunderson, CFO for WSECU, discusses selling mortgages to Fannie Mae and participating consumer and commercial loans.

 
 

Employees of the state of Washington joined together in 1957 to form WSECU ($2.3B, Olympia, WA), and for 58 years the credit union has been “proud to support our dedicated public employees,” says the institution’s website. In 2003, WSECU passed the $1 billion in assets mark and 10 years later expanded its field of membership to include anyone in the state.

Today, WSECU has $2.3 billion in assets and more than 225,000 members. It also has a robust mortgage sales and loan participation line of business that helps it carry a 94.1% loan-to-share ratio — versus 80.0% for credit unions with more than $1 billion in assets and 78.9% for Washington credit unions — and 101.3% ratio for loans and real estate servicing portfolio versus shares — versus 87.4% for asset-based peers and 88.2% for state credit unions — as of midyear 2015, according to Search & Analyze data available on CreditUnions.com.

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In this Q&A with Randy Gunderson, CFO for WSECU, he discusses why and how the credit union began participating consumer and commercial loans in addition to its long-standing practice of selling mortgages to Fannie Mae.  

When did the credit union begin selling loan participations?

RandyGunderson_WSECU
Randy Gunderson, CFO, WSECU

Randy Gunderson: Our first deal closed in the second half of 2014, driven by our phenomenal consumer loan production. The credit union has been selling mortgage loans to Fannie Mae for quite some time, and we viewed consumer loan sales as an extension of that. As an organization, we built this strong production engine and we didn’t want to turn it off.

How did you get started?

RG: We began exploring selling loan participations by speaking with a few trusted credit union brokers who had experience in the market. Initially, we provided all of them the same slice of our vehicle portfolio to see what they would say regarding pricing. They gave us varying views of the portfolio and what it was worth. Ultimately, we decided we didn’t want to sell through a broker initially because we had other credit unions interested in direct relationships with us.

CU QUICK FACTS

WSECU
Data as of 06.30.15
  • HQ: Olympia, WA
  • Assets: $2.3B
  • Members: 227,952
  • 12-MO Share Growth: 8.17%
  • 12-MO Loan Growth: 12.82%
  • ROA: 1.01%

Are auto loans what you sell primarily?

RG: Yes, we sell mostly indirect auto loans. However, our indirect vehicle loan portfolio also includes indirect RV loans. In fact, our first RV-only deal is settling as we conduct this interview, which is exciting for us. We’ve sold pools that contain both auto loans and RVs but never purely RVs. Our first commercial real estate loan deal is settling next week as well.

Did you bring in outside help, beyond speaking with the brokers initially?

RG: Yes, we ultimately found an independent consultant that we pay a fixed fee to provide portfolio valuation services. We had no idea how to price a deal on our own in the beginning, and we found valuation could vary quite a bit. Now that we’ve had more experience with the vehicle loans, we have a better idea of the pricing structure, but we still need assistance validating, especially as we expand to include commercial loans.

What new skills did your staff need to learn to make this successful?

RG: There was a huge learning curve on our part. This affected everyone from myself to those who service and price the loans on a daily basis. Personally, I had to learn to be a salesman and CFOs typically don’t do sales. Initially, I spent a lot of time on calls with other credit unions to understand what they were interested in. I really had to learn to interview people so I could discover if there was a fit between what they were interested in buying and what we wanted to sell. There isn’t always a fit so these calls are critical.

Our pricing areahad to learn a new skill as well —considering a third-party investor. We’ve always underwritten loans in the best interest of our members. But now, just like when we underwrite mortgages to FNMA standards, we have to think about tighter consistency and what other credit unions are looking for as investors. 

We also needed to develop new skills in our consumer loan servicing area. In the past, they serviced our members for our credit union and that was that. Then, all of a sudden, we had contractual obligations with other credit unions to prepare reports and remit funds by a certain date, and there was no wavering on that. 

Our goal is to have the same position after a loan sale as we did before … so we seek those who are willing to buy the full spectrum and provide tons of data and statistics to show them what they can expect. 

Do you retain servicing on all the loans?

RG: Yes, with the exception of the commercial deal I mentioned earlier, which will be our first service-release deal.

With our consumer loans, our intention is to always retain the servicing to maintain the relationship with the member. This is similar to how we treat mortgage loans — we retain servicing 99% of the time.

However, we view commercial lending differently. We’re still developing our services on the depository side of commercial banking, so we didn’t feel we’d be losing a banking relationship. Businesses that use our commercial lending services typically have their deposit relationship elsewhere and don’t plan to move it to the credit union. By the way, the commercial deal isn’t a participation. It’s a whole loan sale, which is what bank buyers are typically interested in. In this case, the structure isn’t plain vanilla, and we didn’t find interested credit unions because of that.

How did you come upon credit union buyers initially and now the bank buyer?

RG: WSECU staff leverage their relationships from conferences, roundtables, etc. It’s been word-of-mouth, and it began with credit unions here in our state that we had long-standing relationships with. Working with a local credit union that we had a close relationship with was important, especially with our first few deals because we were still learning and there were bumps to work out.

Now, we work with credit unions all over the country. As for the bank, we found it through a broker because the commercial structure was unique. Overall, we’ve sold approximately $200 million in loans to eight different financial institutions, and we’ve done multiple deals with several institutions.

What advice would you give to another credit union considering getting into loan participations?

RG: Sell the loans that you want to sell — not necessarily the loans that others want to buy. Hopefully, you find a symbiotic relationship, but you don’t want to take the risk of adverse selection for you or the other credit union.

For WSECU, we originate loans across the full credit spectrum. We take risk when we make loans and many credit unions, for example, only want to buy loans that are A or A+ paper, which would leave us with an imbalance in our portfolio. That doesn’t make sense. Our goal is to have the same position after a loan sale as we did before in terms of risk, so we seek those who are willing to buy the full spectrum and provide tons of data and statistics to show them what they can expect.

We don’t waiver on this point, so we have ended up saying no to a lot of credit unions. 

 

 

 

Aug. 24, 2015


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