Jim McClintick is the director of national accounts for the
Network Liquidity Acceptance Company LLC, (NLAC).
NLAC is a CUSO and wholly owned subsidiary of U.S. Central Credit
Union. (888) 872-0440, ext. 6153.
The credit union mortgage lending community is being flooded by
refinancing and is discovering a new market segment that previously
hasn't received much attention. As housing prices increase and consumers
feel safer investing in their homes than in the stock market - the
need for mortgages over $300,700 is climbing. Credit union members
needing jumbo mortgage loans are a growing segment of the mortgage
market. As credit unions begin to focus on this affluent segment,
they are realizing the benefits that come along with being a member's
primary financial institution. One of those benefits includes additional
yield generated from other credit union products that members are
using. But along with the benefits come risks. If kept on the balance
sheet, the inherent size of jumbo mortgage loans quickly increases
not only the loan portfolio, but also the corresponding interest
rate risk. Many credit unions are turning to the Network Liquidity
Acceptance Company LLC, (NLAC) to help clear their balance sheets
of these jumbo loans. The benefits of selling to NLAC will be discussed
later in this article.
Interest rate risk is a concern because of the falling interest
rate environment over the last 24 months plus the increased demand
for 15 and 30 year fixed-rate jumbo mortgages from members who take
advantage of those lower interest rates. Many credit unions are
comfortable keeping short term fixed-rate or adjustable-rate jumbos
on their books, but recently had to factor the mix of longer-term
fixed-rate loan products into their portfolio in an effort to meet
the needs of their members.
Such large holdings of jumbo mortgages can expose the credit union's
net economic value, and ultimately its capital, to interest rate
risk. At today's low interest rates, the gain in the value of these
loans from an additional 50 basis points decline in rates pales
in comparison to the loss in value for a corresponding rise in rates.
Additionally, as rates rise, the average life of a portfolio of
jumbo mortgages increases because mortgagors have little or no incentive
to refinance. Instead they make only the required monthly payment,
diminishing the cash flow that can be used by the credit union to
make new loans or investments at existing higher yields.
In order to manage the corresponding risks with this type of product,
credit unions should consider selling their jumbo mortgage loans
as they are originated. This would allow the credit union to move
the loan off its balance sheet at current market value and be less
exposed to interest rate risk.
Finding the right partner is imperative to preserve the relationship
with members. This relationship is particularly important with members
who have a greater potential for using more products. Credit unions
should keep in mind the following factors when looking for a purchaser
of its jumbo loans:
- Does the purchaser guarantee that the natural-person member
will not be cross-sold?
- Is the purchaser committed to providing the same level of excellent
credit union service as the credit union? ·
- Does the purchaser allow the credit union to retain the servicing
or act as the sub-servicer in a servicing-released transaction?
- Does the purchaser provide private-label options in a servicing-released
- Does the purchaser allow the credit union to continue to solicit
its members with other credit union products?
- Does the purchaser understand out of the box lending where
credit unions have a proven loan performance track record?
- Does the purchaser tailor its program to fit established operational
processes already in place at the credit union?
As options are examined, NLAC is a credit union solution provided
by the Corporate Credit Union Network. As a corporate CUSO, NLAC's
services are offered through corporate credit unions. That means
NLAC understands and shares the same philosophy that guides credit
unions in their relationships with their members. It also means
as credit unions are making comparisons, they can have confidence
in finding an outlet that meets their critical needs.