Are you Missing Out on Revenue from Denials?

Consumers have been cashing in on rock-bottom interest rates from buying homes to vacation houses (true even in a down economy) to refinancing mortgages (some savvy members did so two or three times) and to the love affair with cash out refinancings boosted by stellar growth in the housing market.


Consumers have been cashing in on rock-bottom interest rates from buying homes to vacation houses (true even in a down economy) to refinancing mortgages (some savvy members did so two or three times) and to the love affair with cash out refinancings boosted by stellar growth in the housing market.

The home buying season for the past three years has been more like a nationwide tidal wave sweeping the mortgage market and rolling in the revenue. However, all that could ebb this year as the refis take a whirlwind break. Now's the time to get your game face on to plan your next move because the ''production party'' isn't over just yet, and if it doesn't end soon, another economic downturn may be in sight.

Where will the next revenue wave originate, and how can you ride the crest to added income? Consider the return on investment available when you turn your credit-challenged borrowers - those who don't meet your lending policy - into profitable members by approving those mortgage applications that are typically denied. Let's review why the mortgage market is so viable, where it's headed and why you'll want to grab your share.

Why is mortgage lending so important?
Mortgage lending is vital to the success & growth of a credit union. Now is a great time to get a program started at your credit union or to take your program to the next level since you can grow at a steady, conservative rate without being ill-equipped. Once your credit union is committed to mortgage lending as a core product, you can expect a larger market share, plus these added revenue-generating benefits:

  • Once a mortgage is obtained, the number of services a member uses nearly doubles
  • Member retention increases because you are considered to be the primary financial institution
  • CUs can draw from a healthy fee income & investment income

While these added advantages will definitely enhance your credit union's bottom line, your most profitable and loyal borrowers may be your riskiest to take on board. Did you know that, on average, 20 percent of members applying for a conventional mortgage will not qualify? So, how can you manage the risk to capitalize on this potentially lucrative market?

So what's the mortgage outlook for 2004: a changing tide?
While we're still riding the wave of a not-seen-in-40-years phenomenon, there are near-record levels for purchase money originations to be had, according to Douglas Duncan, chief economist of the Mortgage Bankers Association in Washington, D.C.

In 2004, the housing market will still reign as king, since the stock market has moved down the hierarchy as a solid investment option. In its place, real estate takes center stage and continues as a safe investment, creating new opportunities for income and growth.

How to capture revenue in a declining mortgage market?
To net drifting revenue, first and foremost develop a business plan, especially if you are just entering the mortgage arena. This will lay the groundwork for you to develop channels to pump up your volume and sustain your growth. Here are a few solid resources within your market that you can tap to maximize your efforts:

  • Establish a referral stream by developing relationships with realtors, CPAs, financial advisors, etc.
  • Offer cash-back or discounts for members who refer your credit union
  • Offer no points, no closing costs on loans to drive the purchase market toward your direction

In conjunction with your business plan, analyze your marketing strategy. Do you have one? If so, ensure it is aligned with your objectives. If you don't promote the available services, too much is left to chance.

Consider this: If an applicant has already been turned down for a mortgage loan or suspects a decline is imminent, how likely would it be for that person to apply in your branch or muster through the awkward silence on the phone while their colorful credit runs in the background? What's more, there's a readily available, faceless option that waits online to ease this stress and lure your borrowers away from you.

So how can you compete? Be available when your members are, where your members are and where your competitors are…Do you have a 24/7 mortgage application solution? Is it more than ''print-and-fax'' brochure ware?

Avoid turning away any borrower
So you've built and now they are coming. But hold on…you're not out of the woods yet. As you know the only way the credit union gets paid is on closed loans. Your credit union needs to figure out a way to make the loan work, or the borrower will go to a competitor and even risk paying a significantly higher rate. Again, why not make the loan work for you both?

Try to help by offering smart options as opposed to making the decisions.

For example, if an applicant for a 30-year fixed mortgage does not qualify, don't be afraid to look into a subprime option in a 30-year fixed loan or find a lower rate in a subprime ARM. The goal, after all, is to help your member and keep the business.

The mantra: 'We don't offer that because our members wouldn't want it,' presents the question, really? Has research been conducted or even informal member surveys been done to conclude this?

Chances are, assumptions were made in a glass tower untouched by member response indicating a positive need for the diverse mortgage product. But are there options available if the risks still seem too daunting or if the loan would not be acceptable based on your loan policy?

  • Use a third-party investor to purchase your loans on a service-release basis
  • Use a third-party investor to purchase your loans but have a loan serviced in your name

Subprime mortgages: the bottom line to a win-win
Industry publications frequently tout subprime lending as one of the fastest growing areas in the mortgage lending business. A significant contributing factor to this growth is the ever-increasing prevalence of credit cards and other unsecured debt that enables many consumers to drown in a sea of debt and desperation.

Sad to say, but a mortgage loan, like any other loan, is really just the means to an end for the borrower. Unfortunately, for an applicant who experiences the uncertainty of securing that coveted approval, the options are drastically different. No stone can be left unturned to find the ''yes man,'' even if it means being preyed upon by borderline predatory lenders who promise anything for a price.

The bottom line with subprime lending is that those who have less will pay more for less, either because these individuals have less access to credit or fewer options with which to work. That is, unless of course, their credit unions offer a lending option to fit their special needs.

If you could fulfill the lending needs of these higher-risk borrowers with a viable mortgage loan solution that would financially benefit both your credit union and the borrower, it would create a win-win situation for everyone.

Putting pencil to paper can bring potentially lucrative business to the table. For example, the national average home price in June 2003 was $169,400, according to the Federal Housing Finance Board. Your credit union can earn 1 to 2 percent of the loan amount with an investor, which in this case would be $2,541 based on 1.5 percent.

And that's just for turning one denial into an approval for, let's say, one per week. Annually, that amounts to approximately $132,000 of added revenue for just one more approval each week! Can you afford to turn away your members?

In the end, and it will end, the ''twilight zone''-mortgage lending rates that we have come to know will slowly creep up. And then what? If you want to be a player in mortgage lending, you need to act now while the mortgage business is still healthy.

Take an evenhanded view of your business objectives and goals to determine how competitive your organization is and how you can improve your position. Options include entering mortgage lending first of all, diversifying your mortgage lending product array to offer solutions to your most credit-challenged applicants and expanding your third-party, investor-purchase options. Financial institutions that move more expeditiously are less likely to end up on the long list of competitors that don't survive the next down cycle. Good luck!
Cheryl Grandolfo
Christiann Sobczak

Cheryl Grandolfo is brand manager with Lending Solutions, Inc. Christiann Sobczak is mortgage lending manager with Lending Solutions, Inc. LSI's exclusive turnkey Mortgage Lending Program can open the door to new lending opportunities and enable you to cater to a prime segment of your member base 24 hours a day, 7 days a week by offering you the flexibility of choosing from four service levels appropriate for your lending requirements.

You may contact the authors by email at:
or visit the Lending Solutions, Inc. web site




Feb. 9, 2004


  • Interesting and informative! The operative word here is ACT NOW!!! I believe that Credit Unions are in the business to provide services and products to a field of membership that historically were “under-severed” (by other financial organizations). So, in actuality, no potential homebuyer should be denied a mortgage. Credit Unions who want to play with the big boys should be taking on “big-boy risk” ventures - and if that happens to be in mortgage lending then so be it. The risk exposure could be absorbed by what was mentioned in your article. I would like to know more about CRA laws and affect on State, Federal and SEC credit unions.