Doomed By a Significant Structural Flaw - The Conservatorship of Fannie & Freddie Creates an Opening for Credit Unions

Credit unions have systematically created intra-industry solutions to fulfill needs in payments, insurance, investment options and lending platforms. The major area in which credit unions continue to be dependent on third party solutions is the secondary mortgage market.

 
 

Following the conservatorship of Fannie Mae and Freddie Mac, Treasury Secretary Henry Paulson described the entities as being "doomed by a significant structural flaw" in an interview with National Public Radio. This description echoes comments given by former Freddie Mac CEO Richard Syron in an interview with The Washington Post. He said that balancing the dual tasks of creating profit for private investors and serving the public by boosting the housing market "makes the job almost impossible."

Paulson's move marks a seismic shift in the U.S. mortgage market. The role that Fannie and Freddie, or their successors, ultimately play in the market is to be determined. Paulson is leaving that decision to Congress and the next presidential administration. This year, Fannie and Freddie have issued more than 75 percent of single-family mortgage related securities. So whatever the outcome, the secondary market is going to be different.

Even in this troubled environment, credit unions continue to pursue sound mortgage lending strategies. The industry's $40.6 billion of first mortgage originations are up 40 percent year-to-date versus the first half of 2007. Secondary market sales are up nearly 24 percent to $9.9 billion. Credit union first mortgage delinquency of 0.78 percent (60 days or more past due) is well below the 3.11 percent rate (90 days or more past due) of FDIC-insured institutions. Year-to-date net charge-offs show an even greater disparity, with credit unions at only 6 basis points through June and FDIC-insured institutions at 98 basis points.

Even with this higher quality track record, credit unions and their members have been subject to the GSEs' market limits and price increases required by their deteriorating capital positions.

The Right Time for a Credit Union Solution
Coming from a position of strength when other players in the mortgage market are in upheaval gives credit unions a unique opportunity to shape their future role. Credit unions have systematically created intra-industry solutions to fulfill needs in payments, insurance, investment options and lending platforms. The major area in which credit unions continue to be dependent on third party solutions is the secondary mortgage market.

Credit unions have become significant mortgage lenders over the last decade. First mortgages are the largest segment of the industry’s loan portfolio today at 36 percent, up from 25 percent in 1998. In addition to the $201.8 billion portfolio on the balance sheet, credit unions service nearly $64 billion in loans sold to the secondary market.

Credit unions do not need to wrestle with the "impossible job" of balancing competing constituents with their mortgage business. Their member-focused mission is clear. Today, credit unions have the scale, the track record, and professional resources to develop a cooperatively-owned secondary market solution. What do you think the next steps should be?

 

 

 

Sept. 8, 2008


Comments

 
 
 
  • This is an interesting idea, however, since the market for private label mortgage securities is severly disrupted and even FN and FR are having difficulty finding buyers for their MBS, I am not sure who is going to buy credit union mortgages.
    Kendrick Smith
     
     
     
  • I strongly agree that the credit union industry should be looking at an alternative to the secondary market. CUs continue to move forward in this market and need to create our own secondary market solution.
    Phil Poehler