With mortgage rates rising, many credit unions are selling their fixed rate mortgages to the secondary market on a flow basis to minimize interest rate risk, receive the best secondary marketing pricing options by selling the loans as soon as they are funded, and remove conforming loans with higher credit risks. As the spread between fixed and adjustable rate mortgages has narrowed, fixed rate mortgages are more popular since consumers have less of an incentive to choose the lower variable monthly payment option given that they could potentially face future payment shocks if rates rise. Credit unions have put $126.6 billion in first mortgages on the books in the last three years,and have sold 35.0 percent of total originations to the secondary market in 2005 versus 40.3 percent in 2003 due to liquidity concerns and balance sheet risks.
“Credit unions have adjusted what they are selling,” said Nathan Hagen, president of Secondary Marketing Resources, a secondary market consulting firm. “Two years ago a credit union may have sold only its 20- and 30-year fixed rates but today, as liquidity has tightened, they are selling all of their fixed rate loans. Yet, to some extent this is a more conducive environment to put mortgages on the books because rates are higher.”
The secondary market allows credit unions to control flow management, accept alternative mortgage products and manage interest rate risk.
The secondary market provides credit unions an outlet to increase their market share and their mortgage penetration rate amongst their membership. It also enables credit unions to continue originating loans even after they have reached their internal mortgage loan limits.
Toyota Federal Credit Union ($233m in Torrance, CA) not only sells its fixed rates, but also its 5/1 ARMs to the secondary market. “We’re at the point where we have what we want in portfolio in terms of volume, and we will sell conforming mortgages to the secondary market in order to originate new loans for our members,” said VP Mortgage Lending Ed Casanova.
Alternative Mortgage Products
Credit unions can pursue a blue ocean strategy to increase their market share in their community by selling to the secondary market. The secondary market has recently started to purchase several alternative mortgage products. Many of these programs help members begin the path to first-time homeownership.
AEA Federal Credit Union ($302m in Yuma, AZ) has been able to originate several specialty mortgage products that it would not have otherwise because the secondary market is now a willing purchaser. The credit union is part of the Southwest Border Alliance that is designed to help low-income members qualify for a mortgage. One of the initiatives is the sweat equity program.
The sweat equity program allows members to put down as little as $500 of their own money along with federal housing grants to receive a mortgage loan from the credit union. The Southwest Border Alliance program also allows members to qualify for a loan using non-traditional credit. Even if a member does not have established credit, AEA Federal Credit Union can determine a credit history from rent or credit card payments. “We’re the only financial institution in our county that offers this type of mortgage,” said Teresa Laurent, vice president of member services. “Real estate agents actively approach us for this and other low-income housing projects that we support. We would not be able to offer the programs without the ability to sell the loans to the secondary market.”
Interest Rate Risk
Altura Credit Union ($737m in Riverside, CA) aggressively manages the interest rate risk of its portfolio. The duration of its assets is only two years so the long term exposure to lower yielding assets during a rising rate environment is minimized. “We have an internal policy that limits our portfolio of fixed rate mortgages with original maturities exceeding seven years to ten percent of total assets. We further protect our balance sheet from extension risk by limiting the total held-to-maturity portfolio of first mortgages to a maximum of twenty percent of total assets,” said SVP/-Corporate CFO Diana Wilcox. Altura Credit Union sold $166.8 million in first mortgage loans to the secondary market in 2005, an increase of 137 percent from 2004.
To expand its market presence, Altura Credit Union, through its affiliate company Patrion Mortgage, LLC, is actively developing a wholesale mortgage operation program to partner with mortgage brokers. After selecting brokers who share the core values of Altura Credit Union and Patrion Mortgage, they will share pricing sheets with them to attract new business. The conforming fixed rate mortgages will most likely be sold to the secondary market, but the credit union plans to portfolio some of the hybrids and ARMs that are originated through the wholesale program.
Learn more about successful strategies for working with the secondary market on the upcoming webinar, Optimizing Performance Using the Secondary Market, sponsored by Charlie Mac and The Callahan Center for Credit Union Leadership