First Mortgages Drive Loan Growth

Credit unions have been leveraging the opportunities in the mortgage market to reach record high market share and minimize risk.

 
 

Over the past year, the credit union loan portfolio grew $31.7B, or 5.91%. While nearly all of the other loan categories, including other real estate, used auto, credit cards, and member business, contributed to this growth, 70% came from 1st mortgages. Mortgages grew $22.5B, or 11.7%.

What housing crash?

The downturn in the housing market has been devastating for many mortgage lenders, causing some to completely exit the market, while others have scaled back their mortgage programs and significantly tightened their lending standards. For example, FDIC-insured institutions reported a year-over-year decline of $169.9B, or 7.7%, in one-to-four family residential mortgages. Meanwhile, credit unions are leveraging this opportunity to gain record market share, as reflected in the first quarter of 2009.

In just two years, credit unions nearly tripled their market share, a dramatic shift can produced by the two classic forces of economics: supply and demand.

According to the Mortgage Bankers Association, mortgage volume in the first quarter is down 2.2% from $453B, seasonally adjusted, in 2008 to $443B in 2009. Nearly 70% of the origination volume was in refinance activity. While falling mortgage rates caused the demand for purchase mortgages leveled off its gradual decline over the past two years, the average weekly refinance application volume in the first quarter was up 70% over the fourth quarter of 2008, nearly three times the average weekly volume for mid-year 2008 all the way back to 2005.

It was in this gap of soaring demand for mortgages and shrinking supply that credit unions stepped up as mortgage lenders to provide crucial credit in a time of need. First quarter mortgage originations were up at credit unions 38.9% over last year, more than double the first quarter volume of 2005 through 2007.

Addressing Risk

If the ongoing recession has taught us anything, it is that there is risk everywhere, and responsible institutions must be ever cognizant of wisely managing risk.

As of March 31, 2009, credit unions were carrying $3.1B in delinquent mortgages, with 60% of those delinquent two to six months. The upward trend in delinquency and charge-offs is certainly disconcerting, but mortgages at credit unions tend to be higher quality assets compared to the overall market. Mortgage delinquency at FDIC-insured institutions reached 5.95% in the first quarter, compared to 1.46% at credit unions; the net charge-off rate increased to 1.36%, compared to 0.21% at credit unions.

Credit unions are primarily managing mortgage risk in two ways: selling mortgages on the secondary market and modifying troubled mortgages in their portfolios. Credit union activity in the secondary market has grown rapidly just in the past year. Mortgages sold increased from $5.0B in first quarter of 2008 to $13.9B in 2009, a 176.8% increase. Credit unions have primarily used secondary sales to manage rate risk by moving low-rate mortgages originated in this environment out of the loan portfolio, freeing up much needed capital.

In the first quarter, credit unions were carrying $2.0B in modified mortgages, representing 0.92% of total mortgages outstanding, up 57 bps since third quarter 2008 when credit unions were first required by the NCUA to report mortgage modifications. Combined with traditionally conservative underwriting standards, modifications do appear to be helping to alleviate the stress of delinquency for credit unions.

Top issues for mortgage lenders going forward:

  • Maintaining and increasing market share as mortgage lenders reenter market
  • Avoiding undue rate risk
  • Serving the mortgage needs of members with lower credit scores as underwriting standards tighten
  • Curbing rising mortgage delinquency

Reader response: What do you see as the most important issues facing credit unions in the mortgage market?

 

 

 

June 22, 2009


Comments

 
 
 
  • Gregg, thank you for your comment. Certainly, there is much more to the picture than is included here. This article is meant primarily to be a summary of credit union mortgage lending activity over the past quarter and how this compares to years past. As such, there are those that perform better or worse than the aggregated data presented here.

    You are correct that mortgage lending is primarily done by larger credit unions; the 300 credit unions with the highest origination volume account for $20M, or 78% of the total industry origination volume. However, in the first quarter of 2009, 58% of credit unions were originating mortgages.

    In response to your question regarding the nature of these originations: 61% of first quarter mortgage originations were fixed rate over 15 years; another 24% were fixed rate 15 years or less. The interest only & option arm mortgage volume totaled $228M, or less than 1% of total originations. While the quality of loans being funded at this time is uncertain, rate risk for fixed rate products is a very real concern for credit unions, as identified in the article. As of the first quarter, secondary sales were at 54% compared to mortgage origination volume.

    The intention of the article is not to recommend mortgage lending for all credit unions – each one has to make that determination - but rather acknowledges that there is value in meeting the credit needs of current or prospective home-owning members. In addition, by growing market share, credit unions have the opportunity to further expand relationships in other areas of members’ financial needs.
    Elliott Kashner
     
     
     
  • Your looking at all loans as if they were equal. There are $7 billion in Interest Only and Option ARMs on credit union books. Of that, over 6% are delinquent. The top 40 CU's account for $5 Billion and 23 of those are located in California. Of the 550+ cu's with these disastrous loans on their books - 15 have 100% delinquency.

    Also, what are the nature of the current loans being funded? 30 year fixed? With interest rates at all time lows there is a real risk associated with them. When rates go up, they will be unsellable except at huge market losses.

    Just because volume went up, I don't necessarily think that that's a good thing. I surely can't tell from the data provided. Indirect autos was thought to be a good thing at the time because volume was increasing. You might want to ask SAFE cu what they are doing with their 800+ repos for sale now.

    It's easy to recommend when the losses don't come from your operation at Callanhan's... More insight is required to see if this is a good thing or another NCUSIF debacle that could have been avoided.
    Gregg S.
     
     
     
  • Ok, now it's clear as mud! In order to correctly disclose delinquency we have to list "possible but not really" delinquent loans. No wonder funding the ALLL account is a bottomless pit.
    Gregg S.
     
     
     
  • When discussing delinquency, it is important to note that modified loans that qualify as Trouble Debt Restructures are required to be reported as delinquent until 6 full payments have been made under the modification agreement. Therefore, there may be loans reported as delinquent that are currently performing under the terms of the modification--but you can't distinguish between them and loans that are "truly" delinquent.

    In reviewing the delinqency data at 1Q for IO/Payment Option mortgages, there are 10 credit unions with 100% "reportable" (over 2 months) delinquency for 1st mortgages. Of those 7 report all of that total is under 6-months--so are they modified and performing but still being reported as delinquent under TDR accounting? or truly delinquent? We can't be sure. At least 4 of these institutions are reporting the same volume under "modified" delinquency which indicates that they may be in the first category--modified TDRs that may or may not be performing.
    Alix Patterson