Frank Pollack couldn't be any more correct: credit union mortgages are the best for both members and their credit union. That's certainly the case for BECU (formerly Boeing Employee's Credit Union). Mortgage lending is a focal point for our growth and member service strategies. Like Pentagon Federal Credit Union, we had an incredible year in 2003, originating almost $1.4 billion in mortgage loans last year; this year we'll do even more.
All it takes is Creativity
Our members gravitate toward fixed-rate and conforming ARM loans. Turbulent economic times in the Pacific Northwest seem to have made our 'liberal-conservative' members more conservative, at least when it comes to their finances. That hasn't stopped us from being product-creative, however. Property values in Puget Sound have continued to escalate, even though the economy is not that strong. Which leads to another point of agreement: for many seeking to finance a home, fixed-rate mortgages are simply too expensive. Members who tend more toward the liberal have shown a willingness to learn more about the innovative mortgage products BECU offers.
One such loan they like is the interest-first mortgage. Interest-first mortgages come in both fixed-rate and ARM varieties, yet the concept is the same. For the first 10 or 15 years the member makes interest payments only. Beginning in the 10th or 15th year, the loan becomes fully amortizing. At any point, though, members are free to make principal payments, which, in turn, automatically adjust the member's monthly payment. Members are pleased with just how much more affordable their new home becomes.
Interest-first loans do more than make housing affordable. Because they improve cash-flow, members have additional money to invest for retirement or for college educations. Life insurance is another possible use members may make of the additional cash, or they may choose to use it to cover living expenses. Loan products like these transform the 'mortgage as commodity' into 'mortgage as tax-, estate-, financial planning tool. Commodities have little utility. They're also not that much fun to sell, since price tends to be all important. Loan products that offer more, on the other hand, add value to members, and their relationship with us.
BECU's product creativity doesn't end there, though. In the future, the near future, hopefully, we'd like to offer a portable mortgage, for instance. In another vain, meeting the needs of an increasingly diverse membership requires to think creatively every day.
High-dollar housing is just one slice our regions residential real estate market. Puget Sound and the State of Washington are home to many lower income areas. We serve our members there, too, yet in different ways.
We're of the firm belief that within the next five years low- to moderate income members and members from emerging markets will be the majority of our borrowers. Helping finance their homes are a whole host of conforming and non-conforming mortgage loans. Some of these loans we place in our portfolio. Taking the mortgage process back to Main Street from Wall Street is how Chip Filson characterized this in a recent article. Understanding our members' particular needs, their financial habits and how they view the homeownership/mortgage relationship has helped us fashion products that meet their needs and ours.
That's not to say BECU takes undue risk, we don't. On the liberal-conservative scale, we're conservative. Mitigating our risk while serving this growing population of members is a multi-layered affair. Layer one I've already mentioned: we make concerted efforts to understand needs and habits. Layer two is an extension of layer one: we work closely with numerous community groups whose objectives match ours. Organizations like the Urban League and United Way exist to build community. Credit unions exist to help members establish financial security. Our goals intersect in housing. Communities don't become stable until their residents have a stake in them. Residents can't establish a stake unless they can afford to live in their communities. Community groups and credit unions, consequently, are made for each other.
The Secondary Market
Layer three is the secondary market. As big a credit union as we are, we couldn't possibly lend to every member who needs a home without our Fannie Mae partnership. And, whether it's Fannie Mae, Freddie Mac, the Federal Home Loan Bank or Charlie Mac, no credit union with the goal of realizing their mortgage lending potential could possibly do so without partnerships such as these.
The importance of secondary market partnerships can't be overstated, nor are they one-dimensional. Getting back to the third layer, Fannie Mae offers a number of innovative products designed to help members of limited means, and those who are willing to establish roots in their community. Then there's the soon to be available longer-term amortization products. When the issue is affordability, where payment makes all the difference, innovation like this helps people who otherwise couldn't afford homes.
Another secondary market dimension is liquidity. I mentioned that we made $1.4 billion in mortgage loans last year. Sounds like a lot. It is and it isn't. A billion of anything is lot. Equating it to members served, on the other hand, makes it seem miniscule. $1.4 billion dollars equals 8,200 mortgages, which means we lent to 8,200 members out of 340,000, a small number indeed.
Among BECU members the homeownership rate is high at 83%. For the sake of discussion let's say we increased our member penetration from its present 4.7% to 10% and our annual market share from its current 2.4% to 10%. At our average loan size that means the amount of mortgages granted in a single year would total $4.8 billion, roughly equal to our assets at this point in time. Lending strictly on 'Main Street' would prohibit BECU from achieving 10% market share, which, by the way, is still not high enough. Strong secondary market partnerships mean that our market share is only limited by our imaginations.
Where Main Street meets Wall Street
Main Street is where, why and how we lend. Our balance sheet in concert with Wall Street is what makes our lending possible. If we take the 10% market share example far enough - - to the point where Wall Street had no involvement - - it's probably a safe bet that the United States would not be the world's homeownership leader. The Wall Street/Main Street discussion is a national policy issue much larger than Fannie Mae, Freddie Mac and all the other secondary market players. Commitment to homeownership became national policy during President Franklin D. Roosevelt's first term in office with the passing of the National Housing Act of 1934. His commitment: every American should have a safe and decent home. Lenders alone don't have the wherewithal to make that commitment a reality. Lenders and the financial markets, on the other hand, can and are.
BECU relies on other partnerships as well. We have technology partners that help us deliver unparalleled member experience and matchless efficiency. Our service provider relationships not only help us make the mortgage transaction faster, they help us save our members time and money. And, whether you are a fan of Mortgage Insurance or not, this is another product whose creative use can mean the difference between putting a member in a home, or letting them continue to waste their money on rent.
How to Succeed
Here's where Mr. Pollack's opinion diverges from my own. We - - credit unions - - are not simply 'intermediating money', we are helping members from all walks of life achieve the American Dream. Mortgage lending that does this meaningfully is about so much more than price: it's about helping members achieve financial well-being. Keep that foremost in our minds, and we will be successful.
Frank Pollack’s description of Pentagon’s mortgage lending strategy is available in the March Callahan Report. To obtain this month’s copy, please click here.