Like many credit unions,CitizensFirst Credit Union* ($370M, Oshkosh, WI) sells its long-term mortgages while keeping its short-term products on its balance sheet. But Ken Buksnes, assistant vice president of mortgage and commercial lending, wanted the credit union to have its cake and eat it, too. Specifically, he wanted a way for CitizensFirst to attract consumers that want long-term fixed-rate loans (at least longer than 10 years) without exposing the credit union to too much risk.
CitizensFirst’s 10-year-fixed product was traditionally the longest fixed-rate mortgage product the credit union offered. Unfortunately, the product was undistinguishablefrom the offerings of other financial institutions. The credit union’s management team knew it needed something innovative and interesting to set the institution apart.
We knew we had to be competitive with the secondary market, Buksnes says. We wondered if there was something we could do to attract people who gravitated toward a 15-year-fixed loan.
The credit union wanted a fixed-rate program that contributed to loan and membership growth without taking on the kind of interest rate risk that comes with a 15-, 20-, or 30-year fixed-rate mortgage, Buksnes says. Management presented this dilemma tothe CitizensFirst staff, from tellers to executives, and assembled the employees into brainstorm teams.
The teams lobbied for their best ideas and management further refined them. The result? A customizable home loan program called Retire Your Mortgage thatallows members to choose a loan term anywhere between five and12 years. The program is designed as a countdown to retirement and helps baby boomers pay off their mortgage before they leave the workforce. Shorter-term loans have lower rates but highermonthly payments, whereas longer loans have higher rates but lower payments. For example, a five-year loan carries an APR of 2.6%; on the other end of the spectrum, a 12-year loan carries an interest rate of 2.95%.
CitizensFirst began advertising the program in January 2012. Retire Your Mortgage appeared in radio ads, newspapers, and real estate books. Although Buksnes says the radio ads did appear to increase exposure, most of the borrowers became aware of theprogram only after approaching CitizensFirst about a 15-year loan.
The most effective way we’re getting [interest] is from members calling in looking for the traditional 15-year-fixed mortgage, he says.
Targeting the boomer market is one way the credit union alleviates risk. Because boomers tend to be more established and financially secure than younger members, they’re commonly able to make higher payments. For example, the average credit score of members who participate in Retire Your Mortgage program is 775.
One of the nice things about this product is it attracts a high quality of borrower, Buksnes says. Not everyone can afford to take their mortgage balance and put it on a five-year term.
Currently, the loans average nine years in length at a 2.8% APR. The biggest concern among prospective borrowers is whether they can afford the higher payments on the reduced timeline. To combat this, mortgage loan specialists examine the member’soverall credit load to make sure their targeted loan term is reasonable and that they’ll be able to comfortably pay off the loan. As a bonus, these discussions also lead to cross-selling opportunities.
Sometimes we can get it to where having a seven-year payoff is attainable by restructuring other things, Buksnes says. For example, a loan specialists might refinance a car loan or adjust a credit card balance.
Another challenge had to do with customizing the loan origination system to this type of program. CitizensFirst relies on a flexible LOS vendor (Prime Alliance), but it still required some adjustment. When members applied online, Buksnes says, wehad to set it up where the applicants could chose a 10-year fixed rate product, that we named 5-12 Year/Pick Your Term,’and once they would submit their application under that 10-year product, we could customize the term and rate on our end. A bit of an inconvenience, but it has been working pretty well.
More than a year after the program’s launch, the scale of its success surprises Buksnes. In 2012 alone, loans generated from the Retire Your Mortgage accounted for 26% of the credit union’s loan volume. This translates to 300 loans and totalsapproximately $25 million.
More than one in four of the first mortgages we closed was under this program, Buksnes says.
If there are any drawbacks to the program, it’s that the average loan balance tends to be a bit smaller than most home loans the credit union finances. Buksnes estimatesloans made through the program are approximately 15% smaller than the average CitizensFirst mortgage.
Still, Retire Your Mortgage continues to pull strong numbers. Through mid-April 2013, loans generated through the program accounted for 23% of the credit union’s loan volume. For the time being, the credit union won’t make any changes to theprogram, and Buksnes expects it to continue to grow during the year.
It drove our loan growth in 2012, Buksnes says. Whereas we saw decreases in all of the adjustable mortgage rate programs, this wasthe only program that showed positive growth. It has far exceeded our expectations.
* Update: In March 2015, CitizensFirst rebranded as Verve, A Credit Union.