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Why the mortgage insurance industry is shifting away from a delegated model.

Call it stress avoidance or a quest for peace of mind.

These are the motivators behind the enormous shift many credit unions are making in their approach to mortgage insurance(MI).

As part of a quest to reduce credit risk, credit unions and other mortgage lenders have been turning away from a delegated underwriting model in favor of a proven approach that adds an extra layer of protection: full-file MI underwriting. This front-end Non-interest income is rising amidst today’s low interest rate environment, according to newly released third quarter 2012 credit union performance data. Total non-interest income is up to $10.7 billion. That’s the highest value in three years and up 18.0% over the first nine months of 2011.

Credit unions posted year-over-year increases in the two main components of non-interest income, fee income and other operating income. When factoring all the categories of non-interest income, total non-interest income per member is up 12.1% from 2011 to $112.01 per member.

Fee Income As A Percentage Of Assets Is Stable

Fee income, which is mainly composed of overdraft, ATM, and credit card fees, increased 7.7% to $5.5 billion from $5.1 billion a year ago. As a percentage of average assets, fee income is flat year-over-year, indicating credit unions are not relying on member fees to increase income. Fee income per member was $57.73 for third quarter 2012. This is the second-lowest level posted in the past five years.

Callahan & Associates | www.creditunions.com

Secondary Market Sales Drive Other Operating Income

Other operating income, which includes income from selling mortgages on the secondary market, increased to $4.9 billion. That’s a 30.3% year-to-date increase from last September. Other operating income per member was $51.34, a five-year compound growth rate of 9.8%. This increase is mostly the result of credit unions selling mortgages on the secondary market in an effort to mitigate long-term interest rate risk and identifying alternative sources of revenue to counterbalance low loan yields.Mortgages sold year-to-date increased by 97.1% over September 2011. Although credit unions are selling mortgages, they are still helping members by servicing the loans. The number of real estate loans sold to the secondary market but still serviced by the credit union increased by 16.6% year-over-year; now 9.0% of credit unions service loans after they sell them.

Callahan & Associates | www.creditunions.com

The shift in other operating income as a larger percentage of non-interest income highlights the creative ways credit unions are growing their bottom line without increasing members’ fees. Other operating income as a percentage of non-interest income for credit unions increased from 39.8% two years ago to 45.8% as of third quarter 2012. Credit unions in Massachusetts and Missouri are notable examples. The two states grew other operating income 60.3% and 41.3% while increasing fee income just 4.6% and 5.7%, respectively.

Closing Out 2012 Strong

Callahan & Associates | www.creditunions.com

Credit unions are adapting to the low-rate environment and posting strong financial performance. Loan rates are down across the board, which has forced credit unions to find new sources of revenue. Non-interest income is now up to 1.07% of average assets that’s an increase of nine basis points from 2011 and non-interest income now represents 28.0% of total income for credit unions.

Consumers are flocking to credit unions for all the right reasons, says Hank Sigmon, CFO of First Tech Federal Credit Union ($5.6B, Palo Alto, CA). But in this ultra-low-rate environment we are having trouble generating sufficient retained earnings and capital to support that growth. The Federal Reserve announced that it is going to keep interest rates low, so the net interest margin will remain under pressure for some time.

To accommodate for that pressure, credit unions are exploring new avenues to ensure sustainable growth to their bottom lines regardless of larger, macroeconomic pressures.

*Spike in 3Q09 includes NCUSIF stabilization pass-back income.

review provides a second set of eyes to critically review the loan and help reveal instances of under-qualified buyers and ? in rare cases ? new and sophisticated forms of fraud.

Keeping The Past In The Past

Like many recent changes in lending practices, the move toward full-file underwriting by mortgage insurers grew out of the 2008 mortgage crisis. Delegated underwriting became a widespread practice among MI companies in the 1990s and into the next decade, and lenders developed new financing options requiring small down payments or no down payments at all, according to Carl David Reed’s Decoding the New Mortgage Market.

Not only did MI delegation lead to billions of dollars in claims for MI companies, the delegation model also exposed lenders to rescissions and buybacks down the road. In too many cases, claim denials due to lost documentation forced lenders to spend valuable time searching for missing documents and piecing together details of loans made years earlier.

In response, lending professionals have begun to collaborate closely with their MI partner, which adds the expertise of MI underwriters to the origination process. By putting the focus on full-file underwriting, these lenders can avoid the heartburn that comes with rescissions and buyback demands by helping to keep flawed loans out of the system at the outset.

The Pioneering Approach Of Credit Unions

Many credit unions have been industry leaders in adopting this kind of preventive focus by either completely eliminating the delegated approach or reducing it substantially.

As more and more credit unions shift away from a delegated model, mortgage insurers have responded by streamlining the full-file review process to make it as efficient as possible. In recent years, United Guaranty’s own underwriting staff has tripled and the institution has invested millions of dollars in technology in order to complete full-file reviews in 24 hours or less.

Pricing Advantages

With risk-based pricing, credit unions also gain more accurate MI pricing in stable markets for savings that can be passed directly to valued members with no additional fees or hidden costs. United Guaranty believes this alternative to traditional pricing can provide benefits to credit union members, reflecting their solid credit quality and the quality loans credit unions originate.

Ensuring Safety For Credit Unions

Combining a full, second-party MI underwrite with pricing that truly reflects the high quality of credit-union loans can ensure a book of business that holds few surprises. By identifying problems while they can still be solved, a comprehensive MI underwriting analysis can help lenders avoid hassles down the road and provide peace of mind about the future.

For more information about the benefits of full-file underwriting and member savings through risk-based pricing, contact Shannon VanSickler, vice-president Credit Union Channel, at 303.829.5276, or call your United Guaranty account executive today.

About United Guaranty: United Guaranty Corporation and its subsidiaries provide innovative, quality risk solutions that help mortgage lenders remain competitive while generating a profitable and responsible book of business for their stakeholders. Products include first-lien private mortgage insurance and a suite of loan analysis and risk management tools. Distribution channels include national and regional mortgage bankers, credit unions and community banks, and builder-owned and Internet-sourced lenders. United Guaranty was established in Greensboro, North Carolina, in 1963 and has been a company of American International Group, Inc. (AIG) since 1981.

888.822.5584 | www.ugcorp.com
United Guaranty Residential Insurance Company
United Guaranty Mortgage Indemnity Company
230 North Elm Street, Greensboro, NC 27401

United Guaranty is a marketing term for United Guaranty Corporation and its subsidiaries. United Guaranty and Performance Premium are registered marks. Coverage is available through admitted company only.
This article is sponsored by a recognized solutions provider in the credit union industry. Callahan & Associates does not endorse vendors or the solutions they offer, and the views and opinions offered here might not reflect those of Callahan. If you are interested in contributing an article on CreditUnions.com, please contact the Callahan team at ads@creditunions.com or 1-800-446-7453.
May 30, 2014

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