Lizeth GeorgeBy Chris Perry, MGIC and Josh Ley, CUNA Mutual Group
Are you making the absolute most of your ability to portfolio lend? We have already seen a dramatic increase in mortgage rates from the historic lows of the past few years. If rates continue to increase over the next few years, loans will become more expensive for your members – and this will put pressure on your credit union’s growth. It will be important to look at all areas of your balance sheet and find strategies to grow your portfolio. Let’s examine how you can use your first mortgage portfolio products to better serve your current members, attract more new members, and manage your overall capital and long-term interest rate risk. With the 2020-21 markets in the rearview mirror, and considering all the major changes we’ve seen so far in 2022, is now the time to take action?
2020 and 2021 were outstanding years. According to the NCUA 5300 report, Credit unions experienced record deposit growth – 20.89% in 2020 and 12.90% in 2021. The average deposit per member increased from $10,970 in 2019 to $14,033 in 2021. With deposit growth outpacing lending, the loan-to-share ratio for credit unions dropped from 83.89% in 2019 to 69.86% in 2021. Portfolio mortgages is one direction that credit unions have turned to in order to help raise their loan-to-share. From 2019 to 2021 the percent of credit union first mortgages that are portfolio loans has risen from 38% to 44%.
As we enter an economic cycle during which the Fed will increase rates over the next few years, it will be important for credit unions to manage their interest rate risk, but at the same time, serve their members. One product that can provide both interest rate protection and reasonably priced loans for members is Adjustable-Rate Mortgages (ARM).
What is the 2022 mortgage market going to look like? Well, the refinance boom of 2020 and 2021 is over. Volume and margins have been cut in half, if not more. Competition for the remaining purchase business is fierce. To differentiate your first mortgage product offerings, a credit union must utilize its most powerful tool – its portfolio lending capability. Portfolio lending products shouldn’t be used just to close loans for members who don’t fit into standard Agency guidelines, but rather to identify unique borrower needs and proactively meet them with niche programs and loan products. Niche programs can help you earn your current members’ mortgages, as well as earn new members’ mortgages from referral sources in your community (including real estate agents, builders, SEGs, and direct consumer marketing).
What niche programs will help your members the most? Borrowers’ number one impediment to purchasing a home is coming up with the down payment. Most first-time homebuyers still believe they need to save 20% of the purchase price to buy a home. Freddie Mac and Fannie Mae have decent first-time homebuyer programs, but they certainly don’t meet every borrower’s need. Your portfolio program can help fill the voids. Focus on several first-time homebuyer programs that meet those needs.
Another option: The conforming loan limits for mortgages on one-unit properties to be acquired by Fannie Mae and Freddie Mac is $647,200, meaning many lenders won’t lean above that amount or will require higher down payments. This creates a tremendous opportunity for your credit union. You can offer a 97% Loan-to-Value (LTV) or a 95% LTV above conforming loan limits to meet this need. Sound risky? You can have your borrowers pay for Mortgage Insurance (MI), which reduces your exposure below 80% LTV while protecting the membership at large. A true win-win! Plus, MI rates have never been lower and more affordable.
Will your members accept ARMs or do they need 30-year fixed-rate loans? If you offer niche programs, you can align your offer with intermediate ARMs, such as a 5/5 or a 7/1 ARM. ARMs can offer your members lower pricing than 30-year fixed-rate loans, or you can align them with other niche programs. Your members will suddenly like your 5/5 ARM because they can’t obtain that program as a 30-year fixed-rate loan, and it can help them buy the home they love.
Where can you obtain these first mortgage originations? This niche program differentiates your credit union’s offerings from other first mortgage lenders your members may be considering. The products mentioned in this article can help you win your members’ loans and earn new member referrals from numerous sources. You can even recruit producing loan officers with unique portfolio offerings.
Like with car loans, numerous credit unions are winning new members and booking mortgages through first mortgage indirect purchase programs from independent mortgage bankers. These are just a few of the ways credit unions can capitalize on their main differentiator (portfolio lending) to earn purchase business in this new market.
Don’t let the new market of 2022 lower your loan-to-share ratio even more! Take action now by engaging your CUNA Mutual and MGIC partners to examine your first mortgage offerings today.
