California Surprise: One CU Finds Success In Mortgages

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SUNNYVALE, Calif. — Although housing market declines have led to steep losses for many lenders, the $5.4 billion Star One Credit Union's 2010 lending growth was fueled largely by booking mortgages.

Star One serves Santa Clara County, just south of San Francisco. CUDATA.com identified it as one of the Top 10 CUs in the country by lending growth for 2010. Its president, Rick Heldebrant, said first deeds originated in 2010 totaled $1.8 billion, up from $1.12 billion in 2009.

"From what we have seen on peer-to-peer comparisons, we had a lot of originated first deeds and we are not selling those on the secondary market," he told Credit Union Journal. "My understanding is our peers are selling half of their volume on the secondary market. We did well on loan originations."

According to Heldebrant, Star One's interest rate risk strategy has evolved over time. It used to sell its mortgage loans, but began portfolioing those loans after deciding it had sufficient capital — 10.63% — to do so.

"Our simulations and spreadsheets show it is better for us to keep the loans and borrow against them rather than sell them on the secondary market. I don't know if others don't have the capital ratio to do it, but we like to do it that way."

Because Star One holds mortgage loans, it does a combination of complete refis and modifications, Heldebrant continued. If interest rates go down, it has a "quick and easy" program to modify the rate without a new appraisal or title insurance, in return for a "slight fee."

"That is what we call a modification, not the loan modifications other people have talked about the last two years," he explained. "It is a real advantage to the members. For us, it keeps us from getting swamped, because we can do it in 30 minutes rather than two days for a completely new real estate loan."

There are also other advantages in not selling loans on the secondary market, Heldebrant asserted, including time saved and better earnings compared to investments. He said Star One has its own formulas to determine how much it wants to borrow and at what term.

The credit union has benefited from some good news, too: the local real estate market continues to hold up well. Heldebrant said Star One performs an analysis twice a year to determine current loan values and "we seem to be doing OK." Star One has loans in several geographic areas, most of which have not seen precipitous drops in values. Most of its members had 30-year loans with 20% down, very conservative, so it "did not take the same hit a lot of lenders did."

"In the Silicon Valley we see boom and bust," he observed. "Unemployment is still high and some members who have been out of work for a while are struggling. Before two years ago we never saw real estate loans go bad. We have had a handful, but nothing compared to Las Vegas or Florida. We have some now, but a lot of credit unions would like to have our numbers."

In 2010 Star One reported net income of $66.8 million, excluding NCUA assessments. It paid nearly $4.3 million to the NCUSIF and $4.5 million to the corporate stabilization fund, leaving it with net income of $57.9 million.

Consumer Lending 'Disheartening'

In contrast to the robust numbers in mortgages, consumer loans are "disheartening," Heldebrant said flatly.

"People are trying to fix up their own balance sheets and pay down their debt. We have very good rates on car loans, but when a member goes to the dealership the dealers say they will offer a better price only if the financing is through the dealership. We have good rates, but we don't want to get crazy with pricing; we won't cut the rate to a point we are not making money on the loan."

The CU's credit card portfolio is "plodding along," he added.

As for 2011, real estate volume has slowed down because rates are not as low as they were last year. Heldebrant said it has 10% penetration with its membership on first deeds, meaning, "Our numbers will depend on the housing market and if people are going to move around and buy new houses. I expect the new firsts will be down. On the consumer side, last year was lackluster and this year will be about the same."

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