CUs Make Headway Despite Meltdown

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MADISON, Wis.-Despite poor loan growth overall, most credit unions have had "two really strong years in a row" on the mortgage front. The challenge now, one analyst is stressing, will be to dig deeper and invest time and resources to make mortgage lending an even bigger source of loans.

"I think what we're seeing is a natural maturation process that has actually been spurred on by the mortgage meltdown," said Mike Schenk, VP-economics and research for CUNA. "During times of economic downturn, credit unions serve as a countercyclical force and a safe haven. Credit unions' market share of mortgages has doubled in less than a decade. Up to now, we were really minor players."

Indeed, until recently, credit unions controlled a paltry 2% of the nation's mortgages; even now, CUs still only originate about 5% of mortgage loans. But all that is happening against a backdrop that would at first seem to be working against credit unions:

Even though affordability is at near-record highs (both in terms of housing prices and interest rates), and incomes have risen over the last six months, the expectation is that housing prices are going to drop further, which is stalling people from buying homes.

In 2005, 8.4 million homes (overall) were sold. Compare that to just slightly over five-million homes sold in 2010.

In 2005, 1.3 million new homes were sold, compared to just 320,000 new homes sold in 2010.

So, there's a much smaller mortgage pie to be meted out, which would seem to create a very difficult environment in which to grow market share. Yet credit unions are well-known for thriving in difficult economies.

"Credit unions have really garnered more share of what little activity is out there," Schenk related. "We really are originating a lot of mortgages. In 2009, credit unions did $95 billion in first mortgages. That was 10% higher than the previous record of $88 billion in 2003. We've actually two really strong years in a row.

"And that's just looking at originations. If you look at outstandings, credit unions had $230 billion in first mortgages (according to CUNA's monthly estimate)-that's more than double what we had outstanding in 2002."

So why all the doom and gloom about mortgages? Some of it is due to the fact that there has been a drop off from the booming growth that occurred during 2001-08, when credit unions saw double-digit growth in mortgages every single year. Now, that growth rate is down to 4%.

"Part of that is a reflection of the low demand, and part of that is NCUA is afraid of the interest rate risk, so more than half of all mortgages originated by credit unions are being sold to the secondary market, where before, in 2008, credit unions only sold 30%," Schenk related.

But a big part of the growth is tied less to booms and busts and has more to do with the learning curve and experience. "I think what we're seeing is a maturation process. In 1995, first mortgages made up about 20% of credit unions' loans, now they make up 40% of credit union loans, and 60% of credit unions are active in the primary mortgage market," Schenk said. "Over time, credit unions have matured and are approaching this market as other mature providers would, establishing relationships with Realtors, establishing CUSOs, This is a change from where credit unions were at when they first got into mortgages, and a lot of these changes are here to stay. It's difficult to break into a new market because inertia is pretty strong, but as people learn that credit unions do make mortgages and do a good job with them, we'll continue to make inroads."

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