In a new effort to both aid liquidity and boost profitability on the sale of mortgage loans, Navy FCU was expected to ink a deal last week under which it will sell its jumbo mortgages to U.S. Central CU's Charlie Mac but retain the credit risk.
Under the pilot program, Navy Fed will continue to sell its jumbo mortgages, defined as loans greater than Fannie Mae's and Freddie Mac's $333,700 conforming loan limit, to Charlie Mac but will retain all of the credit risk through its Navy Federal Financial Services CUSO in return for a premium on the sale of the loans.
Charlie Mac, formerly known as Network Liquidity Acceptance Company, LLC, is a CUSO owned by the corporate network that is aiming to create a secondary market for loans within the credit union movement.
According to Dennis Godfrey, president of the Navy Federal Financial Services, the deal was facilitated because of the widespread knowledge that credit union mortgage loans have a much lower default (charge-off) ratio than those made by other mortgage lenders. "We know that the marketplace credits credit union loans as if they were normal mortgage loans using the same default and foreclosure ratios that they may apply to a Bank of America or other normal lenders," said Godfrey.
"But we know that default and foreclosure rates (for credit unions) are much lower," he said. "So we went to Charlie Mac and we said, 'We will protect you on the credit risk.' Navy Federal Financial Services will take all of the credit risk."
The deal calls for NFFS to pay Charlie Mac a credit enhancement, a fee up to a certain limit, on the loan pool. In the event of a foreclosure or subsequent sale, if there is a loss on the loan, the CUSO will assume responsibility for all of the loss.
Navy Fed figures the probability of losses on the loans are slim, with delinquency rates for its huge mortgage portfolio (they don't separate jumbo loans from comforting mortgages) at just 0.29% for 2003, and only 0.27% for January of 2004.
The CUSO has not reinsured itself against the losses and will retain all of the credit risk, said Godfrey. He would not say what the premium will be on the sale of the jumbo loans to Charlie Mac. The first deal of the pilot calls for Charlie Mac to buy $200 million of Navy Fed's jumbo mortgages.
If the program is successful it could be expanded. "It's possible we would extend it to other investors and other credit unions," said Godfrey.
