PLEASANTON, Calif.–As the San Francisco Bay Area housing market continues its recovery, $3.8-billion Patelco Credit Union expects to set a record for mortgages this year and top it in 2013.
While the volume is strong, it comes with a cost, as Patelco has instituted a number of internal procedures, in addition to compliance-related costs that have increased.
VP of Home Loans Vince Salinas told Credit Union Journal Patelco has been a major home lender only for nine years, but will book more than $550 million in mortgages this year and is expecting volume to increase 20% next year, because it did not do much marketing this year.
“The return is there, it is just a matter of wanting to invest in the infrastructure,” he said. “We need consumers to consider their credit union as a mortgage lender, and too often they don’t. But any credit union that wants to get involved in mortgages needs to understand it is a lot of work.”
A lot of that work is due to stringent new underwriting standards in the wake of the housing meltdown, Salinas explained. Moreover, the business has become more expensive for lenders, as so much documentation is needed to stay compliant with Fannie Mae selling guidelines.
The New Way of Life
“This is the way it is going to be going forward,” he predicted. “Any lender that wants to do mortgages in this state has to understand there are new costs. We underwrite a file three times before it funds. No longer do you see a loan close without it being looked at by an underwriter. A lender is responsible for performance even after the loan closes. I have to fund both pre-funding quality control checks and post-funding audits for Fannie Mae, which is something that was not there two years ago.”
Salinas said Fannie Mae has gotten “very specific” about the quality of the loan it will buy. Stated income loans, which contributed to the housing crash, have become difficult to find, he said.
“Those borrowers are going to have to shop harder and might have to pay more. Stated income products have their place, but the problem came when they were misapplied,” he asserted. “Same with negative-amortization programs. Lenders were just trying to loan as fast as they could, with no checks and balances.”
Credit Quality 'Very Good’
The credit quality for borrowers seeking mortgage loans is “very good,” said Salinas, who noted credit scores for Patelco’s membership typically are above average. Some members had “issues” during the financial crisis, but he said it makes every effort to work with them.
“Most credit unions have had to tighten up their credit standards to please the regulators, and we are working on getting our delinquencies and troubled assets down, similar to many other financial institutions today,” he said. “Patelco is in a very good position now, because delinquencies have come down every month for the last year, and we are having to put less and less aside for loan losses each month.”
Currently 90% of Patelco’s mortgage volume is refi’s. Salinas said it is working hard to create relationships with Realtors to increase its purchase lending.
“Because we are in the Bay Area we want to be involved on the jumbo side–property values of $1 million or more,” he said. “This means bigger loan amounts with a higher loan-to-value ratio. We have limited add-on fees compared to other lenders.”
Cash Call and Quicken are new national competitors that were not around five years ago, but a lot of the small brokers are gone, Salinas said. The “real” competition, he noted, is in resources. Patelco had to add temporary staff to handle the refi volume.
“We don’t want to hire people and then lay them off when volume declines, but it is difficult to find quality underwriters for a reasonable amount of money.”
Appraisals have been a “challenge,” but Salinas said working closely with vendors is the solution. With recent regulatory changes he said appraisers have become more independent from the lending entity, but that has made them more insulated from requests for reconsideration and negative feedback.
Appraisers “don’t really answer to anybody in the process,” he lamented. “We try to work with companies that screen the appraisers. We outsource the appraisal process to comply with the law. The management company decides what communications to pass along.”
While there are pockets in the greater Bay Area that are affected by large numbers of short sales, Salinas said they are shrinking.
A 'Reasonable Risk’
To protect itself from interest rate risk, Salinas said Patelco sells long-term, fixed-rate products to Fannie Mae and has done so for several years. It keeps adjustable-rate mortgages and jumbo mortgages on its books, and when the secondary market returns for jumbo and fixed products it will look to sell those, as well.
“Jumbo loans have higher income, better credit quality, more equity and cost less to service,” he said. “On a $1.5-million property where the borrower puts down 20%, they now have $300,000 in equity to protect, so they are less likely to walk away. It is a reasonable risk.”
