ALEXANDRIA, Va.-Pentagon Federal Credit Union wanted a mortgage loan that would serve as a differentiator, and says it has found it in its 5/5 ARM product.
The 5/5 adjustable rate mortgage reprices after five years, similar to a 5/1 ARM. The key difference: instead of repricing every year, as a 5/1 ARM does, the 5/5 from PenFed reprices every five years.
And as an added safety net for borrowers, the maximum the rate on the 5/5 can increase is two percentage points.
James Schenck, EVP of real estate, title and business development for $15-billion Pentagon FCU, told Credit Union Journal PenFed's goal was to "differentiate itself" with a product that was "member-friendly in a rising-rate environment."
"A lot of lenders had 5/1 ARMs, which after five years reprice every year and rates were going higher and higher," he said. "We wanted a product whose features were advantageous for members. The competitor loans could go up as much as 5% each year, but ours can only go up at most 2%, then it is set for another five years. This means borrowers know for sure their worst-case rate for the next 10 years.
"We wanted to give a product that was clear, simple to understand, and had better reset features," he added.
Under PenFed's current offer, the starting interest rate on the 5/5 ARM is 3.5%. The loan is offered with no closing costs to borrowers, meaning PenFed covers taxes, title, appraisal and other fees.
Rod Raszler, PenFed's VP of mortgage operations, said the 5/5 ARM gives borrowers a chance to take advantage of the benefits of an adjustable rate mortgage without the variables that come with traditional 5/1 ARMs.
"Ours is much more stable," he asserted. "If someone starts at 3.5%, and then it reprices at 5.5% after five years, it ends up as a blended 10-year rate of 4.5%. With our rate cap it would take 15 years for the repricing of our loan to match the 5% rise other loans could do after just five years."
Same Rate For All Ranks
Another differentiator, Raszler said, is PenFed "treats everyone from private to general with the same rate."
"A lot of other firms offer risk-based pricing, which we do not do," he said. "It is very important to our board that we treat all members equally. This differentiates us from the competitors who say rates are 'as low as...' when only 10% of their borrowers get that rate."
This strategy appears to be working for PenFed. Schenck said volume projections for 2011 are exceeding last year's numbers. When the first half ends June 30 the CU expects to have nearly $2 billion in application volume just in the 5/5 ARMs, and it expects to exceed $4 billion in applications during 2011.
"We are coming into our strongest months now, so we are confident the product will exceed last year's total of $3 billion in applications," said Schenck. "We will be up 25% to 40% from last year."
Why is the 5/5 ARM doing so well when most mortgage lenders are struggling to find business? Schenck said no closing costs is a "big feature."
"Paying the appraiser, the tax, the buyer's title and the origination fee is a really incredible value proposition in this environment," he said. "We take great pride in balancing our loans with the deposits we have, so we are managing our interest rate risk on a daily basis."
Despite the low rate, Schenck said the 5/5 ARM is a profitable product for PenFed, while at the same time it provides "maximum value to the membership."
PenFed keeps the 5/5 ARMs on its portfolio and it retains servicing. Schenck said management is "very proud" that the CU does not sell the loans, and added its loss rate is "very low on this product."
Bringing Mortgages To Other CUs
PenFed has partnered with several national brokers, which originate the 5/5 ARM product on its behalf. In a program introduced earlier this year, PenFed partners directly with North Island CU in San Diego and USC CU in Los Angeles to offer the 5/5 ARM. Schenck said the partner credit unions originate the loan, PenFed handles the underwriting and closes the loan in PenFed's name. At origination, the partner credit union has the option to choose how much of each loan it wants to hold, from 10%/90% to 50%/50% to 90%/10%.
"Or we'll hold the whole thing," Schenck said, noting PenFed does the servicing on the loan in any case.
"We will be announcing new products going forward," he said. "We are showing credit unions can work together to support each other and the industry. We wanted to start in California due to the scope and scale of the mortgage market there, but we will be looking to partner with credit unions nationally to offer this product to their membership."
The partnerships with North Island rolled out at the end of the first quarter, while USC will be offering PenFed mortgages by the end of June.
According to Schenck, a mortgage partnership with PenFed is a good fit for CUs that have members who live across the United States for various reasons.
"This product allows them to reach their national membership. One example is college-affiliated credit unions whose alumni move all over. In the past the credit union might have been more of a regional or local lender, but this lets them expand."
