With mortgage rates expected to inch up, credit unions are struggling with how to handle their mortgage portfolios and avoid exposure to interest rate risk.
Offering some answers were three top mortgage lenders who discussed their own asset/liability management efforts at CUNA's Future Forum.
Wescom CU VP Real Estate Lending Tom Orman, Meriwest Mortgage CUSO President Jack Buckman, and Navy FCU AVP-Secondary Marketing Charles Stewart have one thing in common: mortgages-big mortgages, and lots of them.
"We generally have more loans than we need for our portfolio needs, so we had to lay off a lot of those loans into the secondary market," said Buckman. "We have 52% in real estate-40% in mortgages and 12% in home equities. ALM is big. We portfolio our ARMs and sell off our fixed rates."
This is particularly important for a $900-million CU on the West Coast, where the median home price is approaching $500,000. Since a jumbo loan is defined as anything above $333,700, that means many of Meriwest's mortgage loans fall into that category.
"Jumbo loans have to be a big part of our business, so the question we have to ask is how are we going to fund these loans, plus, we don't want to porfolio a bunch of $500,000, fixed-rate loans," Buckman related.
Not surprisingly, Meriwest has turned to the secondary market. But not all secondary market partners are created equal, he cautioned. For one thing, that partner has to be willing to let the credit union continue to service the loans.
Outside Parties Cross-Selling Members
"You should always try to maintain the servicing so you can maintain that relationship," he advised. "We used to work with Countrywide, and even before they had a bank they had 13 products they were cross-selling. They're going to cross-sell your member right away from you. You need a partner where the pricing and underwriting are consistent.
In Pasadena, Calif., Wescom Credit Union is in much the same position.
"The median home price in Orange County is $655,000 and $440,000 in LA County," Ormon said. "In the U.S. overall, the median home price is $183,000."
The maximum real estate loan Wescom will make is $1.5 million, and $230,000 is the average retail mortgage loan. Despite the potential exposure to interest rate risk, Ormon noted, mortgages are still an important product for credit unions. "This shouldn't stop you from wanting to do mortgages," he added. "Rates are still low. Our average fixed-rate mortgage loan is 5.16%, but that's still better than not making loans. Interest rate risk policies are a must have, and selling loans is an active part of what we do."
Wescom partners with mortgage brokers to offer wholesale mortgage loans, many of which are jumbos. "We sell all wholesale loans, and we sell jumbo fixed rates right along with conforming loans," he related. "We hold all of our ARMs. You have to line up your procedures and streamline so you can sell your loans quickly. We underwrite to the secondary market. It's just the way it's done. It provides standards and guidelines and guarantees we can sell the loan later down the line if we need to for income reasons as well as interest rate risk."
Although Navy FCU has a lot of low-income members, it does its share of jumbo loans to high-ranking Navy officers, because the world's largest credit union serves ensigns and admirals alike, according to Stewart.
"Our top four mortgage areas are also some of the most expensive areas: Virginia, Maryland, California and Florida," he offered. "We're not doing super-jumbos, but we're looking to do those. We have a board-imposed cap of $650,000, but that's 10 years old, so we're looking to get that revised. Our jumbo borrower's average FICO score is 740, so we're talking about high-quality borrowers. And they are also our most profitable members. They help subsidize the lower end of the scale."
Navy is portfolioing its ARMs and balloon loans, but "every mortgage loan we make is saleable," he added. "We don't allow too many exceptions through the door. We're looking to produce a liquid product so if we need the cash, we can sell them."
'Pretty Ugly'
Although the jumbo borrowers tend to be "high quality" that doesn't mean those loans don't ever fall apart.
"Obviously, the severity of the loss with these loans is much higher. When these loans go bad, they go very bad. It can get pretty ugly," Stewart related. "That why we need to have a trusted partner, a jumbo investor who is looking out for us."
And it just so happens that these three credit union mortgage lenders do have one other thing in common: Charlie Mac, which was the sponsor of the mortgage panel discussion.
"Charlie Mac is an all credit union channel, and there's a value to that," Stewar advised. "Credit unions really do produce better mortgages than pretty much any other community lender in America, but that hasn't translated well on Wall Street, yet. Navy is a huge credit union, but we're still nothing in the greater market place. Charlie Mac is helping to create a better story for credit unions. We want to see credit unions get better prices on the secondary market and be rewarded for the better loans that we produce."
Charlie Mac is a CUSO of U.S. Central providing a credit union-only secondary mortgage channel, according to panel mediator Brett Cooper of Charlie Mac.
"We did the first-ever credit union-only jumbo securitization in July," he said, noting that the hallmarks of Charlie Mac include allowing credit unions to retain servicing and there's no cross selling, so the member relationship is safe, as well.
