SCHAUMBERG, Ill. — As the reduction in mortgage demand has some credit unions
Industry insiders and analysts say home equity is the next big lending opportunity that could replace a sagging refinance business. Many also contend that loosening mortgage standards slightly is needed to bolster credit union portfolios without adding much risk.
During the past year CUs have increased their attention on near prime borrowers. In the first quarter of 2013, 15% of credit union mortgage originations (in dollar volume) were near prime; in the first three months of 2014 this business represented 21% of the mix, according to Experian data.
CUNA data also found that credit unions sold 58% of their mortgage loans in the first quarter of 2013, compared with 33% in the same period this year, a sign CUs could be making more non-qualified mortgages and portfolioing them.
"Banks and credit unions are looking for ways to grow their overall business and lending portfolios," said Alan Ikemura, Experian product manager. "As they see through declining delinquencies that borrowers can meet their credit obligations, why not make some slight changes to lending criteria? I think it's time, due to the improving economy and delinquency ratios for credit unions to look downstream for ways to increase their portfolios."
A recent Credit Union Journal online poll found that the reduction in mortgage business is having an effect on underwriting at some CUs. When asked if their credit union is reaching out to members with lower credit scores to keep the mortgage pipeline flowing, some 19% of respondents said yes.
The $58 billion Navy FCU has already adjusted its home equity guidelines, raising the maximum amount homeowners can borrow-up to 100% on a fixed equity loan and 95% on a line of credit. Previously, the Vienna, Va.-based CU allowed members to borrow up to 90% of their home's value with both offerings.
"We looked at our book of business to determine how members in these loan-to-value ranges have performed, and performed during the financial crisis. By-and-large, they performed very well," said Richard Morris, VP of investor relations and equity lending. "Home values are beginning to rise, so we felt it was the right time to go out a little further on LTV for members who can afford it."
Good Fit For Home Improvement Needs
Analysts say that growing consumer confidence in their own balance sheets, rising real estate values, homeowners locked into long-term fixed-rate loans and less likely to move are making home equity loans a good fit for home improvement needs.
Navy said it is seeing a dramatic rise in home equity lending this year, with home improvements being the predominant use for the dollars.
"Our home equity line of credit (dollars loaned) is up 51% this year over last year and our fixed rate home equity loan is up 100%," said Morris, who said the expectation that mortgage rates will rise has borrowers flocking to the fixed-rate product.
Home equity is also taking off at the $23 million WSSC FCU in Laurel, Md., said CEO Jeffrey Goff.
"So far this year we have processed new HELOC requests totaling $475,000, and members have taken advances equal to half of the limits approved to date-a significant volume considering our asset size, the size of our home equity portfolio (less than $2 million) and the fact that home equity lending had been very light in recent years," said Goff.
Goff expects the credit union will soon see greater interest from lower-credit-score borrowers whose credit is improving.
"In the last six months we have assisted members who had A credit ratings in the past but got caught in a situation that took them off course," said the CEO. "We consider it to be part of our mission to help these members stabilize their debt situation, which then allows them to focus on repairing their credit."
Bill Handel, VP of research at Raddon Financial Group, Lombard, Ill., believes it's time for CUs to loosen their belts after tightening them during the recession-adding a big opportunity exists with Gen Y.
Handel said CUs should look for "creative" loans to reach first-time homebuyers, avoid the 20% down payment, but still protect the institution.
A 'Family Mortgage'
In Upper Marlboro, Md., the $1.3 billion NASA FCU just launched a zero-down, "Family Mortgage" that does not require private mortgage insurance. The loan allows a member to be a non-occupant co-borrower to assist their adult children or elderly parents with mortgage qualifying.
"The Family Mortgage is a great solution for young adult members who want to buy their first homes, and would benefit from their parents' assistance or appreciate the ability to avoid large down payments," said Bill White, VP of real estate lending in a published report.
Mike Schenk, CUNA's interim chief economist, said he would not be surprised if some credit unions were adjusting their lending standards slightly due to the improving economy. And when decisions are made, Schenk thinks they will be based more on good borrowers the CU knows coming back into the mortgage market after the recession damaged their credit for a few years.
"Folks who are near prime today, many were likely on the sidelines a year ago," said Schenk. "They are coming back and knocking on credit unions' doors."
If credit unions are dropping their lending standards slightly, Bob Dorsa contends it the result of credit unions being credit unions.
"If anything, CUs are bending over backward for good members," said the president and CEO of Las Vegas-based American Credit Union Mortgage Association. "They will make loans that members are entitled to despite concerns about qualified mortgages."
A recent Wall Street Journal article asserted that credit unions are loosening lending standards and piling into longer-term assets, facing greater interest rate risk. Both CUNA and NAFCU challenged the article.
CUNA responded by stating on its Website that credit union long-term asset exposure is manageable, standing at 35% of total assets-a five percentage point increase compared to pre-recession levels, but a reasonable exposure given that it is dwarfed by the 51% of assets in net worth and core deposits.
NAFCU President Dan Berger responded with a letter to the Wall Street Journal, saying, "Credit unions are safe and sound institutions and have successfully weathered the recent financial crisis because of their prudent business model . . . and are even more acutely aware of the importance of risk management than other financial institutions."
Conservative Lenders
Schenk pointed out that credit unions are very conservative lenders, reflected in very low historical loan loss data compared to banks, and have near-record levels of capital, an abundance of liquidity and manageable interest rate risk. "So marginal increases in mortgage lending do not raise big issues for the overwhelming majority."
Saying CU behavior generally reflects what is going on in the banking world, Schenk pointed to the recent Federal Reserve Senior Loan Officer Opinion Survey on Bank Underwriting Practices that showed a mixed approach to underwriting. The study found that some banks are easing credit (13%), some are tightening (14%), but most (73%) are unchanged.
Both Schenk and Carrie Hunt, NAFCU SVP of government affairs and general counsel, assert that credit unions must be able to take some risk to grow.
"They are being beat up on the interest rate risk front. If they can't assume some interest rate risk then they have to assume some credit risk, or maybe some liquidity risk," said Schenk.
But Hunt is concerned that NCUA may not be giving CUs enough room to make those kinds of necessary decisions. "I see a regulator whose view is that credit unions should not take any risk whatsoever."
NCUA spokesperson John Fairbanks reminded that interest rate risk is a matter of serious concern at the agency.
"Many credit unions in the system are well-positioned to manage this risk, but some have potentially excessive exposure to interest rate risk."
Fairbanks said NCUA sees the exposure reflected in aggregate industry statistics, such as the net long-term-asset ratio reaching 35%.
"But an aggregate measure can obscure the even more dramatic change in credit unions with portfolios that have very large exposures to fixed-rate assets," noted Fairbanks. "For example, the share of credit unions over $100 million with net long-term assets in excess of 50% of assets has more than tripled in the last 10 years, rising from 4.3% in Q1 2004 to 13.3% in Q1 2014."
Fairbanks added that some credit unions may be extending more favorable credit terms in order to retain or attract loan business. "This is not a concern if it is well managed."
