When your members are shopping for a mortgage, they are looking out for their own best interests.
Some members want the best rates, some want the best service, some need a wide selection of flexible programs from which to choose, and others want it all. If your credit union can't offer them what they want, they will search elsewhere. In the best case, the goal should be to have the members come to the credit union first, so that you could present all of the benefits that you have to offer.
Credit Unions Have Choices
In-house departments, out-sourced turnkey solutions, or a combination of approaches are available to perform the functions of a mortgage program. Secondary market sales may be used to dispose of the closed loans or a credit union may choose to maintain all or a portion of them in their own portfolio. Your decisions will shape the income potential of your program as well as the value of the services that are offered to your members.
Here's the problem: many CU executives are faced with making definitive choices in all of these areas and limiting the offerings to their members.
Let's take a look at the portfolio management implications of some of the major strategies:
Correspondent Lending: This is an appropriate choice for credit unions that maintain a fully-functional in-house mortgage department, with a depth of knowledge in originating, processing, underwriting and closing a variety of loans. Organizations that utilize correspondent lending should ensure that they are employing efficient technology and processes; comply with all applicable state and federal regulations; and establish relationships with investors and vendors that meet their needs.
A correspondent lender has the option to retain loans in its portfolio or to sell them in the secondary market. The income and pricing on these loans will depend upon the disposition of the serving rights. Sale of the servicing rights will typically provide higher income on the sale of the loan and/or lower rates to the members. Retention of the servicing rights either by the CU or a party that services them in the credit union's name will ensure that the relationship between the member and the credit union is preserved. This option may decrease initial cash income to the credit union, but studies show that the long term effect is very positive.
Full-Service Turnkey Solution: credit unions that are either not staffed to transact mortgage loans internally or do not elect to include a mortgage department in their operations may choose a full-service turnkey solution for their program. The key is to establish a relationship that incorporates the credit union's critical requirements.
Questions to ask and resolve when selecting a full-service solution include: What products could we offer and do they include all of the products that our members need? What kind of technology and service platforms will be available to our members? Is the process transparent, giving my members the same experience that they would have at our credit union, or will my members get the feeling that they're being passed off to another company? Will that other vendor preserve our relationship with our members or be a predator, cross-selling them on services away from the credit union? Do I have the option to participate in the process of originating the loans and assisting our members? What are my income opportunities in this process? What kind of fees will my members pay directly to the originating entity?
The key to making this type of relationship work for both the credit union's portfolio management strategy and the member is to select a provider that is going to offer all of the appropriate programs and create an environment that makes it easy for the CU to pick and choose the loans it wants to retain. It shouldn't come down to a situation where members whose loans are being sold have a very different experience than the members whose loans are being retained.
Direct Seller/Servicer: Some credit unions elect to have a completely in-house proprietary mortgage program, including the secondary market functions. In this case, they will generally obtain a direct seller/servicer endorsement from one of the large government sponsored enterprises, such as Fannie Mae or Freddie Mac. Credit unions operating in this manner, will need, in addition to an experienced staff in the originating, processing, underwriting and closing areas, a secondary market specialist, possibly a servicing staff and a compliance/quality control manager. They will also require additional software capabilities that will permit them to sell and service loans in a conforming manner.
Some of the unique challenges are in the income/financial area. An organization should be certain that it has sufficient volume to obtain good pricing from the investor. Also, to offer other non-conforming loan products, they will need to establish contractual relationships with other investors. This may prove difficult if the credit union cannot demonstrate either an expertise in underwriting non-conforming loan products or cannot provide sufficient volume in these categories.
The Ideal Situation
Wouldn't it be great if a credit union could utilize more than one strategy to operate its mortgage program, instead of feeling that it had to choose one method and place all of its eggs in that basket? As an example, a credit union that takes a correspondent approach often has to leave business on the table in the form of loan requests that they can't fulfill. Now the credit union is permitted, through another source, to operate their existing correspondent program, but to include a wide breadth of non-conforming products through the supplement of a full-service solution. Regardless of what type of loan a member requests, the application could be underwritten and closed through the credit union. Additionally, the credit union could enjoy enhanced pricing through the volume discounts of the new lender that they chose.
Living in a contractual environment, most mortgage services providers require a CU to interact with them in only one way and this is a significant limitation on the credit union's portfolio, income, and member service potential. Instead, find a mortgage services provider that will work with the CU on its own terms, allowing the use of appropriate platforms for the various loan types that may be presented to the credit union. The benefits include: increased mortgage volume, increased service levels to members, potential for greater income to credit union, additional resources to achieve desired ALM goals, cross-selling opportunities.
Ultimate Service Provider: regardless of the operational processes that you use, choose to have all loans originated and serviced in the credit union's name, regardless of whether they are held in the credit union's own portfolio or sold into the secondary market. Anticipate that the rates you receive will be a little higher to compensate for the retention of the servicing rights. The benefit will be the enhanced long-term relationship that you gain with your members.
Low Cost Choice: position your credit union as the best deal by offering rates as low as possible on all loans and charging low fees. Forego any origination, underwriting, processing, document preparation fees, etc. wherever you could. Offering these low rates may require that loans sold into the secondary market are sold servicing released, making the trade-off for the servicing rights, lower interest rates for the members.
CU Profit Center: Your mortgage program may be structured to maximize the income on each loan by offering competitive rates that will perform well in your portfolio and that will provide attractive income on loans that are sold in a servicing-released manner into the secondary market. Additionally, the CU may elect to implement reasonable fees.
Doing your homework with the strategies stated above will help you in providing your members with the mortgage choices they need to stick with you as their primary financial institution. It's all about enhancing your value for them.
Jill Peterson is VP-marketing with CU National Mortgage. She can be reached at 973/244-7100, ext. 1024 or at Jpeterson
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