Credit unions should keep a close eye on the mortgage market next year.
Mortgages continue to be an important part of credit unions’ overall loan portfolios. Total first mortgages at credit unions reached $425.1 billion in September, up about 9 percent from the year before, according to CUNA Mutual Group’s latest trends report.
Because of that, any slowdown in home buying and originating mortgages is of great concern to the industry. To stay competitive, executives should look at their technological offerings to ensure they are providing excellent service to members while institutions that focus mainly on refinancing home loans may need to rethink their strategy next year.
“I think the housing market will remain strong in 2019,” said Brett Terry, assistant vice president of retail lending at Merrimack Valley Credit Union in Lawrence, Mass. “But I do believe we will see a leveling out of supply and demand.”
Strong economy and housing market
For now, credit unions are operating in a fairly strong economic environment with unemployment dropping to 3.7 percent in November, its lowest such level in more than 49 years. Credit quality has also remained strong. Delinquencies at federally insured credit unions for all real estate loans were .45 percent in September, down three basis points from a year earlier, according to a report by the National Credit Union Administration.
Russell Cole, president and CEO of CUSO Home Lending, a mortgage lender based in Hampden, Maine, said the U.S. housing market has been strong through most of 2018. The current housing market is characterized by a lack of inventory and increasing home values, he added. Home prices climbed by about half a percent in September from August while rising by 6.5 percent over the prior year, according to the Core Logic Home Price Index.
Credit unions have taken advantage of these trends and have increased their overall share of the mortgage market, said Steven Rick, chief economist for CUNA Mutual Group. In 2007, credit unions originated about 2 percent of all mortgages but today that number is 8.6 percent, Rick said. That could climb to as high as 9 percent next year, he added.
“Part of this is because many banks have pulled out of the mortgage market in the wake of the subprime debacle,” Rick said. “But another factors is that more credit unions have entered the mortgage business and without having to loosen their underwriting standards.”
But Cole cautioned that these conditions “may be changing as interest rates rise, which will have an impact on current housing inventory pricing.” The Federal Home Loan Mortgage Corp., also known as Freddie Mac, said in its November forecast that it expects mortgage rates to continue to rise, “putting downward pressure on homebuying activity.”
The Federal Reserve raised rates for the fourth time this year at its December meeting. Most analysts expect rates to rise next year, but there is little consensus on how much. Terry believes the central bank will enact two rate hikes in 2019, while other analysts are forecasting as many as three hikes next year.
Ben Rempe, chief operating officer of the digital lending platform LenderClose, thinks the mortgage market could also be hurt by a slowing economy. The stock market has recently been volatile, and there’s speculation that the economy could be in a recession by 2020.
“When the economy slows down, chargeoffs go up, originations go down and homes stop appreciating, collateral deteriorates,” Rempe said. “This is all bad. However, it will not necessarily put lenders out of business.”
Inventory of homes is increasing, which hurts pricing, and sales are softening. All of that points to the mortgage market cooling, said Mike Schenk, chief economist at Credit Union National Association. Overall mortgage originations declined this year by 7 percent, according to the Mortgage Bankers Association. But credit unions have fared better, Schenk noted.
Cole noted that credit unions historically have been known to be in the refinance business. Those that focus on that area “have seen a drastic decline in their mortgage originations over from 2017 to 2018 which will continue into 2019 and beyond,” Cole said.
Drew Stanley, chief strategy officer at Franklin Mint Federal Credit Union in Chadds Ford, Pa., said credit unions should work to ensure their mortgage programs are prepared to make loans on home purchases, rather than just refinancing existing credits.
“Refinances will likely continue to slow,” Stanley said.
Credit union response
Terry indicated that credit unions have “significant competitive advantages” that they will need to leverage to be successful in 2019. Regulatory relief passed earlier this year included an exemption for institutions with less than $10 billion in assets from the ability to repay/qualified mortgage rules.
“This will allow credit unions to continue to lend to members who may have slightly elevated debt-to-income ratios,” Terry said. “It is a step in the right direction to a more consumer friendly, common sense underwriting criteria.”
Additionally, a restriction that limited loans for non-owner-occupied properties, which house between one and four people, to no more than 15-year terms has been lifted, and these credits are no longer considered member business loans, Terry said.
“This will open many opportunities where credit unions could not previously compete,” Terry said.
Much growth next year is likely to come from existing home sales, particularly from first-time buyers, said Miron Lulic, founder and CEO of SuperMoney, an online financial comparison platform. Millennials bought 36 percent of all homes in 2017, according to 2018 Home Buyer and Seller Generational Trends Report published by the National Association of Realtors. That makes them a good demographic to target, Lulic said.
Improving technology offerings to ease access and delivery of service to members should also be considered, Cole said.
“Credit unions should also continue to look at ways to improve the borrowing experience for members as we compete with the likes of Rocket Mortgage and other fintechs that are making the process more frictionless for borrowers,” Stanley said.
Rempe suggests that lenders must be more aware of their competition and acknowledge that consumer expect speedy transactions.
“They must focus on operational efficiencies to originate more effectively,” Rempe said. “In doing so, they’ll save money and originate more loans. If the market does slow down, community lenders cannot afford to lose loans because they don’t move quickly enough. They also can’t afford to carry the same fixed expenses. Streamlining the process and using technology is the answer.”