ACUMA January 2014 Pipeline by ACUMA

ACUMA

PIPELINE MAGAZINE

Change is Coming

JANUARY • 2014

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TABLE OF CONTENTS

2014... Can you Believe It?

In the Pipeline: Insights and Observations on CU Mortgage Lending

- by ACUMA President Bob Dorsa

4 8

Keys to Navigating a Post-GSE World - by Alan Bahr, Director of Product Development, CUNA Mutual

ACUMA’s 2013 Annual Conference: Our Biggest and Best Ever - by Bob Dorsa

10 Special Section: Reaching Realtors

... The Key to Purchase Money Lending

10 12 14 17

ACUMA and the NAR: 10 Years and Still Growing Strong - by Bob Dorsa

Breaking Down Doors: Overcoming Realtor Objections - by Dave Porter

Who’s Who in Real Estate National Association of Realtors

Tightened Credit Conditions Shape Today’s Home Buyers - by Jessica Lautz,

18 U.S. Macro Outlook 2014: A Breakout Year? - by Mark Zandi

26Down, but not out

- by Robert Stowe England

37 The Top 300: Be Ready for Purchase Loans in 2014 - by Tracy Ashfield

46Private Capital: A Case Study - by Tom LaMalfa

54SPECIAL REPORT: Mortgages and Credit Union Performance: 1980–2011 - by Luis G. Dopico, PhD, and James A. Wilcox, PhD,

JANUARY 2014 - PIPELINE 1

FROM THE DESK OF ACUMA PRESIDENT BOB DORSA ACUMA

PIPELINE MAGAZINE

2014... Can you Believe It? It is my great pleasure to once again wish you well so early in the year. I noticed during the holiday season and the ”year in review” broadcasts just how much time is compressed into 12 months. This year we commemorate the launch of another giant piece of legislation directed toward home financing institutions. The market collapse of 2009 and the hangover it left is fading away and the economy seems to be pointed in the right direction. Life teaches us never to be too complacent, however a measure of normalcy, or what we remember of that feeling, seems to be in the air. Over the decades we have often been faced with “challenges” in one form or another and, just as we have done before, we will become stronger for it. I am delighted that the words “Credit Union” are appearing more and more in the mainstream media. Like the phrase “the high tide raises all boats,” we are more prepared to meet the challenges of today than ever before. I believe we can continue the upward market share trend we began several years ago, instead of folding out tents in the face of the long troublesome purchase money market we have dreaded each time that cycle came along. We may be in store for more intense competition for loan production than we have seen for many years and must rise to the challenge. A recent Filene Special Report suggests that Credit Unions have to “run faster or better just to stay in place.” We can catch up in a hurry by leveraging our mortgage lending expertise and cooperative based housing finance business model at a time when markets and demographics are shifting. We can adapt quickly, if we choose to. It will take strong leadership and a reasonable amount of money. Now is NOT the time to cut back and allow our competitors to establish financial institution relationships with the consumers of the future, we must act aggressively and seize what we can. ACUMA is poised and ready to assist credit unions in this effort. We have spent the past decade working and developing relationships with the nation’s Realtors. With the financial support of our members we are beginning to see our efforts pay dividends well beyond our dreams of a few short years ago. We continue to pursue our goal of a double digit market share and look to engage ALL credit unions in mortgage lending, no matter what size, in the effort. If we can do it with credit cards and financial services we can do it in mortgage lending. I hope you are up for the challenge and look forward to your joining with us. I really do believe that together we can achieve great things for credit unions and their members. Sincerely

Bob

PIPELINE - JANUARY 2014

ACUMA Pipeline is a publication of the American Credit Union Mortgage Association, PO Box 400955, Las Vegas, NV 89140.

Bob McKay

Baxter Credit Union Chairman

Mark Wilburn

66 Federal Credit Union Vice Chairman

Pam Davis

Delta Community CU Treasurer

Barry Stricklin Tower FCU Secretary

John Reed

Maine Savings FCU Director

Tim Mislansky

Wright-Patt Credit Union Director

Bob Dorsa President

The information and opinions presented here should not be construed as a recommendation for any course of action regarding financial, legal or accounting matters by ACUMA, The ACUMA Pipeline or its authors. © Copyright 2014 by ACUMA. All rights reserved. Printed in the USA

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IN THE PIPELINE: INSIGHTS AND OBSERVATIONS ON CU MORTGAGE LENDING

Keys to Navigating a Post-GSE World By Alan Bahr, Director of Product Development, CUNA Mutual

mplementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides a measure of where the mortgage market is today. Now, three years since the legislation passed, only 40% of its rulemaking requirements have been written and implemented.1 In addition, the health of the secondary market is slow to return. In the years leading up to 2008, more than a third of mortgage securitizations were for loans not guaranteed by the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. Today privatelabel securitizations represent less than 1% of total volume.2 However, there is good news. After surviving the dark days of the mortgage meltdown and generating enough liquidity to meet the real estate borrowing needs of the nation, we’re beginning to see a consensus develop regarding the future of mortgage finance. That consensus is coalescing around answers to three questions that will exert tremendous influence over the marketplace:  What should the federal government’s role in mortgage finance be?  What comes after Fannie Mae and Freddie Mac?  How do we attract new private capital into the marketplace? Regarding the first question, most legislators and mainstream consumer and industry groups believe the mortgage market needs a federal backstop to ensure access to liquidity. While this belief may be gaining support, few are suggesting we return to the ways of the past. The emerging consensus is that the

PIPELINE - JANUARY 2014

backstop should be accessed only after private capital solutions are exhausted. The second question elicits even more unanimity. All but a few fringe stakeholders call for a wind-down of the GSEs, but while early plans did little to describe a world without Fannie and Freddie, actions are now being taken to establish a new secondary platform. Finally, there is the question of how we bring private capital into the marketplace. In one respect, this topic generates overwhelming agreement. Everyone wants private capital to support mortgage ﬁnance. However, investors hold the fate of the market in their hands and must eventually decide if the old ways of evaluating private-label securitizations remains viable. With this background in mind, let me go through each one of these structural issues one by one.

A day may come when we’ll need new loan programs and acting on good information could help us remain competitive in a changing environment

THE GOVERNMENT’S ROLE

Do we need the 30-year fixed-rate mortgage? Answering that question is important, because without federal support, there is little chance for a broadly offered 30-year fixed-rate mortgage. Few borrowers, even among large corporations, can raise 30-year fixed-rate money. The reason individuals can do so is because the government steps in to make investors whole when defaults occur. Elimination of that support could radically change the structure of tomorrow’s mortgage market. Without a backstop, we can expect a gradual proliferation of lending programs as Wall Street firms jockey for market share, pitching a variety of loan programs and guidelines. While having options is nice, the 30-year fixed-rate loan will probably not be one of them. I’m not saying it will go away completely. Some portfolio lenders, for example, might continue to provide long-term financing, but before the loans can be offered broadly and be placed into securitizations, Wall Street sponsors will have to arrange credit enhancements to render the securities palatable to investors. In that regard, there isn’t enough private capital—in the form of AAA-rated guarantees, pool insurance and other enhancements—to support the trillion or more dollars of mortgage debt that is originated each year. In place of 30-year fixed-rate loans, we’ll likely see shorterdated Adjustable Rate Mortgage products similar to what is offered in other industrialized countries. Furthermore, pricing and liquidity will almost certainly suffer. No private credit enhancement is equal to the full backing of the US government and a federal backstop will be cheaper than other options. Mark Zandi, Chief Economist at Moody’s Analytics, estimates that a fully privatized system will result in an increase in mortgage rates of over 80 basis points.3 The main argument made by those who want to eliminate federal support is that it puts a potential burden on taxpayers. While this is a legitimate concern, it

��

�� ACUMA HAS BEEN IN OPERATION SINCE 1996. DURING THAT TIME ACUMA HAS FOCUSED �� ON ONE TOPIC, CREDIT UNION MORTGAGE LENDING. ��

Join ACUMA : Members Only : Contact Us

Expanded in 2014 HOME

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AS AN ACUMA MEMBER EVERYONE IN YOUR �� ORGANIZATION IS ENTITLED TO ALL THE BEN�� EFITS OF MEMBERSHIP. INCLUDING... ACUMA Mobile helps credit unions improve NAR Convention Highlights NAR Convention Photos

Realtors® National Convention & Expo

ACUMA Community

Click on thumbnail to start slideshow.

ACUMA completed it sixth consecutive year facilitating

Click Here

Attention Realtor®

the America’s Credit Union exhibit at the REALTORS® National Convention and Expo this week.

Bob Dorsa reports many Realtors are in fact members of a local Credit Union and have already joined Realtor FCU. Conversations with Realtors and Brokers still indicate they like Credit Unions for deposits and auto loans but

we have much more work to do convincing them Credit Unions are a reliable resource for home finance. “Several Realtors did in fact state a very positive attitude when doing business with a Credit Union processing a home

loan for a client” which is a bit of an improvement over prior years.

Another observation from this year’s exhibit was the

total absence of a large number of lenders. Other than

��

the major competitors, Wells Fargo, Chase and Bank on

America, America’s Credit Unions were the only lenders present. The America’s Credit Union banner (attached)

was our way of “strutting our stuff” when it comes to the

ACUMA can help you identify Credit Union real estate lenders and services in your area. More. . .

New Leadership Webcast! Delinquency Loss Mitigation - Best Practices Thursday, Oct 8, 2009 Time: 1:00 pm PST

• Discounted pricing for ALL ACUMA Webinars as well as Conferproductivity with presentations designed ence and Workshop fees. to effectively prepare and train employees, �� engage key audiences, and advance business • Direct connection to the nation’s leading mortgage lending experts. �� opportunities. • Access to the ACUMA Community Web Site full of useful tools and Education and information for ACUMA members �� trusted information exclusively for proficient mortgage lending. with maximum impact using dynamic, mobile�� Content includes industry related, articles, regulators brief, videos ready content that can be accessed quickly, and �� and podcasts. viewed as on-demand video presentations or �� presented live – anytime, anywhere. • The best source for networking with the National Association of ACUMA Mobile, another outstanding benefit �� Realtors and other mortgage and housing related authorities. of your ACUMA Membership �� role many of ACUMA’s members are playing in current production levels. “I even noticed several participants gazing at the banner almost in disbelief of the sheer

number and volume of loans transacted in the first half of 2009."

local credit union players so they can introduce their

buyers to that Credit Union. We have experienced great through some of the nation’s leading Credit Unions and

we know Realtors make their living from referrals and satisfied buyers. This is just out of the many benefits we realized as a result of our participation at this year’s

event. The 2010 NAR Realtors Convention and Expo is in New Orleans and ACUMA has already submitted their plans to participate again.

Truity CU are mixing business with pleasure

Strategic Mortgage Solutions

show representing Navy FCU) educating a Realtor about the opportunity they familiarize themselves with the

success with satisfied buyers financing their homes

2014 promises be�� the�� beginning of a�� new mortgage lend�� to�� ing landscape. With the shift from Reﬁ to Purchase Trans�� actions, �� anticipation �� of the fully implemented Dodd-Frank �� legislation and new rulemaking by the Consumers Financial �� Protection Bureau, credit �� unions may have to revisit �� (CFPB) �� the manner and strategies surrounding mortgage lending. �� In addition to the regulatory front, the �� hopes of rising �� home values and concurrent increase in rates�� will heighten the �� focus on Purchase Mon�� ey loans and see further �� reductions Reﬁnance �� in�� transactions. �� These trends and �� processes will take time, �� and a keen aware�� money �� ness of what to do to stay �� Dave Miller, Cenlar (left) and Mark Wilburn, current and competitive. ��

Miss the event? Click here to view a recorded version.

One quick story regarding a conversation between Bill

Tessier, VP – Realtor Alliances, Navy FCU (working the

for Credit Union Lenders A Prime Alliance Company FHA - Facts and Figures Become An ACUMA Member Six Good Reasons to Join ACUMA! Join ACUMA

We urge you to make the best of your opportunities. ACUMA �� is the leading trade association dealing exclusively with these �� issues. We have created an extensive network of knowledge�� able individual and organizations that can guide you through �� whatever your needs are. Now is not the time to rest or pull �� back but a time to feature home ﬁnance as a cornerstone of �� your organization’s services offer to your members. �� Join ACUMA today, you’ll receive an immediate return on �� this investment, �� like �� the �� guy �� with �� the �� nice �� clothes �� says, We �� Guarantee it! ��

Cooportunity [koh-op-er-too-ni-tee]

n o u n

A favorable time or occasion when all parties involved in the mortgage process experience success.

Collaboration + Opportunity = Growth

As a CUSO, we share the members-first philosophy and understand that when Credit Unions work through a collaborative cooperative, it creates a winning environment for everyone.

Credit Unions can benefit from:

�� (FHA & VA loans) ��

Find out how we help make Credit Unions GREAT real estate lenders!

(877) 913-9292 mycuCooportunity.com

IN THE PIPELINE: INSIGHTS AND OBSERVATIONS ON CU MORTGAGE LENDING

may miss a critical reality. Dodd-Frank did little to reduce our exposure to the “too big to fail” problem and taxpayers may be required to cover extraordinary mortgage losses whether through a government backstop, or by bailing out failed ﬁnancial institutions. If the backstop is put in place, however, the government can charge for the protection upfront. For these reasons, the sentiment of most stakeholders is to support a limited federal role.

THE POST-GSE MARKETPLACE

Legislators on both sides of the aisle, as well as the administration, demand a wind-down of Fannie and Freddie, so the GSEs are going away, right? Well, their names will likely go away, but the data, tools and systems they possess should not. These assets are valuable and taxpayers will be well served if the GSEs are somehow monetized. In this context we have an interesting development. While many of the people who call for an end to Fannie and Freddie are saying we need a revamped way to securitize loans, the Federal Housing Finance Agency (FHFA) has tasked the GSEs with creating a new platform that will certainly incorporate their best origination and trading processes and tools. It’s possible that the new entity—which is being called Common Securitization Solutions, LLC—will become a central platform through which many of today’s conforming loan origination and purchase mechanisms live on. In this way, no matter how the wind-down occurs, significant pieces of the agencies will likely survive in other institutions and continue to exert influence on the market. The new platform, as the Mortgage Bankers Association envisions it, would aggregate loans, issue mortgage-backed securities, track and report the performance of loan pools, and forward payments to investors.4 Some of the advantages sought by establishing the vehicle include greater transparency and equal treatment for all lenders. This, of course, was not accomplished by the GSEs, which give undisclosed fee discounts and guideline concessions to large aggregators. The transparency could also provide a public way to confirm compli-

Without federal support, there is little chance for a broadly offered 30-year ﬁxed-rate mortgage.

ance with guideline and credit enhancement agreements. Why should the GSEs—who were complicit in the meltdown—help develop the future of mortgage finance? If you look at who could take over Fannie and Freddie’s primary activities, it’s clear that the beneficiaries of a complete GSE removal are Wall Street firms. They could develop new loan programs and provide underwriting guidance and tools. They could also act as super aggregators and provide market liquidity for securitizations. However, voters will eventually question the prudence of handing these responsibilities over to the companies that brought us subprime and the mortgage collapse.

NEW PRIVATE CAPITAL

Think of all the credit enhancements that can be used in a mortgage-backed security. They include private mortgage insurance, sponsor risk retention, deal subordination, pool insurance and private guarantees. Determining how these enhancements “mix and match” to minimize cost and maximize liquidity is not a trivial task. Prior to the meltdown, the analysis was performed by Wall Street traders, who worked with rating agencies to quantify risk. Back then, the market accepted AAA ratings on faith, but it won’t go back to that system without assurances that the risk analytics have improved. Wall Street must regain credibility and convince investors that it offers a reasonable alternative to the GSEs. That may not

happen while the government’s support of mortgage finance remains dominant and its lack of a clear road map fosters uncertainty. If growth of private capital is a priority, we must first clarify the federal role in mortgage finance and gradually reduce the dominance of the GSEs, which due to their exclusive government support possess a competitive advantage over Wall Street. Thereafter, deal sponsors and investors will need time to work out the terms of future securitizations.

KEY TAKEAWAYS

Given stakeholder sentiment today, I believe the government will provide limited catastrophic backing to mortgages, which will require it to establish loan eligibility requirements. If this occurs and the central securitization platform becomes part of a market standard, loan-selling processes may not change significantly for the majority of originations. Only as confidence returns to the market will new, broadly offered loan programs emerge. Moreover, we shouldn’t expect radical changes to real estate finance while Fannie and Freddie remain dominant secondary forces. However, watch for regulatory actions meant to reduce GSE dominance, particularly through G-fee increases. As this occurs, new lending programs could emerge, so seek the advice of CUSOs and other aggregators that are in touch with future deal sponsors. In addition, formalize the evaluation of new loan programs by appointing people at your credit union who will keep abreast of secondary market developments. A day may come when we’ll need new loan programs and acting on good information could help us remain competitive in a changing environment.

FOOTNOTES 1: USA Today, Sep 12, 2013 2: Securities Industry and Financial Markets Association 3: Cost of Housing Finance Reform, Moody’s Analytics, Nov 2013 4: The Central Securitization Platform: Direction, Scope, and Governance, MBA, Aug 29, 2013

JANUARY 2014 - PIPELINE 7

IN THE PIPELINE: INSIGHTS AND OBSERVATIONS ON CU MORTGAGE LENDING

ACUMA’S 2013 ANNUAL CONFERENCE

OUR BIGGEST AND BEST EVER By Bob Dorsa

or any of you who have attended our ACUMA Annual Conference (held in the fall of each year), these photos will serve as fond memories of great days of networking with the best and brightest, in the fabulous city of Las Vegas. 2013 marked our largest attendance in the near 18 year history of ACUMA and we are pleased to share these snapshots from our event. It is difﬁcult for me to adequately describe what it is about getting all of these passionate people together to debate the key issues, like a professional sports team would huddle to devise a plan to defeat their opponent. For us our “opponent” has not been regulatory or technological but more how to tell our story to the millions of consumers and, especially, REALTORS®. We are

(above) Lots of information (right) Attendance in 2013 was our largest ever

PIPELINE - JANUARY 2014

getting better and at the 2013 event participants were challenged to continue that growth. Attendees received information from speakers addressing business success in our niche on speciﬁc topics such as ethics, strategic development, and social media. Speakers included attorneys, an economist, credit union CEOs as well as representatives from the Center for Responsible Lending and NAR traveling from Conference Co-hosts Tracy Ashﬁeld and Bob Dorsa across the nation and Washington D.C. working for collaborators and competiThe photos tell the story quite well. tors alike. We have high-powered speakers and Thanks again to all the people who very attentive participants absorbing joined with us in 2013 and for everyone every word. First class facilities along else, I will use one of our tag lines, “if you with a lavish food and beverage selecare serious about credit union mortgage tion combine to facilitate undoubtedly lending… you’ve got to attend.” the best live social media business net-

IN THE PIPELINE: INSIGHTS AND OBSERVATIONS ON CU MORTGAGE LENDING

Always plenty of good food and beverages.

“I enjoy meeting folks from different credit unions so I can “borrow” best practices.” 2013 Conference Participant

Up Close and Personal with Tim Segerson

Social Media Connectivity a must!

Lots of direct questions (left) and attentive conference participants (above).

JANUARY 2014 - PIPELINE 9

SPECIAL SECTION: REACHING REALTORS® - THE KEY TO PURCHASE MONEY LENDING

SPECIAL SECTION

REACHING REALTORS®...

THE KEY TO PURCHASE MONEY LENDING By Bob Dorsa

elcome to our special section devoted to enhancing our industry’s relationships with REALTORS®. At ACUMA we believe that the future of CU mortgage lending depends upon our ability to reach the real estate professional. ACUMA supports this effort on two fronts. First, through our support of outreach events like the NAR and second, by educating and encouraging CU professionals in their efforts to build relationships with REALTORS®. The special section includes...

ACUMA AND THE NAR It’s hard to believe that ACUMA has been an active participant in the NAR for a decade. Check out the coverage of this year’s Expo starting on this page and make sure to view the participant videos on our website. The word is getting out there at last. CUs are mortgage lenders!

AFRAID OF REJECTION? Building relationships with REALTORS® means getting out there and asking for their business. Dave Porter discusses ways to handle rejection that turn the conversation on it’s head.

INCREASE YOUR LENDING IQ It is essential that we understand the basics in the life of a professional Realtor if we are to have any chance of successfully approaching them. Ever wonder what all those different certiﬁcations that REALTORS® hold really mean? Our summary of these programs will take away the mystery.

TOMORROWS BUYER Are you marketing to the right member? NAR Marketing Exec. Jessica Lautz shares her take on who will be buying homes in 2014. Her predictions may surprise you. We hope you ﬁnd this special section interesting and informative. Remember that gathering information is just a start, the rest is up to you!

10 PIPELINE - JANUARY 2014

ACUMA AND THE NAR

10 YEARS AND STILL GROWING STRONG By Bob Dorsa

en years ago ACUMA set our efforts our NAR Exhibit Staff. Our credit sights on improving the image union partners and representatives from of America’s Credit Unions in the many of our financial supporters gave up eyes of the nation’s REALTORS®. We their holiday weekend to meet, greet and have been gratified to see support con- interact with hundreds of Realtors and tinue to grow for our annual “America’s others attending the Expo. You would be Credit Unions” exhibit at the NAR. In fact, with the support of credit unions and supporting organizations of all sizes, involvement in the NAR has grown every year, (including the years of the unfortunate Housing Crash of 2007-2009, when our booth was one of only four representing financial organizations at the conference). The entire credit union industry owes a debt of gratitude to these forward thinking organizations. We must also recACUMA NAR Exhibit Champions. ognize the outstanding

SPECIAL SECTION: REACHING REALTORS® - THE KEY TO PURCHASE MONEY LENDING

NAR VIDEO INTERVIEWS SHOW HOW FAR WE’VE COME Phil Reichers and Anita Domodon always at home with Realtors.

amazed at some of the questions I overheard in their conversations. Granted, it’s only a few days out of the entire year, but our message seems to be gaining momentum. Included here are some cool photos from our exhibit and a sampling of video

“Promotions done by individual CUs have beneﬁted us all” Harald Huggins, Burtonsville, MD Watch the video at: www.brainshark.com/acuma/vu?pi=927494785

“CUs offer great rates and awesome customer service” Ed Birdsong from Lake Jackson, TX with Vince Salinas at NAR.

interviews with REALTORS® attending the event. REALTORS®, who are members of and work with Credit Unions! Every year ACUMA conducts video interviews with REALTORS® as part of our “Favorite REALTOR®” contest. These interviews provide us with amazing insights into what people in the real estate industry are thinking about CU mortgage

Chris Bornhoft, Spokane, WA Watch the video at: www.brainshark.com/acuma/vu?pi=172262965

“CUs are less judgemental, offer more options than banks” Karen Pawlak, Chicago, IL Watch the video at: www.brainshark.com/acuma/vu?pi=406446796

Nate Burns and Vince Salinas with visiting Realtor.

lending. Here are a few quotes from selected interviews along with links so you can watch them yourself. These interviews and more are also accessible on our website at www.acuma.org.

“My credit union makes it streamlined and easy” John Harris, Bolingbrook, IL Watch the video at: www.brainshark.com/acuma/vu?pi=68738030

JANUARY 2014 - PIPELINE 11

SPECIAL SECTION: REACHING REALTORS® - THE KEY TO PURCHASE MONEY LENDING

Breaking Down Doors: Overcoming Realtor Objections By Dave Porter

he truth be known, you won’t experience too many rejections when you venture out in search of purchase transactions. Real estate agents seldom bite and for the most part are fairly tame. There are so many unsubstantiated fears about calling on real estate agents. In the lending program training and sales training and consulting I do for credit unions around the country I offer up solutions to these and other obstacles. This article is to outline a few of the objections you may encounter and offer perhaps some strategies to counter them.

just like me.” [The concept here is to look at their social proﬁle and ﬁnd something in common that you can mention] I know you have game. I want to be your safety net, a back up when your lender might not be able to perform or is too busy or when you need a local lender. I will be here and I have your back.”

OBJECTION

“I’M NOT A MEMBER OF YOUR CREDIT UNION.”

OBJECTION

RESPONSE:

“WE ARE A CLOSED OFFICE AND WE HAVE A PREFERRED LENDER RELATIONSHIP.”

“And why is that? We are recognized as a top credit union in the area and are different than banks and mortgage brokers. We’d love to have you join. I dare you to compare our fees and services versus your national bank. We keep your deposits in the community not in New York or San Francisco.”

RESPONSE: “I think it’s great that you have a long term relationship with a lender. I assume that this relationship is in the best interest of serving your clients and for that I commend you. I do want you to know that unlike banks or mortgage brokers, we work for our members and are not-for-proﬁt in nature; simply put, we are relational not transactional. I will reach out to each agent individually and let them know about my background and competency and about our credit union.”

OBJECTION

“I ALREADY HAVE A PREFERRED LENDER.” RESPONSE: “I would expect no less; you are a top agent and I saw on (LinkedIn or Facebook) that you went to “____ college,

12 PIPELINE - JANUARY 2014

My advice: get some background on the agent and brokerage. Let them know you’ve done your homework. It’s ﬂattering for them and lifts you above the competition.

OBJECTION

“GIVE ME A BUYER AND I’LL LET YOU DO THAT LOAN.” RESPONSE: You’re on! And when we process and close that loan on time, will you give us your next two loans? Let’s brainstorm about ways to generate buyers; I have some ideas ...”

OBJECTION

“I THOUGHT YOU ONLY DO REFINANCES?” RESPONSE: “When reﬁnances were so popular we were busy serving our members but we have been doing purchase business

for years. We offer FHA, VA and conventional ﬁnancing and our members love that we are local. Can I be your lender?”

OBJECTION

“MY LENDER DOES CO-MARKETING WITH ME.” RESPONSE: That’s an advantage but from what I have read about you on your Web page and heard about how you do your business, I suspect you put your clients first and will suggest a lender that has great rates and fees to serve them before using anyone else. We have our own marketing ideas I’d like to share like co-hosting a homebuyers workshop or perhaps a joint mailer. Let’s discuss these. Are you free Monday at 3PM or would 4PM be better?” You may have to deal with one or two of these but you won’t know until you get out and visit real estate offices. My advice: get some background on the agent and brokerage. Let them know you’ve done your homework. It’s flattering for them and lifts you above the competition. Start now. Dave Porter has been in the real estate and mortgage lending industry for more than 30 years. Dave is Director of TMT (Too Many Things) at PorterWorks. He can be reached at dp@porterworks.com.

FAST TURNAROUND AHEAD. GET A 24-HOUR RESPONSE ON FULL-FILE SUBMISSIONS

Simply send us the documents you gather in the normal course of the loan process. Plus, when we underwrite, we’re helping protect you and your credit union by reducing the risk. It’s the fast track to peace of mind. To learn more, visit UGCORP.COM or call 877.642.4642.

© United Guaranty Corporation 2014. All rights reserved. Coverage is available through admitted company only. United Guaranty is a marketing term for United Guaranty Corporation and its subsidiaries. United Guaranty is a registered mark.

SPECIAL SECTION: REACHING REALTORS® - THE KEY TO PURCHASE MONEY LENDING

Who’s Who in Real Estate UNDERSTANDING THE DESIGNATIONS AND CERTIFICATIONS OFFERED BY THE NAR AND AFFILIATED ORGANIZATIONS. A THROUGH KNOWLEDGE OF THESE PROGRAMS WILL HELP YOU QUALIFY LEADS, TARGET PROPOSALS AND INCREASE YOUR INDUSTRY “STREET CRED.”

he National Association of REALTORS® and its affiliated Institutes, Societies, and Councils provide a widerange of programs and services that assist members in increasing skills, proficiency, and knowledge. Designations and certifications acknowledging experience and expertise in various real estate sectors are awarded by NAR and each affiliated group upon completion of required courses.

CERTIFIED PROPERTY MANAGER / CPM®

ACCREDITED BUYER’S REPRESENTATIVE / ABR®

The Certiﬁed Real Estate Brokerage Manager (CRB) is one of the most respected and relevant designations offered in real estate business management and is awarded to REALTORS® who have completed advanced educational and professional requirements. CRB Designees are better positioned to streamline operations, integrate new technology and apply new trends and business strategies. Join today and discover a new approach to enhancing knowledge and leveraging opportunity.

The Accredited Buyer’s Representative (ABR®) designation is designed for real estate buyer agents who focus on working directly with buyer-clients at every stage of the home-buying process.

ACCREDITED LAND CONSULTANT / ALCSM

The esteemed Accredited Land Consultants (ALCs) are the most trusted, knowledgeable, experienced, and highest-producing experts in all segments of land. Conferred by the REALTORS® Land Institute, the designation requires successful completion of a rigorous LANDU education program, a speciﬁc, high-volume and experience level, and adherence to an honorable Code of Conduct.

CERTIFIED COMMERCIAL INVESTMENT MEMBER / CCIMSM

The Certiﬁed Commercial Investment Member (CCIM) designation is commercial real estate’s global standard for professional achievement, earned through an extensive curriculum of 200 classroom hours and professional experiential requirements. CCIMs are active in 1,000 U.S. markets and 31 other countries and comprise a 13,000-member network that includes brokers, leasing professionals, asset managers, appraisers, corporate real estate executives, investors, lenders, and other allied professionals.

CERTIFIED INTERNATIONAL PROPERTY SPECIALIST / CIPS®

Instantly align yourself with the best in international real estate by earning the CIPS designation. The program includes five full days of study focusing on the critical aspects of international real estate transactions, and an influential network of 2,000 professionals who turn to each other first when looking for referral partners.

14 PIPELINE - JANUARY 2014

CPM designees are recognized as experts in real estate management. Holding this designation demonstrates expertise and integrity to employers, owners, and investors.

CERTIFIED REAL ESTATE BROKERAGE MANAGER / CRBSM

CERTIFIED RESIDENTIAL SPECIALIST® / CRS®

The CRS designation is the highest credential awarded to residential sales agents, managers, and brokers. On average, CRS designees earn nearly three times more in income, transactions, and gross sales than non-designee REALTORS®.

COUNSELOR OF REAL ESTATE / CRE®

The Counselors of Real Estate® is an international group of recognized professionals who provide seasoned, expert, objective advice on real property and land-related matters. Only 1,100 practitioners throughout the world carry the CRE® designation. Membership is by invitation only.

GENERAL ACCREDITED APPRAISER, GAASM

For general appraisers, this designation is awarded to those whose education and experience exceed state appraisal certiﬁcation requirements and is supported by the National Association of REALTORS®.

SPECIAL SECTION: REACHING REALTORS® - THE KEY TO PURCHASE MONEY LENDING

NAR’S GREEN DESIGNATION / GREEN

Through NAR’s Green Designation, the Green REsource Council provides ongoing education, resources and tools so that real estate practitioners can successfully seek out, understand, and market properties with green features.

GRADUATE, REALTOR® INSTITUTE / GRISM

REALTORS® with the GRI designation have in-depth training in legal and regulatory issues, technology, professional standards, and the sales process. Earning the designation is a way to stand out to prospective buyers and sellers as a professional with expertise in these areas.

PERFORMANCE MANAGEMENT NETWORK / PMN

This designation is unique to the REALTOR® family designations, emphasizing that in order to enhance your business, you must enhance yourself. It focuses on negotiating strategies and tactics, networking and referrals, business planning and systems, personal performance management and leadership development.

REALTOR® ASSOCIATION CERTIFIED EXECUTIVE / RCE

RCE is the only professional designation designed speciﬁcally for REALTOR® association executives. RCE designees exemplify goal-oriented AEs with drive, experience and commitment to professional growth.

RESIDENTIAL ACCREDITED APPRAISER / RAASM

For residential appraisers, this designation is awarded to those whose education and experience exceed state appraisal certiﬁcation requirements and is supported by the National Association of REALTORS®.

SOCIETY OF INDUSTRIAL AND OFFICE REALTORS® / SIOR® The SIOR designation is held by only the most knowledgeable, experienced, and successful commercial real estate brokerage specialists. To earn it, designees must meet standards of experience, production, education, ethics, and provide recommendations.

SENIORS REAL ESTATE SPECIALIST® / SRES®

The SRES® Designation program educates REALTORS® on how to proﬁtably and ethically serve the real estate needs of the fastest growing market in real estate, clients age 50+. By earning the SRES® designation, you gain access to valuable member beneﬁts, useful resources, and networking opportunities across the U.S. and Canada to help you in your business.

It is essential that we understand the basics in the life of a professional Realtor if we are to have any chance of successfully approaching them. ACUMA President Bob Dorsa

NAR CERTIFICATIONS AT HOME WITH DIVERSITY / AHWD®

Learn to work effectively with – and within – today’s diverse real estate market. The At Home With Diversity certiﬁcation teaches you how to conduct your business with sensitivity to all client proﬁles and build a business plan to successfully serve them.

BROKER PRICE OPINION RESOURCE (BPOR)

The BPOR certiﬁcation provides REALTORS® with knowledge and skills to perform accurate and professional broker price opinions (BPOs) and comparative market analyses (CMAs), while reducing risk and increasing opportunities.

E-PRO®

NAR’s e-PRO® certiﬁcation teaches you to use cutting-edge technologies and digital initiatives to link up with today’s savvy real estate consumer.

MILITARY RELOCATION PROFESSIONAL / MRP

NAR’s Military Relocation Professional certification focuses on educating real estate professionals about working with current and former military service members to find housing solutions that best suit their needs and take full advantage of military benefits and support.

RESORT & SECOND-HOME PROPERTY SPECIALIST / RSPS

This certiﬁcation is designed for REALTORS® who facilitate the buying, selling, or management of properties for investment, development, retirement, or second homes in a resort, recreational and/ or vacation destination are involved in this market niche.

SHORT SALES & FORECLOSURE RESOURCE / SFR®

The SFR® certiﬁcation teaches real estate professionals to work with distressed sellers and the ﬁnance, tax, and legal professionals who can help them, qualify sellers for short sales, develop a short sale package, negotiate with lenders, safeguard your commission, limit risk, and protect buyers.

JANUARY 2014 - PIPELINE 15

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SPECIAL SECTION: REACHING REALTORS® - THE KEY TO PURCHASE MONEY LENDING

Tightened Credit Conditions Shape Today’s Home Buyers Jessica Lautz, Director, Member and Consumer Survey Research National Association of REALTORS®

he Proﬁle of Home Buyers and Sellers is an annual report released by the National Association of REALTORS®. It provides a pulse of the most recent buyers in the housing market and shows how the buyers today are different than in past years and even past decades. Today’s buyers continue to face tightened lending conditions and often tightened inventory in many markets in the United States. As buyers face more restrictive lending standards, the characteristics of the typical home buyer changes. Today’s buyers are often older, have higher household median incomes, and are more likely to be married couples as opposed to single female or single male buyers.

As buyers face more restrictive lending standards, the characteristics of the typical home buyer changes. Today’s buyers are often older, have higher household median incomes, and are more likely to be married couples

The most recent Profile shows that 66 percent of recent buyers are married couples, which is the highest share since 2001. Conversely, the share of single females, once at a peak of 22 percent of buyers in 2006, has dropped to just 16 percent in 2013. The share of single male buyers has dropped to nine percent in 2013, down from 12 percent in 2010. Additionally, the share of first-time buyers remains suppressed at 38 percent compared to a historical norm of 40 percent. The economic conditions in the country are also affecting the use of homes. For the first time in the history of this survey, buyers were asked if they purchased a multi-generational home. Fourteen percent of buyers did purchase a multi-generational home. Those who purchased this type of home did so for many reasons: living with children over 18 in the home (24 percent), the buyer purchased for cost savings (24 percent), for health and caretaking of aging parents (20 percent), or to spend more time with aging parents (11 percent). Eighty-eight percent of buyers financed their home purchase and the typical amount financed was 90 percent. First-time buyers typically financed 95 percent while repeat buyers typically financed 86 percent. First-time buyers rely on savings or gifts from relatives or friends for their downpayment, while infrequently using sale of stocks and bonds, 401k or pension funds including loans, and loans from friends and relatives. Repeat buyers also use savings for downpayments, but do so less frequently than first-time buyers; however, this is more frequent than repeat buyers had done in the past as they typically have less equity from their current home to use as a downpayment. Forty percent of buyers said that the mortgage application and approval pro-

More than half of first-time buyers who reported saving for a home was difficult reported student loans delayed them in saving for a home. Repeat buyers were more likely to report credit card debt delayed them in saving for a home purchase. cess was more difficult than they expected. First-time buyers were more likely to report the process was more difficult for them. Six percent of recent buyers had a distressed property sale in the past–either a short sale or a foreclosure. The typical year the buyer sold a distressed property was 2009 before re-entering the housing market. Buyers were asked to identify difficulties in their home search and home buying process. Twelve percent of buyers overall cited saving for a downpayment was difficult. These buyers were asked what expenses made saving for a downpayment difficult. Of buyers who said saving for a home or downpayment was difficult, 43 percent reported student loans, 38 percent reported credit card debt, and 31 percent car loans were debts that made it difficult to save. More than half of first-time buyers who reported saving for a home was difficult reported student loans delayed them in saving for a home. Repeat buyers were more likely to report credit card debt delayed them in saving for a home purchase, at 42 percent.

JANUARY 2014 - PIPELINE 17

FEATURE ARTICLE

U.S. Macro Outlook 2014:

A Breakout Year? By Mark Zandi

18 PIPELINE - JANUARY 2014

A BREAKOUT YEAR?

Finally, A Breakout Year?  Preconditions are in place for much stronger economic growth in 2014. The path won’t be straight up, and signiﬁcant hurdles remain, including Congress’ budget battles and the winding down of the Fed’s bond-buying program. But the U.S. economy’s fundamentals are strong.  Evidence of this underlying strength is clearest in the job market. Payroll employment growth has accelerated to around 200,000 net new jobs per month, and the gains are increasingly broad-based across industries and pay levels. The unemployment rate is steadily declining even as labor force participation stabilizes. The economy is on track to reach full employment—estimated as a 5.75% jobless rate and 64% labor force participation—in three years. JANUARY 2014 - PIPELINE 19

A BREAKOUT YEAR?

SOLID FUNDAMENTALS

The problems and imbalances that developed during the housing bubble nearly a decade ago have largely been corrected. Households have significantly reduced their debt burdens. The average share of after-tax income that households must devote to servicing debt is as low as it has been since at least 1980. Households are also locking in extraordinarily low interest rates: Only a fifth of liabilities are tied to rates that adjust from year to year. The banking system is well-capitalized and highly liquid. Banks are holding highquality tier-1 capital equal to more than 9% of their assets. This compares with an average capital-to-asset ratio of just over 7% since the FDIC was established in the 1930s. Since being required to stress-test their portfolios every year, the nation’s largest banks have prepared themselves to withstand the darkest economic scenarios imaginable. With sturdy balance sheets, banks are looking to make more loans. Especially encouraging is the financial health of nonfinancial businesses. Corporate profit margins have never been wider, as businesses have significantly reduced their cost structures. Unit labor costs—compensation measured in relation to productivity—have barely budged since the recession. In manufacturing, costs are about where

Though the coming year could see another false start, the greater likelihood is that the U.S. recovery will ﬁnally evolve into a full-blown, self-sustaining expansion.

they were a quarter century ago. Businesses have also done a good job repairing their balance sheets, as debt service is low and they are awash in cash. Like households, ﬁrms have locked in record low interest rates. Some problems remain. More than 2 million ﬁrst mortgage loans are in or near foreclosure and a growing number of home equity loans are approaching payment resets. But given consistently rising house prices, these problems are manageable. Rapidly rising student loan debt is also a worry, but not on a scale that will threaten the broader recovery.

IN THE GROOVE

The main missing ingredient for stronger growth is conﬁdence. The nightmare of the Great Recession weighs heavily on the collective psyche, and political brinkmanship and policy uncertainty have been hard to bear. But sentiment has improved in the weeks since Congress agreed to reopen the government and increase the

Treasury debt limit. Investors are especially upbeat, as stock prices continue to hit record highs. Corporate credit spreads have tightened as well, meaning that bond investors are demanding less of a risk premium to buy businesses’ debt. The Fed’s long-term asset

Moody’s Analytics 2014 U.S. Macro Forecast Key Points. • Preconditions are in place for a much stronger U.S. economy in 2014. • Accelerating job growth should allow the U.S. to reach full employment in three years. • Debt burdens have fallen, businesses are flush with cash, and profit margins are strong. • Confidence has been the missing ingredient, but signs point to stronger investor and consumer sentiment. • Congress must avoid more damaging brinkmanship and the Fed must gracefully unwind its monetary stimulus. • The next few years will determine whether the recession undermined the economy’s long-term potential. 20 PIPELINE - JANUARY 2014

ACUMA�2014�Annual�Conference September�14-17� Encore�Las�Vegas

n the ever changing world of CU mortgage lending you can count on ACUMA to consistantly deliver the information ACUMA President Bob Dorsa professionals need to meet the needs of their membership. Every year we strive to make our annual conference the best ever. We do it by bringing nationally known speakers, a program tailored precisely to your needs and state of the art conference technology together into a seamless educational experience. Throw in an outstanding venue, sumptuous dining and time to network with the best and brightest in the CU mortgage industry and you have a one of a kind, can't miss experience. What will we do to make it better in 2014? Plan to join us again next September 14-17 at the fabulous Encore Las Vegas and ﬁnd out.

A Tradition of Excellence

the recession. In manufacturing, costsThe are about where they were a quarter ago. Businesses done a good jo as labor force participation stabilizes. economy is on track to reach full century employment employment— —estimatedhave as aalso 5.75% jobless rate their sheets, debt service forcebalance participation participation— —as in three years. is low and they are awash in cash. Like households, firms have locked in record low interes

Some remain. More than 2 million first mortgage loans are in or near foreclosure and a growing number of home e Solid problems fundamentals A BREAKOUT approaching paymentYEAR? resets. But given consistently rising house prices, these problems are manageable. Rapidly rising studen also a worry, but on a scalethat thatdeveloped will threaten thethe broader recovery. The problems andnot imbalances during housing bubble nearly a decade ago have largely been corrected. Ho

significantly reduced their debt burdens. The average share of after after--tax income that households must devote to servicing deb In the groove has been since at least 1980. Households are also locking in extraordinarily low interest rates: Only a fifth of liabilities are tied adjust from year to year. purchases haveingredient helped to buoy The main missing for ﬁnanstronger growth is confidence. The nightmare of the Great Recession weighs heavily on the co HOUSEHOLDS SHED DEBT, cial markets, but investors also appear psyche,toand political brinkmanship and policy uncertainty have been hard to bear. But sentiment has improved in the weeks si CHART 1 expect better economic times ahead. LOCKdebt IN limit. LOW RATES aren’t nearly as cheeragreed to Consumers reopen the government and increase the Treasury

ful, particularly those in lower-income households that don’t benefit from risingare stock and house upbeat, prices. Yetas even Investors especially stock prices continue to hit record highs. Corporate credit spreads have tightened as well, m here optimism is growing. Consumer bond investors lesslawof a risk premium to buy businesses businesses’’ debt. The Fed Fed’’s long long--term asset purchases have helped sentiment are falls demanding each time federal makers become embroiled in another financial markets, but investors also appear to expect better economic times ahead. budget battle. Encouragingly, however, confidence rebounded quickly after the latest standoff in as October. Consumers aren aren’’t ended nearly cheerful, particularly those in lower lower--income households that don don’’t benefit from rising stock and h Businesses also appear to be getting even here growing. Consumer sentiment falls each time federal lawmakers become embroiled in another budget theiroptimism confidence is back. The Moody’s Analytics weekly surveyconfidence finds business rebounded quickly after the latest standoff ended in October. Encouragingly, however, confidence breaking out to the upside. In early December, positive responses to thealso survey’s questions Businesses appear to beoutweighed getting their confidence back. The Moody Moody’’s Analytics weekly survey finds business confidence bre negative responses by more than at the upside. In early positive responses to the survey survey’’s questions outweighed negative responses by more than at an any time since December, the housing bubble’s peak in early 2005. The economy is the housing bubble bubble’’s peak in early 2005. The economy is bubble bubble--free today. bubble-free today. The outlook hinges importantly on how Congress handles the current CHART 2 round of budget negotiations. While The banking system is well well-capitalized high--quality tier tier--1 capital equal to more than 9% o a misstep is possible, lawmakers ap- and highly liquid. Banks are holding high pear on track to reach a deal that will This compares with an average capital capital--to to--asset ratio of just over 7% since the FDIC was established in the 1930s. Since being keep the government open and avoid stress stress--test their portfolios every year, the nation nation’’s largest banks have prepared themselves to withstand the darkest economi another showdown over the debt limit. The tentative deal will also replace the imag imaginable. inable. With sturdy balance sheets, banks are looking to make more loans. budget cuts imposed earlier this year under budget sequestration, making up for smaller spending reductions Especially encouraging is the financial health of nonfinancial businesses. Corporate profit margins have never been wider, as b with increased fees on air travel and an increase in pension contributions by some federal employees. MOODY'S ANALYTICS / Dismal / Copyright© 2013 / www.dismal.com The economic drag Scientist from fiscal policy will thus fade, from close to 1.5 percentage points of GDP in 2013 to 0.4 percentage point or less in 2014. The drag in 2015 and 2016 will be minimal. The principal weight on growth next year will be the expiration of the emergency unemployment insurance program, which will also slow GDP growth by 0.15 percentage point. Lawmakers still need to raise the Treasury debt limit again, Stronger growth next year also depends on the Federal as the government’s borrowing authority will run out again Reserve’s ability toround gracefully interest rates The outlook hinges importantly on how Congress handles the current of manage budgetlong-term negotiations. While a misstep is possib early next year. The Moody’s Analytics baseline outlook as- as the job market improves. Under the Moody’s Analytics baseappear sumes on track reach a deal that the gracegovernment avoid over that to policymakers will do this will in a keep reasonably line, the open 10-yearand Treasury yieldanother is expectedshowdown to rise by about 100 the debt limit. The ten ful way. Not doing so would create substantial economic and basis points to 3.75% as the unemployment rate falls to 6.6%. also replace the budget cuts imposed earlier this year under budget sequestration, making up for smaller spending reductions political fallout. Given Congress’ past behavior, it is conceivThe Fed must accomplish this while winding down its fees onable air that travel and increase in pension contributions by someprogram. federal This employees. there willan be another round of brinkmanship, which bond-buying could be tricky; an undesirable would hurt the recovery. surge in long-term rates last summer was triggered when Fed officials began merely to talk about slowing the pace of

BUSINESSES GETTING THEIR CONFIDENCE BACK

MANAGING LONG-TERM RATES

The economic drag from fiscal policy will thus fade, from close to 1.5 percentage points of GDP in 2013 to 0.4 percentage poi 2104. The drag in 2015 and 2016 will be minimal. The principal weight on growth next year will2014 be the- expiration the emerg JANUARY PIPELINEof23 unemployment insurance program, which will also slow GDP growth by 0.15 percentage point.

ist

A BREAKOUT YEAR?

asset purchases. Investors seemed to assume that tapering meant the Fed would begin raising short-term rates soon after QE ended. The jump in fixed mortgage rates hurt housing, which is vital to the broader recovery. Policymakers have since worked to convince investors there are no plans to raise short-term rates soon. This appears to have worked, at least for now, as long-term rates are ending the year where policymakers want them. If rates again start to rise too quickly for comfort, policymakers can respond using a range of tools. One option would be to adopt a lower threshold for core consumer expenditure inflation, pledging not to raise short-term rates unless inflation is greater than, say, 1.5%. Core inflation has recently slowed near 1%. An even more aggressive step would be to reduce the 6.5% unemployment threshold for raising short-term rates.

TREND GROWTH

Households have signiﬁcantly reduced their debt burdens. The average share of after aftertax income that households must devote to servicing debt is as low as it has been since at least 1980.

A worry regarding the economy’s nearterm prospects is the possibility that the Great Recession damaged its longer-term potential. Before the recession, it appeared that the economy could sustain real GDP growth as high as 3% per year without lowering the unemployment rate or increasing the capacity utilization rate—signs that output is heating up. Since the

CHART 3

downturn, however, this potential rate has clearly fallen, and despite only 2% growth, the unemployment rate has fallen and the utilization rate increased. This suggests the economy could have been weakened in ways that will last over the longer term. The growth of both productivity and the labor force, two key components of potential, has recently come to a virtual standstill. Unless this changes soon, the economy may reach full employment more quickly, but living standards will rise more slowly, exacerbating inequality in income and wealth and creating major fiscal problems down the road. However, it is premature to conclude that the recession permanently undermined the economy’s potential. An important test will occur over the next several years as unemployment falls and labor compensation growth, which has been stuck around the inflation rate, accelerates. Businesses probably could pay even less, but are reluctant to undermine morale and productivity with wages that don’t keep up with inflation. As unemployment declines, however, businesses will eventually need to pay more. This should prompt potential workers who have left the labor force to return, and encourage businesses to ramp up investment, accelerating productivity gains. Moody’s Analytics estimates the economy’s potential growth rate at 2.5% per year. The rate has slowed since the recession, but mainly because of the retirement of baby boomers, a demographic trend that has long been part of our baseline outlook.

FISCAL DRAG BEGINS TO WANE

FORECASTING WITH A RULER

Economists have a tendency to forecast with a ruler, assuming the economy’s recent performance will continue into the future. Many such forecasts were issued in the last decade, assuming the so-called great moderation meant the good times would never end. Similarly, straight-edge adherents now conclude that the difﬁcult times since the recession are here to stay. This view holds that it will take years to return to full employment and that growth will be much slower than we want for the foreseeable future—that the economy is trapped in a “new normal.”

24 PIPELINE - JANUARY 2014

A BREAKOUT YEAR?

Dismal Scientist

Forecasting with a ruler is inevitably wrong, however, and this will become evident again in 2014. Though the coming year could see another false start, the greater likelihood is that the U.S. recovery will finally evolve into a full-blown, self-sustaining expansion. The fundamentals are as good as they have been for decades, and it is increasingly difficult to envisage shocks that could undermine them. Worries exist, including Europe’s ongoing travails, political tensions in Asia, and the possibility of botched fiscal and monetary policy in Washington. But these threats don don’t feel as existential as those the economy has been grappling with since the recession. The U.S. should experience a breakout year in 2014. It is certainly due for one.

CHART 4

ECONOMY’S POTENTIAL SLOWS, TEMPORARILY?

Australia, we provide up-to-the-minute reABOUT MOODY’S ANALYTICS or contingency within or outside the control porting and analysis on the world’s major of Moody’s or any of its directors, ofﬁcers, ECONOMIC & CONSUMER CREDIT economies. employees or agents in connection ’with the However, it is premature to conclude that the recession permanently undermined the economy economy’ s potential. An important tes Moody’s Analytics added Economy. ANALYTICS procurement, collection, compilation, analy-

com to falls its portfolio 2005. Its economics Moody’s Analytics helpsascapital marsis,growth, interpretation, communication, publicaover thekets next several years unemployment andinlabor compensation which has been stuck around the inflation and consumer credit analytics arm is based and credit risk management profestion or delivery of any such information, or in West a suburb of Philadel- to undermine sionalsBusinesses worldwide respond to an evolving accelerates. probably could pay evenChester less,PA, but are reluctant morale and productivity with wages that (b) any direct, indirect, special, consequenphia, with offices in London and Sydney. marketplace with confidence. Through its tial, compensatory or incidental damages with inflation. As unemployment however, businesses will eventually need to pay more. This should prompt potentia More information is available at www. team of economists, Moody’s Analyticsdeclines, is a whatsoever (including without limitation, economy.com. leading independent provider of data, anallost profits), evenaccelerating if Moody’s is advised in have leftysis, themodeling labor force to return, and encourage businesses to ramp up investment, productivity gains. © 2013, Moody’s Analytics, Inc. and/ and forecasts on national and regional economies, financial markets, and credit risk. Moody’s Analytics tracks and analyzes trends in consumer credit and spending, output and income, mortgage activity, population, central bank behavior, and prices. Our customized models, concise and timely reports, and one of the largest assembled financial, economic and demographic databases support firms and policymakers in strategic planning, product and sales forecasting, credit risk and sensitivity management, and investment research. Our customers include multinational corporations, governments at all levels, central banks and financial regulators, retailers, mutual funds, financial institutions, utilities, residential and commercial real estate firms, insurance companies, and professional investors. Our web and print periodicals and special publications cover every U.S. state and metropolitan area; countries throughout Europe, Asia and the Americas; and the world’s major cities, plus the U.S. housing market and other industries. From our offices in the U.S., the United Kingdom, and

or its licensors and afﬁliates (together, “Moody’s”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by Moody’s from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall Moody’s have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance

advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ﬁnancial reporting, analysis, projections, observations, and other information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell, or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH OPINION OR INFORMATION IS GIVEN OR MADE BY Moody’s IN ANY FORM OR MANNER WHATSOEVER. Each opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly

Moody Moody’’s Analytics estimates the economy economy’’s potential growth rate at 2.5% per year. The rate has slowed since the recession, b because of the retirement of baby boomers, a demographic trend that has long been part of our baseline outlook.

Forecasting with a ruler

Economists have a tendency to forecast with a ruler, assuming the economy economy’’s recent performance will continue into the futu forecasts were issued in the last decade, assuming the so so--called great moderation meant the good times would never end.

Similarly, straight straight--edge adherents now conclude that the difficult times since the recession are here to stay. This view holds th years to return to full employment and that growth will be much slower than we want for the foreseeable future future— —that the e trapped in a "new normal. normal.”” CONTACT US

Forecasting with a ruler is inevitably wrong, however, and this will become evident again in 2014. Though the coming year cou false start, the greater likelihood is that the U.S. recovery will finally evolve into a full full--blown, self self--sustaining expansion. The fun as good as they have been for decades, and it is increasingly difficult to envisage shocks that could undermine them. Worries e Europe Europe’’s ongoing travails, political tensions in Asia, and the possibility of botched fiscal and monetary in Washington. B JANUARY 2014 -policy PIPELINE 25 don don’’t feel as existential as those the economy has been grappling with since the recession.

FEATURE ARTICLE

D E R E G N DA

Down, but not out by Robert Stowe England

Mortgage brokers are adapting their business model to survive, after looking like an endangered species. Some insiders now believe the cycle is turning and the role of brokers is poised to grow. 26 PIPELINE - JANUARY 2014

DOWN, BUT NOT OUT

After plummeting from their peak numbers at the height of the housing bubble, the ranks of mortgage brokers seemingly hit bottom in early 2011. Since then, brokers have staged a very modest recovery. Even so, it’s not clear what the future holds for the profession.  Views diverge from those seeing little chance for a signiﬁcant rebound in broker share of the market to those who expect a full recovery.  For the moment, the skeptical view appears to hold more sway.  “Since the credit crisis, particularly the subprime mortgage meltdown, mortgage brokers have become an endangered species,” says Guy Cecala, chief executive ofﬁcer and publisher of Inside Mortgage Finance.  “I’m not very optimistic about their future,” he says, [or] about the chances for a strong rebound in the volume of mortgages originated through this channel.”  Why has the downturn hit this segment of the business so hard?  “Rightly or wrongly, they’ve borne the brunt of the blame for making and marketing irresponsibly underwritten mortgages,” Cecala says, even though mortgage brokers do not actually underwrite loans. JANUARY 2014 - PIPELINE 27

DOWN, BUT NOT OUT

“T

he issue has always been, [in] the case of the subprime meltdown, [that] a disproportionate number of bad loans–or the loans that defaulted the quickest–came from mortgage brokers,” he adds. “There’s always been a perception that mortgage brokers care more about qualifying the borrowers than they do in representing the interests of lenders or investors,” says Cecala. In the wake of the subprime meltdown of 2007 and 2008, “the top lenders immediately started distancing themselves from mortgage brokers,” Cecala says. “And that’s continuing to this day,” he adds. ‘’The latest nail in the coffin, if you will, is Wells Fargo’s [July] announcement it would stop doing business with mortgage brokers.” Wells Fargo Home Mortgage was the last major mortgage lender to operate a direct mortgage broker origination channel. The announcement by Wells Fargo came on the same day that the firm agreed to a $175 million settlement with the Department of Justice (DOJ) in a suit that charged the company’s mortgage lending efforts had produced a disparate impact against black and Hispanic borrowers during the housing boom. DOJ claimed Wells Fargo had discriminated against minorities by offering them subprime loans that carry higher fees or interest rates when the borrowers could allegedly have qualified for better terms. DOJ’s assertions were based on an analysis of loan rejection data and a theory of disparate impact that showed fewer minorities obtained loans. In a statement released July 13, Wells Fargo denied the DOJ claims: “Wells Fargo is settling this matter solely for the purpose of avoiding contested litigation with the DOJ.” Wells Fargo claimed that the loans associated with the settlement came from independent brokers, yet denied there was any connection between its decision to shut down its mortgage broker channel and the payment of the fine. Mike Heid, president of Wells Fargo home Mortgage, explained the company’s view in a July 12 press release: “Through our separate decision to no longer fund mortgages through independent mortgage brokers, we can control how our commitment [to fund homeownership] is met on every mortgage that Wells Fargo makes.” Cecala contends there are other practical issues working against originating through mortgage brokers. “When you try to get any originator to buy back a loan that turns out to be bad or goes to default or is fraudulent, it’s problematic dealing with mortgage brokers,” he says. “Mortgage brokers sell loans ‘as is,’” says Cecala. “There’s no recourse back to them. All you can do is stop buying loans

from them. They don’t indemnify you for your losses.”

THE ACCORDION ANALOGY

Other industry observers, however, predict a recovery in housing will spark parallel growth in broker originations. “I see the mortgage broker industry as somewhat of an accordion,” says Dick Bove, senior vice president of equity research at Rochdale Securities LLC, Lutz, Florida. “It expands and contracts with the market that it serves. Unfortunately, the expansions and contractions tend to be relatively violent.” “In good times you see mortgage brokers all over the place. They spring up everywhere-in storefronts, second-floor offices of commercial buildings, etc.,” Bove says. “And then when the contraction comes, of course, they all disappear.” Bove believes mortgage brokering will come back, as it always has. “I think this is the time to get into the mortgage brokerage industry, because presumably we’ve got five, six or seven years of very slow expansion until we run into a pop in housing activities,” he says. A lot of former mortgage brokers have taken up positions as loan officers with larger lenders and, when they see an opportunity to return to the entrepreneurial role they previously enjoyed, they are likely to do so, according to Bove. ‘’I’ve been doing this thing since the late 1960s, so I’ve gone through quite a few cycles. In every cycle, the theory is that these guys will never come back-that they’ve been wiped out. All those firms get bought up by banks at the peak of the cycle, and there are no more mortgage broker firms,” he recalls. “But they always come back, because they provide a service,” Bove says. “So, I think you’ll see a lot of people coming back into the business,” he predicts.

Bove believes mortgage brokering will come back, as it always has.

28 PIPELINE - JANUARY 2014

BROKER ORIGINATION VOLUME

It has been difficult to measure the exact volume of mortgage broker originations because many mortgage brokerage firms act as both brokers and correspondents. Inside Mortgage Finance provides origination data on pure broker-originated loans. According to Cecala, brokers represented an average 31 percent market share in 2005. The share fell to an average of 9 percent for 2011. On a quarterly basis, however, the mortgage broker share hit bottom in the first quarter of 2011 when it was only 7.5 percent, according to Inside Mortgage Finance. From there, it rose to 10.8 percent in the fourth quarter of 2011.

DOWN, BUT NOT OUT

In the ﬁrst quarter of 2012 mortgage brokers originated $34 billion in mortgages, as their share fell slightly to 9.4 percent, according to Cecala. In the second quarter, however, the broker volume fell to $32 billion, or a 7.9 percent share, the second lowest broker share ever, according to Inside Mortgage Finance. Correspondent lending in the second quarter, however, rose 2.5 percent, from $120 billion to $123 billion, increasing market share from 30-4 percent to 31.2 percent. Meanwhile, retail loan origination rose 9.2 percent from $229 billion to $250 billion, representing a 61.7 percent share “the highest share since Inside Mortgage Finance began analyzing origination channel trends in 1990,” says Cecala.

A DIFFERENT TAKE ON BROKER SHARE

LaMalfa is optimistic about the future of the mortgage broker channel.

From 1991 to 2007, Wholesale Access Research & Consulting Inc., Columbia, Maryland, compiled and published yearly in-depth information on mortgage brokers. Wholesale Access was co-founded and run by David Olson, an economist, and Tom LaMalfa, now president of TSL Consulting, Cleveland Heights, Ohio. LaMalfa contends that the way Inside Mortgage Finance tabulates its data transfers a lot of the business originated by mortgage brokers into the correspondent category. In the annual surveys by Wholesale Access, mortgage brokerage firms were included in the survey as long as they were predominantly brokers, with 80 percent or more of their business originated without a warehouse line, meaning that 20 percent or less constituted correspondent lending, LaMalfa explains. According to Wholesale Access, mortgage brokers represented as much as 68 percent of originations at their peak in 2003, when there was a huge refi boom and $3.8 trillion in total residential originations. Wholesale Access also tracked the number of brokerage firms. In 1990, the first year this was measured by the company, there were 12,000 firms. That number rose to 50,000 in 2003 and 53,000 in 2006, the last year Wholesale Access surveyed.

OPTIMISM ABOUT THE CHANNEL

calling that Wholesale Access and Inside Mortgage Finance “had this debate frequently.” He adds, “From studies we did, anywhere from 30 [percent] to 60 percent of originations deemed to be correspondent were actually originated by a mortgage broker.” Like Bove, LaMalfa is optimistic about the future of the mortgage broker channel. “I think that it is going to expand in the years ahead. I think we’ve already seen the bottom,” he says. “All the bad brokerages–those concentrated largely on nonprime loans–were washed out of the system. We’re down to the cream of the crop today,” LaMalfa contends. He expects that in ﬁve years, mortgage brokers will likely originate 30 percent of mortgages. “The caveat for this prediction,” he adds, “is that the Achilles’ heel in the brokerage industry is regulatory.” “If these regulators get even harsher, it’s going to take a toll and my expectation of growth among brokers is going to be wrong,” LaMalfa says. So, he tempers his prediction in this way: “absent regulations that do further damage to the industry.” LaMalfa says brokers were able to become such a big factor in the mortgage industry because they are the lowcost producers of new loans. “They didn’t have fancy ofﬁces. They didn’t have well-paid middle and upper management. They had small storefronts. There was not a lot of overhead. There was not a lot of regulatory oversight, as long as they complied with state guidelines for licensing,” he says.

LaMalfa believes the share of originations being done today by mortgage brokers is closer to from 16 percent to 19 percentalmost double the level reported by Inside Mortgage Finance. “My reason for differing with their numbers has been the reason I differed with them over the years,” LaMalfa says, re-

THEN CAME NATIONWIDE LICENSING

In 2008, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR), both based in Washington, D.C., set up a Nationwide Mortgage Licensing System (NMLS) to track and oversee licensed mortgage originators. At the end of the ﬁrst year, states listed 13,936 unique mortgage origination companies and 66,692 mortgage loan originators. Title V of the Housing and Economic Recovery Act of 2008–sometimes referred to as the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act)–mandated that all mortgage loan originators be either federally registered or state-licensed through the NMLS. The legislation authorized the creation of the NMLS under the auspices of the Conference of State Bank Supervisors. The NMLS is managed by a subsidiary, a nonproﬁt organization called State Regulatory Registry LLC, Washington, D.C., accord-

JANUARY 2014 - PIPELINE 29

DOWN, BUT NOT OUT

ing to Bill Matthews, the chief executive officer and president of the registry. In the first quarter of 2012, NMLS reported 15,883 unique entities licensed in states to originate mortgages. Representing 110,710 individuals, some of whom are licensed in more than one state, according to Matthews. People with state licenses can be both lenders and brokers and, thus, it is difficult to have a strict classification of each entity or individual on the list, he adds. In the first quarter of 2012, 14,026 or 88 percent of the 15,883 unique entities reported by the states were engaged in first-mortgage brokering, while 3,434 or 22 percent were engaged in first-mortgage lending. This compares with 13,298 or 89 percent of 14,980 unique entities in the first quarter of 2011 that were engaged in first-mortgage brokering and 3,308 or 22 percent in first-mortgage lending. The separate NMLS report on federal data reported 387,618 mortgage loan officers in federally registered depository institutions, as of the second quarter of 2012. Why so many loan officers? “It is easier to get registered than to be licensed,” explains Matthews. Both federally registered and statelicensed loan officers face background checks before they are accredited. States additionally also require that applicants pass a licensing test, pre-licensing education and personal credit checks. Federally registered loan officers include bank loan officers in retail branches whose responsibilities include many other banking activities, whereas state-licensed mortgage loan officers tend to be exclusively dedicated to the mortgage business.

turn, deem there is something wrong or some decision they made that was wrong,” he adds. “The bad part about what happened,” Frommeyer says, “was the fact the DOJ came out and said it was mortgage brokers, it was mortgage brokers, it was mortgage brokers” who originated the loans that demonstrated disparate impact on minorities. “In reality, it was [the lender’s] subprime unit, which they considered a mortgage broker-they bought loans through their subprime unit as brokers,” he contends. Frommeyer also notes that the all the loans cited by the DOJ came from Baltimore and not from independent mortgage brokers across the country. The change at Wells does not mean mortgage brokers have been shut out. “We’re still sending business to these other regional lenders, and they are still selling them to Wells from us-they are just not buying them directly from brokers,” Frommeyer adds. What has changed for Wells, Frommeyer explains, is that by acquiring the broker loans via correspondents, “they can have somebody to buy it back” if that becomes necessary, he adds. So is the mortgage brokerage business on the rebound? “Yes,” says Frommeyer. “We reached the point about 18 to 22 months ago, where I think we got to the bottom realm and now you’re finding a lot of people who left the mortgage broker industry and went into the banking industry are now leaving the banking industry and coming back into the broker industry.” Indiana, for example, lost half its mortgage brokers and is now slowly rebuilding its ranks, according to Frommeyer. One reason for the shift back to brokers is that loan originators can make more money as a broker than they can as a loan officer in a bank, according to Frommeyer. “The difference between doing what we do now and doing what we did years ago is that now we’re licensed. Now you have to take a test,” he says. “Now you have to have continuing education, and in the banking business you don’t have to do that.” Frommeyer believes that the current unlevel playing field for brokers is likely to become more level in the future. He expects that the Consumer Financial Protection Bureau (CFPB) will eventually require all loan officers to be licensed. “I honestly think [the bank loan officers] see the writing on the wall that eventually you are going to have to have a license” to be a loan officer at a bank, he says. “So, you might as well make the move now,” he adds.

Frommeyer believes that the current unlevel playing ﬁeld for brokers is likely to become more level in the future.

BROKERS RETURNING

Amtrust Mortgage Funding Inc., Carmel, Indiana, is one of the mortgage brokerage ﬁrms that survived the Great Attrition of brokers brought on by the housing crisis and the subsequent regulatory onslaught. Its senior vice president, Don Frommeyer, is also head of the Plano, Texasbased National Association of Mortgage Brokers (NAMB). Frommeyer reports that after Wells Fargo shut down its mortgage broker channel, someone from the bank called him to explain why Wells had made the decision. The Wells representative told Frommeyer, “Basically they are looking at all mortgage brokers as third-party paper,” Frommeyer says. “They don’t have any way to come back on a mortgage broker except for fraud, and they want to have somebody that can basically buy back a mortgage from them if they, in

30 PIPELINE - JANUARY 2014

DOWN, BUT NOT OUT

LOAN ORIGINATOR COMPENSATION

On Aug. 16, the CFPB proposed a modification of the loan originator compensation final rule originally issued by the Federal Reserve Board. “The broker is helped because the proposed rule ditches the flat fee,” says Robert Lotstein, managing attorney with LotsteinLegal PLLC, Washington, D.C. “In the past [under the Fed’s loan originator compensation rule] in a consumer pay transaction, the rub was that the loan officer [at a mortgage brokerage firm] could only get paid a salary or an hourly rate. In this proposed rule, the bureau cleans up the problem and allows the loan officer to be paid a commission,” Lotstein says. “That’s a huge win for the mortgage brokerage firms.” The new rule also appears to move part of the distance toward equalizing qualifications among all mortgage loan originators. Specifically, the proposed rule states that all mortgage loan originators must be “qualified,” prompting a lively discussion on what that means within the loan originator community. Frommeyer says that when the original SAFE Act uses the term “qualified,” it means the loan originator needs to be licensed and tested and meet the qualifications that states now require. ‘There shouldn’t be any disparity in requirements between a bank loan officer, a correspondent loan officer or a mortgage broker,” he contends. Importantly, the proposed CFPB loan compensation rule does allow loan officers within a brokerage firm to be paid a percentage of the loan balance amount, but brokerage-based loan officers cannot be compensated based on fees and other charges on the loan. A problem arose for mortgage brokers who are compensated by borrowers instead of lenders after the Federal Reserve ruled in 2011 that mortgage brokers are both loan originators and brokers and would be seen as receiving dual compensation by borrowers. Thus, while the borrower could pay the brokerage firm, the loan officer within the firm could not receive a sales commission, only a salary or hourly wage, Frommeyer explains. The new proposed compensation rule was written after CFPB heard from a variety of market participants, including mortgage brokers, according to Pete Carroll, assistant director of mortgage markets at the CFPB. “Prior to issuing a proposal, we do a small business review panel,” Carroll explains, a process required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Some mortgage brokers have survived current adversities by moving their business under the umbrella of a mortgage banker or correspondent.

“We’ve included brokers in that process,” he says. “Then we get their feedback and take that feedback into consideration when coming out with a proposed rule.” The comments from people on the small business review panel, combined with additional research by CFPB, prompted the agency to move away from the flat fee requirement to allow a percentage of origination fees to the loan officer who originates the loan. “One persuasive element was that the percentage of origination points allows lenders to cross-subsidize small-balance loans,” Carroll says. The review panel also played a role in ending the prohibition against sharing pay with brokers in consumerpay transactions. “The new proposal has eliminated that,” says Carroll. The new rule also “contemplates a more level playing field on compensation,” Carroll says. Importantly, the new rule also looks to better harmonize the “qualification and screening standards” of bank loan officers and mortgage brokers, he says.

REPS AND WARRANTS A FACTOR

Carroll believes the mortgage broker share has shrunk largely because of litigation concerns around investor reps and warranties. “There’s been so much reps and warrant activity, lenders have moved toward greater control over the origination process,” Carroll says, “and this shrinks the broker channel.” Carroll says he expects that as the rep and warranty issue becomes clarified and the regulations are clarified, lenders “will put into place new operations and procedures” to manage originations. “If banks feel like they have a greater hold on their origination operations, they may feel more comfortable about how they can expand their retail operations,” he says. With the CFPB’s new proposed loan originator compensation rule, which is to be finalized Oct. 16, “they’ve opened the door to reclassifying the mortgage broker so they are not classified as both the loan originator and the broker,” Frommeyer explains. This may potentially allow mortgage brokerage firms that do borrower-pay originations the ability to compensate loan originators at the brokerage firm on the volume of mortgage they originate and close, according to Frommeyer. The business strategy for Amtrust Mortgage Funding has been to rely entirely on lender-pay compensation, and that has worked well for the company, according to Frommeyer. While mortgage brokers are pleased to see licensing, testing and background checks for those in the broker business, beyond that, Washington’s intense regulatory oversight of

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DOWN, BUT NOT OUT

mortgage brokers is seen by industry as excessive and creating an unlevel playing ﬁeld with correspondents and depository institutions. Frommeyer is pleased to see progress in some of the language in the disclosure rule proposed by CFPB on July 9 to combine disclosure requirements under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Under existing TlLA rules and the Good Faith Estimate, mortgage brokers had to disclose their proﬁt on a given loan, while loan originators and correspondents and banks did not, Frommeyer says. The new rule requires all players to disclose their compensation. “Everybody is going to have to show that. That’s a good, positive step. To that extent, [the new disclosures] are becoming more apples-to-apples comparisons,” Frommeyer says.

HYBRID MORTGAGE BANKING MODEL

The sharp decline of the brokerage industry since 2007 also has created an opportunity for new players to enter the market.

Some mortgage brokers have survived current adversity by moving their business under the umbrella of a mortgage banker or correspondent. One such business is American Family Funding, Santa Clarita, California, which operates as a branch retail office for American Pacific Mortgage, a mortgage banker based in Roseville, a suburb of Sacramento, California. American Family Funding’s staff members are employees of American Pacific. The name of the branch, American Family Funding, is a dba (doing business as) of American Pacific Mortgage, according to Fred Arnold, who started out as a mortgage broker in 1991 and is now co-manager with Fred Kreger of American Family Funding. ‘The number of people who are pure brokers has dropped tremendously, but there are still a large group of individuals who are entrepreneurs at heart who are operating under a mortgage banking system, under the guidelines and requirements of a mortgage banker,” explains Arnold. A mortgage broker who has migrated into the hybrid mortgage banking business “is still an entrepreneur and is still a small business, in many cases, and it’s still brokering some of its business,” he adds. American Family Funding, for example, does 20 percent of its originations as a broker, even though 80 percent is originated for and funded by American Pacific Mortgage, according to Arnold. The high cost of regulatory compliance is a key reason so many mortgage brokers have moved away from the pure mortgage brokering model, according to Arnold.

32 PIPELINE - JANUARY 2014

“Compliance is so unbelievably expensive in our business,” he says. “It takes a full-time person working at $5,000 to $6,000 a month, and I would have to have a full-time human resources department. That would cost me [another] $4,000 to $5,000 a month,” he explains. “Just those two [expenses] alone would make it difﬁcult to be open for business.” Origination volumes are expected to hit a record $125 million this year at American Family Funding, Arnold says.

FROM BROKER TO BANKER

American Pacific Mortgage was founded in 1997 and opened its first retail branch and affiliate and then grew to 40 affiliates by 2001, according to Leif Boyd, senior vice president for production. After the housing crash of 2007 and 2008, American Pacific decided it had to transition from a pure broker model to correspondent, and set out to obtain significant warehouse lines so it could originate and close on loans and sell them to loan aggregators. The company sells its production to players such as Wells Fargo, JPMorgan Chase, GMAC, Penny Mac, and some jumbos to Redwood Trust. The company is currently also selling to Fannie Mae and hopes soon to be selling to Freddie Mac and sell into Ginnie Mae pools, according to Boyd. In July, American Pacific originated $263 million in mortgages, with 90 percent of its funding through warehouse lines and 10 percent done via broker lines within its 114 branches. The company expects to originate $3 billion for all of 2012, according to Boyd. American Pacific early this year began retaining the servicing rights for loans it sold to Fannie Mae. “We’re on our way to a half-billion [dollars] in servicing,” Boyd says. Dovenmuehle Mortgage Inc., Lake Zurich, Illinois, subservices American Pacific’s servicing portfolio. What drove American Pacific to transition to a full mortgage banker model? “We were driven there through regulation, as regulators clamped down on brokers and made it more of a challenge for brokers to succeed, starting in 2005, when they initially released the changes to the Good Faith Estimate and it became clear that it was going to adversely affect brokers in the way that brokers would [have to] portray [their] compensation,” Boyd answers. The mortgage banker model offered the company some strategic advantages. Importantly, it centralized compliance for all the branches, reducing its cost and variability across the branch offices. Plus, it provides an additional income stream from servicing.

DOWN, BUT NOT OUT

Further, the costs of compliance just keep rising, creating more uncertainty for mortgage originators. “CFPB is starting to come in and audit all these [regulatory] changes. And so I think over the next 24 months we’ll start to get some clarity,” Boyd says. “But if you are a stand-alone broker having to manage through that sort of regulation, it is darn near impossible-especially with the folks I talk to,” he adds. American Pacific has talked with many brokers who are just getting out of the business because they cannot handle the compliance costs and complexity. American Pacific has approximately 1,000 employees, and “we employ 30 to 40 people in compliance alone,” Boyd says. A brokerage with 10 to 12 employees may have to run compliance without dedicated compliance staff. “Especially in today’s world, that can be a very daunting and frightening task,” Boyd says. The high cost of compliance also drives up the cost of mortgages to consumers, Boyd notes. Other mortgage originators tell Boyd they are setting aside $1 million each for CFPB audits that are in the cards, he adds. “That’s a significant hit to any company’s bottom line,” he says. The audits are beginning with large mortgage bankers and are expected to get to mortgage brokers later, according to Boyd. Boyd believes consumers face higher financing costs and enjoy fewer choices for mortgage products and terms as result of the 85 percent decline in the ranks of mortgage brokers from their peak. “Imagine walking to the mall and finding only 15 percent of the stores are open,” he says to illustrate what the collapse of the industry has meant for consumers.

move into the broker channel after it saw larger banks and companies in the business get out. At the peak of its retail operations, 360 Mortgage had 14 branches in the West, Northwest, Mountain States and Midwest. “In May 2008, we had the official kickoff of our wholesale platform,” Greco says. By January 2011, 360 Mortgage decided to commit “100 percent of our resources to wholesale, and we got out of retail altogether,” Greco says. “And so far, our gamble has been paying off.” The company has warehouse lines and sells 100 percent of its mortgages to Fannie Mae and retains the servicing. 360 Mortgage decided to begin servicing two years ago. Loan originator compensation reform hit in April 2011, further decimating the ranks of mortgage bankers, Greco recalls. “Ever since the first of last year, we’ve seen a steady increase,” he says. “We were up 12 percent [in loan originations] in the fourth quarter of 2011. We continue to see a steady increase in 2012,” he adds. 360 Mortgage currently works with 2,500 mortgage brokers in 31 states, with about 900 to 1,000 active on a quarterly basis, according to Greco. “Since the first quarter of 2012, we’ve seen our pipeline increase 700 percent,” says Greco. The company expects to close on $2 billion in loans this year, after doing $500 million for all of 201o A convergence of various forces and industry trends have come together to favor a hybrid mortgage banking model relying on mortgage brokers for originations, according to Greco. He says his company has seen a steady migration of loan officers out of banks, where many went, back into the mortgage brokerage business. A surge in refinancings around the Home Affordable Refinance Program (HARP 2.0) was also a boost to mortgage brokers, he adds. Greco believes the outlook for mortgage brokers is “very positive.” He predicts that “over the course of the next 12 to 18 months, [mortgage brokers] are going to ride the refinance boom that HARP has created.”

“In my thinking, this is an extraordinarily opportunistic time for the mortgage brokers,” Robbins says.

OPPORTUNITY FOR NEW WHOLESALE LENDERS

The sharp decline of the brokerage industry since 2007 also has created an opportunity for new players to enter the market. One of those is 360 Mortgage Group, Austin, Texas, which launched in August 2007-the month the private-sector mortgage securitization market collapsed. “We started the company [with] the expectation that we would see contraction in the business and a little bit of recession,” recalls Mark Greco, 360 Mortgage’s president. ‘’I’d love to say we knew we would be where we are today, but the truth is that we had no idea we would see so much contraction,” he says. “It certainly has been a greater debacle than I think anybody at the time could have imagined,” Greco adds. 360 Mortgage started with a retail platform then decided to

MINI-CORRESPONDENTS

Mortgage industry veteran John Robbins, CMB, chief executive ofﬁcer and president of Bexil American Mortgage, San Diego, thinks that a bright future for mortgage brokers is about to dawn. “In my thinking, this is an extraordinarily opportunistic time for the mortgage brokers,” Robbins says. “More and more

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DOWN, BUT NOT OUT

loan officers who have worked for large banks are going to move over to the mortgage brokerage community,” he says. A lot of mortgage brokers closed shop and moved to the banks to survive the Great Recession, Robbins says. Now that “the storm is passing, the opportunity to actually earn greater commissions and more income resides on the mortgage brokerage side,” he says. Bexil American, which started up in the fall of last year, has put together a mini-correspondent program for mortgage brokers and calls this program its American Mortgage Network. (Robbins had an earlier successful company by that name.) However, as of press time, the mini-correspondent program had not yet been launched. “It’s been my understanding that the CFPB wants to take a look at the mini-correspondent program,” says Robbins. “So, since they are our new regulator, we will not release a new program like this until we are sure it is approved by CFPB.” Under the proposed mini-correspondent program, Bexil American will buy loans closed by its mini-correspondents for Fannie and Freddie, following government-sponsored enterprise (GSE) underwriting and product guidelines, and sell them to aggregators and not directly to the two enterprises. “The mini-correspondents would rely on our balance sheet, our equity, our capitalization, and would rely on our ability to repurchase a loan if necessary,” he says. Under the mini-correspondent program, the mortgage broker “literally underwrites the loan before it closes,” Robbins says. “We physically see it, see all the attributes, impose additional conditions, and all that has to be in the loan before it closes.” The mortgage broker actually closes the loans as a mini-correspondent, and Bexil American “buys it off the closing table,” Robbins says. The mini-correspondent approach does not have the same risk the traditional mortgage banker takes with delegated underwriting, Robbins explains. Even without the mini-correspondent program, Bexil American is already working with mortgage brokers in California, Oregon, Washington and Utah to originate mortgages and sell to aggregators after Bexil closes them and funds them with its warehouse lines. Bexil American currently has 75 mortgage brokers in 16 states in its mortgage broker program and is still finalizing filings needed in eight of the states to get operations up and going beyond the initial four states where it already operates. Robbins says that onerous underwriting and documenta-

tion standards are slowing the ability of all originators in the market to extend mortgage credit, and that limits the amount of funding available to the market. “It’s certainly an albatross [around the neck of] the real estate recovery rather than being a beneﬁt,” he says. “If you look at Fannie and Freddie announcing they are going to accelerate and concentrate on more repurchases, the continued litigation regarding servicing at banks, the host of new regulations coming out of CFPB and both local and state governments, the overall effect of that is the mortgage lenders whether independent or bank-owned are becoming more and more conservative,” says Robbins. “They are being scared to death that they might do something wrong, unintentionally. At a time when there’s a cry from both the federal government and legislators that we need to ease credit and make credit more available, the actions of regulators are imposing the opposite effect on industry.” While Robbins acknowledges that all the rules were put together “with the best of intentions,” the problem nevertheless remains that “nobody looks at cause and effect on the entire industry and what’s being regulated.” Robbins is conﬁdent that reason will ultimately prevail. “The country has always shown resiliency-after it sees it has gone too far, it comes back toward the center,” he says. “That’s where we need to push the pendulum back to the center line, so we can make homeownership available to people who want to acquire a home.”

“I think this is the time to get into the mortgage brokerage industry, because presumably we’ve got ﬁve, six or seven years of very slow expansion until we run into a pop in housing activities,” Boyd says.

34 PIPELINE - JANUARY 2014

Robert Stowe England is a freelance writer based in Arlington, Virginia, and author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance. published by Praeger and available at Amazon.com. He can be reached at rengland@us.net. © 2013 Mortgage Banking Magazine - Reprinted with permission

FEATURE ARTICLE

Be Ready for Purchase Loans in 2014 Tracy Ashfield As the new year begins, we anxiously await news on what piece of the mortgage lending market was being held by credit unions as 2013 drew to a close. Third-quarter 2013 numbers put the credit union market share at a respectable 6.5%, hovering near the all time record share. I hope the statistics will show credit unions continuing to hold that historically robust share. But the big question is: What will happen to that market share in 2014? We know that refinance volume has decreased sharply. There is little hope we’ll see any meaningful increase there. Yes, HARP may not get extended, creating a burst of refinances. And yes, some HELOCs are at an age where members may need to start principal amortization payments in the next 12to-18 months. But despite those scenarios, refinances are expected to grab no more than one-third of mortgage volume in 2014, a steep decrease from 2013.

For credit unions, the implications are apparent. For pipeline activity to be strong, credit unions must actively pursue purchase money loans. That means you’ll have to do more than simply work with Realtors; you must have the products, the process and the people needed to compete. Use your balance sheet capacity wisely, explore new investor relationships and accept the fact that FHA and VA will continue to be valuable home purchase tools for members seeking mortgages. While many credit unions offer mortgage loans, mortgage lending remains concentrated. A full 78% of 2013 loans were booked by 300 credit unions, even though 3,477 institutions reported some mortgage activity. Volume will be down this year for mortgage lenders, but if credit unions can stay focused on maintaining and building market share, 2014 can be a year of strengthening our place in the real estate lending arena. Data provided by Callahan and Associates.

CREDIT UNION 1ST MORTGAGE MARKET SHARES 1989 - 2013 CU Share Credit Union 1st Mortgages # Granted (000’s)

Average

Mort Orig (Blns)

% ARMs

of Total U.S.

$ Granted (Blns)

1989

6.4

107

59,813

453

1.41%

1991

7.5

118

63,559

562

1.33%

1993

19.5

281

69,395

1,020

1.91%

1995

10.00

149

67,204

639

1.56%

1997

17.30

216

80,056

834

2.07%

1999

28.00

308

91,027

1,379

2.03%

2001

46.60

421

110,794

2,243

2.08%

2002

62.30

523

119,187

2,852

2.18%

2003

88.23

18.37%

719

122,666

3,810

19%

2.32%

2004

57.20

16.55%

422

135,501

2,772

34%

2.06%

2005

60.44

14.79%

408

148,309

3,027

30%

2.00%

2006

54.44

15.16%

360

151,425

2,726

22%

2.00%

2007

60.31

12.54%

363

166,163

2,307

10%

2.61%

2008

70.29

12.50%

412

170,713

1,509

4.66%

2009

95.01

8.20%

574

165,620

1,995

4.76%

2010

84.51

8.45%

510

165,802

1,572

5.38%

2011

82.55

8.86%

513

160,994

1,262

6.54%

2012

124.08

6.59%

742

167,169

2,044

6.07%

97.0

8.43%

567

171,168

1,462

6.64%

Sept ‘13

% ARMs#

Total U.S. Residental (MBA)

Year

Originations

% ARMs is from 3-22-13 MBA Mortgage Finance Forecast. MBA didn’t have % ARM row on their 5-22-13, 8-22-13 or 11-26-13 forecasts.

JANUARY 2014 - PIPELINE 37

THE TOP 300

TOP 300 FIRST MORTGAGE GRANTING CU MARKET SHARE AS OF SEPT.30, 2013 $ Originated # Originated $ Outstanding 1st Mortgages 1st Mortgages 1st Mortgages (Fixed & Adjustable) (Fixed & Adjustable) (Fixed & Adjustable) Top 300 1st Mortgages Originated Credit Unions $75,356,048,339

$ Sold 1st Mortgages

387,324

$175,997,355,669

$38,446,551,180

$97,039,154,489

566,921

$264,712,939,551

$46,594,373,274

77.7

68.3

66.5

$ Originated # Originated $ Outstanding 1st Mortgages 1st Mortgages 1st Mortgages (Fixed & Adjustable) (Fixed & Adjustable) (Fixed & Adjustable)

$ Sold 1st Mortgages

RE Loans Sold but Serviced by CU

All Originating Credit Unions (3,477 CUs)* Top 300 Market Share *CUs who granted $10,000 or more 01/13 - 09/13

TOP 300 FIRST MORTGAGE GRANTING CU AS OF SEPT.30, 2013 Rank

Name of Credit Union

VA Navy

$9,345,925,363

39,119

$16,445,259,006

$4,715,466,330

$18,733,280,436

VA Pentagon

$3,748,931,874

12,555

$8,044,380,908

$1,392,857,135

$4,301,687,156

CA Kinecta

$2,306,060,090

6,367

$1,560,561,349

$2,048,651,426

$4,585,066,186

NC State Employees

$2,156,749,446

15,342

$11,777,586,372

$4,041,542

$337,126,914

CA First Tech

$1,344,533,950

4,755

$2,080,340,030

$989,257,024

$2,626,574,854

WA BECU

$1,253,817,234

5,689

$2,570,671,431

$721,091,450

$3,649,134,366

AK Alaska USA

$1,181,370,057

5,199

$561,715,687

$1,170,788,621

$4,286,102,356

CA SchoolsFirst

$1,056,091,731

4,069

$1,966,567,745

$647,170,233

$1,676,611,491

NY Bethpage

$948,028,796

3,397

$1,840,623,826

$629,504,501

$3,084,898,949

10 MI Lake Michigan

$879,476,366

5,839

$1,230,683,642

$1,488,994,324

$4,197,714,653

11 UT America First

$705,123,782

6,176

$795,080,238

$510,377,301

$2,265,559,788

12 CA San Diego County

$704,763,548

2,394

$2,491,861,477

$168,792,792

$671,155,097

13 MA Digital

$701,809,611

2,931

$2,109,737,687

$201,448,179

$902,014,194

14 CA Star One

$661,864,702

1,745

$2,383,712,205

$16,011,715

15 CA Patelco

$637,465,294

1,771

$1,288,279,044

$347,132,342

$1,088,700,570

16 IL

$1,608,153,723

$632,880,270

5,477

$721,018,787

$465,204,598

17 CA Logix

BCU

$618,709,400

2,029

$1,549,426,076

$342,598,790

$868,848,409

18 OH Wright-Patt

$605,975,898

4,766

$422,464,792

$251,808,834

$2,608,317,149

19 CA Evangelical Christian

$579,699,922

120

$719,833,554

$196,555,625

$1,384,302,435

20 CO Elevations

$577,825,552

2,475

$350,173,256

$499,548,329

$1,330,864,598

21 WI Landmark

$548,224,346

3,958

$695,265,656

$385,226,785

$1,427,336,693

22 CO Ent

$537,815,723

3,335

$1,273,435,989

$229,254,405

$724,293,893

23 WI Summit

$524,078,630

3,539

$733,721,434

$325,911,429

$1,402,984,088

24 CA Provident

$515,139,571

1,676

$666,801,493

$407,962,075

$1,173,614,672

25 WI Community First

$510,175,058

3,961

$988,884,572

$76,046,850

$5,961,753

26 OR OnPoint Community

$503,201,775

4,266

$798,243,425

$261,663,820

$1,070,349,088

27 NY Teachers

$501,494,994

1,972

$1,088,568,492

$485,422,796

$1,334,028,757

28 CA Chevron

$496,018,972

1,730

$1,413,438,619

$25,787,580

29 MD SECU of Maryland

$492,255,342

2,474

$1,116,075,053

$204,256,433

$712,492,851

30 WI Royal

$487,423,516

2,876

$557,759,783

$329,253,400

$1,275,626,457

38 PIPELINE - JANUARY 2014

THE TOP 300

31 WI University Of Wisconsin

$481,135,913

2,876

$268,525,610

$427,534,000

$981,490,899

32 TX Randolph-Brooks

$457,892,978

3,090

$1,605,745,735

$50,441,226

$282,824,563

33 VT New England

$452,853,000

2,500

$464,857,213

$312,218,634

$1,203,654,082

34 AZ Desert Schools

$451,221,149

2,968

$459,590,154

$393,395,398

$1,478,808,091

35 FL GTE Financial

$450,561,828

2,728

$361,239,890

$398,501,217

$1,277,790,678

36 VA Northwest

$442,556,794

1,678

$344,348,134

$403,373,878

$1,438,889,798

37 NY Hudson Valley

$441,394,993

2,097

$676,477,190

$237,049,098

$1,237,198,131

38 FL VyStar

$436,121,701

3,289

$1,849,012,526

$57,242,477

$260,018,296

39 ID Idaho Central

$435,679,499

3,004

$416,455,362

$345,583,331

$735,701,523

40 MO CommunityAmerica

$415,475,771

2,417

$597,049,975

$257,550,608

$1,153,357,264

41 CO Bellco

$405,406,323

1,383

$696,347,564

$103,854,045

$512,127,746

42 TX University

$389,880,707

1,575

$424,939,435

$200,794,551

$74,997,451

43 NY CAP COM

$388,655,000

2,629

$481,791,694

$224,652,480

$683,436,031

44 NC Coastal

$378,544,191

1,752

$806,532,123

$206,575,035

$858,000,059

45 CA Mission

$377,233,850

1,436

$533,874,589

$271,821,871

$780,831,101

46 UT Mountain America

$361,468,775

3,312

$1,033,905,487

$337,336,960

$1,170,572,353

47 IA University Of Iowa Community

$356,455,921

1,893

$1,058,571,577

$334,620,619

$22,471,527

48 NY State Employees

$355,064,067

2,086

$234,505,027

$336,012,071

$1,176,595,351

49 PA Police And Fire

$348,418,841

2,090

$1,384,886,008

$93,892,785

$506,988,826

50 MN Aﬃnity Plus

$346,733,935

2,331

$472,573,305

$224,632,703

$1,604,316,687

51 IL

Alliant

$339,781,330

888

$2,742,088,820

$66,022,503

$183,483,818

52 IL

CEFCU

$325,603,092

1,929

$2,071,392,225

$663,799

$151,016,241

53 DC Bank-Fund Staﬀ

$319,279,503

672

$1,620,545,972

$79,911,842

$477,982,423

54 MA Metro

$315,751,557

1,198

$471,879,937

$158,607,818

$464,522,941

55 GA Delta Community

$307,218,686

1,514

$1,328,578,144

$40,127,041

$303,135,224

56 OR Advantis

$301,068,335

1,265

$310,554,672

$226,197,057

$585,186,817

57 RI Pawtucket

$296,397,554

1,872

$1,021,434,258

$47,679,960

$215,426,619

58 CA SAFE

$289,775,644

1,419

$481,578,201

$234,504,480

$548,090,285

59 WI Altra

$286,751,587

2,013

$354,486,769

$198,029,403

$776,670,193

60 FL Space Coast

$279,651,396

1,601

$871,907,855

$132,517,626

$965,067,067

61 CA Redwood

$275,100,689

1,021

$811,490,737

$116,052,000

$557,106,579

62 CA The Golden 1

$273,177,581

1,494

$1,465,049,191

$40,465,872

$435,839,057

63 CA Premier America

$269,991,052

597

$710,121,791

$67,144,750

$255,450,704

64 MD Tower

$265,154,832

1,134

$495,200,656

$199,542,637

$1,137,186,803

65 FL Suncoast Schools

$264,711,870

2,175

$1,699,004,272

$71,598,418

$448,132,342

66 NY ESL

$258,423,079

1,931

$371,277,077

$207,523,636

$1,050,551,489

67 WA Washington State Employees

$257,936,487

1,511

$284,827,731

$202,736,338

$1,308,850,834

68 AZ Arizona State

$257,216,295

1,545

$472,470,973

$147,801,597

$575,320,098

69 CA Stanford

$253,993,697

494

$566,393,160

$69,555,370

$472,700,989

70 IA Veridian

$252,965,582

1,660

$689,090,936

$119,400,164

$793,716

71 CA Wescom

$249,479,450

1,003

$661,295,777

$260,981,959

$1,255,114,896

72 TN Eastman

$247,900,112

2,345

$1,307,316,037

$210,511

$9,217,599

73 IN Forum

$244,533,964

1,252

$286,200,519

$172,250,905

$590,852,050

74 TX Security Service

$239,175,384

1,581

$773,530,848

$18,593,414

$9,053,084

75 CA California Coast

$229,587,513

976

$516,342,175

$96,556,490

$11,549,191

JANUARY 2014 - PIPELINE 39

THE TOP 300

76 WA Whatcom Educational

$225,895,922

1,118

$544,881,317

$68,765,036

$319,248,585

77 PA Members 1st

$223,485,811

1,235

$503,519,114

$122,999,251

78 TX Advancial

$223,139,328

655

$350,693,850

$66,826,932

$283,724,160

79 CA Western

$222,011,099

547

$592,815,539

$81,407,116

$303,914,402

80 CA Financial Partners

$220,645,312

714

$346,427,285

$152,657,189

$558,613,967

81 RI Navigant

$219,873,639

954

$734,847,705

$25,104,646

$129,340,985

82 TX TDECU - Your

$216,195,708

1,665

$737,769,851

$71,692,866

$202,237,522

83 UT Utah Community

$215,444,357

1,261

$172,592,751

$167,190,351

$42,201,739

84 VA Apple

$212,296,709

661

$645,296,777

$48,252,902

$219,951,387

85 IA Dupaco Community

$212,023,610

1,746

$233,954,997

$150,152,531

$544,932,199

86 TN ORNL

$209,962,999

1,551

$494,587,716

$137,947,236

$594,937,148

87 MO First Community

$209,481,340

1,449

$345,666,380

$162,491,310

$608,147,461

88 NY Visions

$204,472,913

1,183

$1,048,919,762

$8,501,600

$80,345,247

89 AL Redstone

$198,384,396

1,487

$380,868,965

$117,205,890

$675,289,100

90 MI DFCU Financial

$192,534,442

1,251

$724,831,626

$108,474,483

$374,278,121

91 CA California

$191,113,607

572

$347,319,177

$74,306,057

$522,990,615

92 OH Superior

$190,415,326

1,646

$175,070,169

$142,894,422

$693,931,566

93 MN Wings Financial

$190,210,048

1,054

$537,647,710

$84,726,086

$376,752,801

94 CA San Francisco Fire

$189,259,307

486

$309,534,246

$90,863,600

$247,382,261

95 NY Sunmark

$188,267,058

1,011

$97,900,834

$156,137,665

96 CA NuVision

$187,882,353

589

$436,352,206

$104,728,700

$407,831,798

97 CA Partners

$187,569,746

740

$351,996,860

$152,438,444

$512,186,560

98 TX American Airlines

$187,246,267

1,031

$1,577,913,105

$8,373,446

99 MD NASA

$187,101,196

762

$370,214,283

$71,182,967

$14,946,051

100 NJ Aﬃnity

$187,085,026

671

$1,113,981,285

$1,284,977

$258,411,164

101 NC Local Government

$184,895,709

1,492

$382,138,203

$141,169,999

102 WI Westconsin

$182,915,665

1,535

$331,153,949

$166,833,808

$727,957,887

103 CA Orange County’s

$182,794,607

668

$345,978,043

$88,026,008

$239,123,905

104 UT Goldenwest

$177,552,273

1,009

$211,539,986

$147,079,959

105 NY United Nations

$177,291,850

504

$989,684,211

$10,171,700

$68,403,555

106 CA Technology

$176,468,282

425

$547,778,014

$48,823,524

$164,747,694

107 NY Nassau Educators

$172,675,220

463

$544,549,792

$76,275,550

$302,812,832

108 PA Citadel

$172,590,365

531

$621,492,024

$78,978,190

$342,375,585

109 IN Purdue

$170,955,824

960

$357,110,299

$88,598,280

$386,760,439

110 MN Central Minnesota

$168,259,464

976

$320,744,497

$16,515,695

$125,598,455

111 MN TruStone Financial

$167,785,694

970

$261,873,818

$108,673,716

$284,336,949

112 MI Michigan State University

$167,291,300

1,196

$675,378,251

$1,759,202

113 WI Marine

$166,297,919

1,508

$181,121,480

$123,731,204

$558,385,480

114 MI United

$164,161,899

857

$641,896,077

$19,190,263

$42,832,174

115 TX United Heritage

$162,582,508

542

$298,266,391

$16,832,990

$3,896,232

116 PA American Heritage

$160,309,426

841

$423,284,358

$173,869,678

$744,885,819

117 WA Spokane Teachers

$159,277,291

999

$777,097,846

$29,333,678

$183,343,308

118 FL MidFlorida

$155,610,035

895

$603,906,561

$67,928,769

$339,943,872

119 NM New Mexico Educators

$154,082,928

677

$339,436,441

$63,903,595

$176,901,391

120 CA USE

$149,346,637

453

$253,209,031

$82,612,867

$134,870,201

40 PIPELINE - JANUARY 2014

THE TOP 300

121 VT Vermont State Employees

$146,129,750

972

$253,763,022

$72,228,057

$331,445,485

122 NH St. Mary’s Bank

$145,121,420

852

$262,537,412

$103,033,300

$376,096,304

123 CA Travis

$143,701,265

776

$330,601,272

$64,362,255

$266,070,914

124 WA Verity

$143,274,600

728

$145,627,917

$82,142,871

$271,839,469

125 WI Fox Communities

$143,210,823

1,216

$564,313,411

$8,913,737

$64,357,552

126 NY Empower

$139,851,313

1,212

$211,087,441

$96,177,922

$385,770,891

127 MA Jeanne D’Arc

$139,270,037

565

$483,663,682

$36,785,414

$123,322,857

128 ND Town and Country

$139,113,294

727

$139,264,887

$86,233,521

129 MA Workers’

$134,183,126

790

$426,410,949

$46,676,292

$174,223,177

130 WA Numerica

$133,645,260

920

$380,746,601

$53,738,478

$291,009,917

131 NV One Nevada

$129,470,277

1,248

$155,442,315

$125,304,117

$164,942,797

132 NY Quorum

$129,119,525

533

$292,663,632

$31,189,102

$97,238,523

133 PA TruMark Financial

$128,557,242

577

$471,948,481

$58,837,925

$368,677,136

134 WI Covantage

$127,918,784

1,193

$483,377,600

$34,719,951

$149,110,153

135 PA Pennsylvania State Employees

$125,761,187

973

$408,112,118

$72,612,663

$269,281,892

136 WA Columbia

$124,862,425

774

$328,373,835

$66,132,350

$106,992,107

137 FL Grow Financial

$124,078,624

783

$525,076,282

$46,059,696

$135,632,058

138 CT Charter Oak

$123,380,439

898

$460,452,484

$35,435,475

$101,362,800

139 IN Evansville Teachers

$122,168,469

1,249

$311,722,380

$29,264,960

$74,478,676

140 CA CoastHills

$120,698,509

445

$288,192,320

$22,759,050

$101,182,895

141 OK Truity

$120,011,940

657

$134,073,903

$98,207,164

$433,209,133

142 MA Hanscom

$119,550,192

507

$227,769,836

$79,922,927

$220,093,430

143 VA State Department

$118,893,033

409

$496,761,127

$64,165,987

144 MN Hiway

$116,821,798

766

$351,971,061

$42,495,624

$180,923,439

145 IN Beacon

$114,873,465

420

$552,152,246

146 CA KeyPoint

$113,951,978

228

$322,736,395

$2,972,089

147 IL

$113,929,241

682

$285,328,757

$41,126,000

$281,451

148 MA Rockland

$113,275,381

523

$364,927,464

$31,736,501

$98,094,526

149 MO Anheuser-Busch Employees

$112,729,319

695

$375,048,321

$60,219,582

$290,270,040

150 NY Corning

$112,646,021

771

$245,065,760

$62,010,340

$369,586,714

151 MD National Institutes of Health

$112,595,933

394

$140,159,248

$71,921,295

$325,586,814

152 MI Lake Trust

$112,506,707

646

$516,145,762

$34,192,001

153 NC Allegacy

$112,135,209

765

$249,279,264

$40,338,401

$222,994,700

154 CA Los Angeles Firemen’s

$112,120,795

351

$421,638,984

$22,146,246

$117,233,362

155 PA Franklin Mint

$112,001,783

494

$237,850,266

$82,140,980

$333,155,646

156 MA St. Anne’s Of Fall River

$111,421,644

560

$407,045,238

$32,888,107

$321,996,233

157 IN Indiana University

$111,371,565

695

$308,068,962

$22,884,226

$18,151,658

158 WA TwinStar

$110,756,358

658

$123,002,655

$109,091,576

$197,361,750

159 NY Self Reliance New York

$110,408,045

215

$593,370,645

160 WI Pioneer

$109,801,183

933

$221,456,204

$27,999,000

$151,284,628

161 SC South Carolina

$109,160,062

727

$353,128,608

$21,562,644

$104,859,170

162 IA Collins Community

$109,025,885

755

$268,776,639

$89,616,393

163 CO Westerra

$108,994,200

628

$388,842,851

$31,108,871

$151,163,717

164 IN Teachers

$108,762,769

970

$657,168,822

$1,167,169

$4,775,333

165 NJ Polish & Slavic

$108,509,549

572

$692,947,194

$15,466,375

$82,881,161

Deere Employees

JANUARY 2014 - PIPELINE 41

THE TOP 300

166 GA Robins

$108,299,067

844

$303,983,838

$48,470,459

$246,644,200

167 CA American First

$107,875,224

452

$138,301,756

$84,330,044

$450,156,204

168 OR Unitus Community

$106,733,766

509

$181,370,845

$74,184,839

$378,339,441

169 IN Eli Lilly

$105,568,312

608

$285,769,586

$51,172,709

170 NC Truliant

$104,642,878

1,129

$418,008,676

$43,102,165

171 NM Sandia Laboratory

$104,131,721

431

$596,217,632

$15,306,583

172 CA North Island Financial

$103,886,368

238

$402,423,748

$21,410,417

$115,672,954

173 TX GECU

$103,866,257

1,121

$418,707,829

$45,352,562

$242,786,073

174 NY CFCU Community

$103,215,293

599

$354,763,342

$21,255,392

$182,593,549

175 CA Kern Schools

$103,082,418

531

$311,556,689

$22,518,744

$268,826,579

176 VA Langley

$101,624,351

580

$279,740,835

$12,675,950

$124,041,460

177 IN Centra

$101,595,931

747

$289,579,298

$33,284,340

$145,730,596

178 CA Christian Community

$101,382,770

271

$424,667,110

$11,414,369

$81,829,515

179 CA 1st United Services

$100,926,185

319

$292,277,858

180 CA First Entertainment

$100,165,191

273

$312,490,690

$23,139,327

$90,859,498

181 WI Thrivent

$99,802,952

724

$199,673,678

$79,767,354

$347,987,580

182 MO Missouri

$99,751,064

814

$36,420,143

$89,953,624

$394,751,047

183 HI HawaiiUSA

$99,563,534

237

$232,785,706

$54,493,010

184 CT American Eagle

$99,180,715

534

$379,207,870

$43,729,278

$299,268,568

185 KY L & N

$99,123,832

616

$322,669,148

$15,535,678

$190,199,839

186 MA Greylock

$99,095,996

629

$450,194,763

$87,818,917

$437,871,774

187 IN 3Rivers

$96,563,235

749

$241,898,141

$9,080,609

$181,709,683

188 NY AmeriCU

$96,538,890

752

$248,779,874

$51,757,916

$222,039,718

189 MA IC

$94,466,018

569

$244,127,867

$42,685,572

$237,891,576

190 CA Bay

$94,358,900

368

$153,128,763

$75,492,240

$253,778,980

191 CO Denver Community

$94,080,812

379

$46,357,265

$88,624,533

$211,393,839

192 VA Virginia

$92,920,148

612

$434,119,484

$27,878,665

$191,305,942

193 AL APCO Employees

$92,524,470

607

$338,559,747

194 MI Community Financial

$92,423,209

538

$232,065,511

$58,400,752

$187,302,838

195 FL Fairwinds

$92,228,054

726

$461,248,885

$13,808,840

$162,009,863

196 HI Hawaiian Tel

$90,890,800

254

$153,007,355

$48,682,700

197 CA Xceed Financial

$90,139,778

296

$439,663,296

$8,504,758

$62,254,007

198 NE Centris

$89,634,837

705

$175,285,466

$50,447,861

$193,776,227

199 VA Dupont Community

$89,325,710

554

$403,900,327

$18,519,117

200 WA Gesa

$88,449,605

553

$192,265,561

$52,636,191

$276,036,531

201 OR Oregon Community

$88,359,668

561

$174,412,988

202 NH Service

$87,442,128

496

$468,906,615

203 UT Deseret First

$87,072,433

470

$120,238,890

$65,489,309

204 WA Global

$85,799,661

398

$85,981,428

$65,798,226

$3,593,875

205 SC Founders

$85,436,789

2,265

$611,103,484

$2,526,400

206 IN Indiana Members

$85,417,962

567

$385,726,137

$30,096,380

$22,951,312

207 MT WhiteďŹ sh

$85,257,849

520

$589,729,892

208 MD APG

$85,188,498

507

$170,888,250

$66,912,048

$243,136,632

209 NY USAlliance

$85,027,780

295

$211,147,866

$6,359,557

$203,029,561

210 WA Seattle Metropolitan

$84,555,146

369

$201,090,236

$46,230,911

$220,771,430

42 PIPELINE - JANUARY 2014

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THE TOP 300

211 MI Dow Chemical Employees

$84,199,901

641

$337,484,884

$584,335

$29,271,437

212 MI Honor

$83,237,822

664

$175,752,964

$41,741,433

$160,780,609

213 FL Community First CU of Florida

$83,190,059

523

$341,675,719

$46,993,591

$307,765,672

214 MA Sharon

$82,212,061

449

$201,772,313

$18,883,709

$87,631,640

215 ID Potlatch No 1

$81,537,987

569

$100,843,523

$61,665,566

$256,208,891

216 WA Solarity

$81,127,917

535

$167,725,182

$41,536,816

$112,634,629

217 OR Oregon First Community

$81,013,123

651

$200,326,244

$39,416,062

$241,507,266

218 MI Michigan Schools and Government $80,977,755

471

$426,256,043

$9,721,967

219 MA Harvard University Employees

$79,734,730

269

$186,915,958

$37,553,675

$125,338,586

220 SC Sharonview

$79,472,994

552

$463,498,325

$369,300

$19,611,410

221 TN Ascend

$79,359,196

703

$493,196,411

222 FL Tropical Financial

$79,094,060

384

$171,295,783

$45,731,792

$194,826,232

223 MN US

$78,513,604

446

$277,775,667

224 MA Direct

$78,373,256

343

$129,095,637

$38,935,987

$252,190,164

225 TN Knoxville TVA Employees

$77,747,764

981

$410,371,082

$7,769,812

226 IL

$144,759,657

$77,497,435

313

$161,614,223

$40,178,664

227 SD Sioux Falls

Great Lakes

$77,486,638

519

$13,838,254

$76,577,989

228 CO Public Service Employees

$77,184,789

366

$130,316,446

$55,477,158

$179,616,745

229 MN Spire

$76,838,937

617

$163,445,642

$28,425,659

230 CA Los Angeles Police

$76,638,850

320

$228,761,220

$36,739,625

$210,222,423

231 CA LBS Financial

$76,476,167

285

$207,660,843

$41,336,604

$94,887,346

232 VA BayPort

$76,409,656

341

$396,017,503

$14,696,057

233 GA Georgia’s Own

$74,453,218

411

$357,902,777

$16,782,600

$68,764,150

234 OK TTCU

$74,433,362

543

$169,416,248

$50,485,559

$121,565,983

235 IL

$74,059,160

471

$110,824,483

$58,051,917

$286,441,792

236 AR Arkansas

Consumers

$74,025,896

544

$198,669,061

$61,799,326

$103,784,451

237 MI Genisys

$73,903,968

529

$320,064,947

$27,481,513

$42,135,630

238 IN Inova

$73,641,369

579

$75,780,515

$90,723,811

$265,445,665

239 AL Alabama One

$73,516,233

1,460

$160,156,386

$37,130,084

$200,963,878

240 OR Rogue

$72,535,456

426

$186,099,711

$58,067,175

$4,241,416

241 OR Selco Community

$72,485,098

664

$246,542,855

242 UT University First

$72,466,949

540

$92,488,961

$51,746,010

$186,080,030

243 AZ TruWest

$72,239,522

346

$241,013,863

$22,128,717

$5,970,688

244 SD Sioux Empire

$71,892,076

544

$3,961,740

$65,304,137

$9,141,599

245 VT Vermont

$71,675,466

441

$95,302,401

$44,854,121

$201,123,716

246 CO Air Academy

$71,545,356

384

$111,282,534

$46,920,571

247 WI Guardian

$71,496,889

481

$51,874,369

$67,088,800

$282,738,843

248 OH KEMBA Financial

$71,155,878

582

$248,099,843

$14,988,889

$13,893,240

249 IA Community 1st

$69,997,072

697

$208,956,360

$18,349,964

250 NY Suﬀolk

$69,723,028

348

$266,449,675

$12,992,675

251 MA Align

$69,610,494

318

$194,332,217

$30,632,910

$170,199,777

252 CO Colorado

$69,439,802

279

$24,051,382

$60,355,453

253 VA University of VA Community

$69,176,752

385

$56,185,484

$49,156,734

254 CA Sacramento

$69,157,846

292

$27,379,536

$61,602,603

$140,657,839

255 MI Educational Community

$68,590,472

548

$176,884,087

$24,655,064

$97,632,420

44 PIPELINE - JANUARY 2014

THE TOP 300

256 NY Island

$68,460,300

289

$164,025,806

$20,117,200

$152,280,419

257 NY Melrose

$68,190,250

153

$309,480,055

$912,792

258 OH General Electric

$67,719,564

373

$365,692,189

$23,519,200

259 DC Congressional

$67,640,061

215

$158,258,259

$37,561,290

260 VT NorthCountry

$67,583,976

368

$126,153,081

$44,310,177

261 MD Mid-Atlantic

$67,557,681

265

$62,067,192

$73,494,332

$68,832

262 TX Austin Telco

$67,507,351

482

$254,681,766

263 NY The Summit

$66,721,240

661

$145,625,451

$36,417,653

$203,863,489

264 TX Firstmark

$66,663,373

638

$263,899,216

265 SD Black Hills

$66,547,641

345

$249,129,697

$22,572,070

266 FL Achieva

$66,478,069

338

$190,496,678

$31,950,015

$121,771,523

267 NM U.S. New Mexico

$66,206,343

356

$158,469,804

$20,201,061

268 DC IDB-IIC

$65,942,831

161

$268,386,907

$13,183,980

269 CA Aerospace

$65,545,150

222

$30,247,990

$47,296,850

$222,100,353

270 UT Cyprus

$65,454,328

403

$121,775,352

$47,578,792

271 WA Hapo Community

$65,218,581

469

$288,296,065

272 MA Webster First

$64,444,922

344

$339,721,825

$438,804

273 IL

DHCU Community

$64,383,164

383

$136,466,451

$52,061,702

$253,689,718

274 CT Connecticut State Employees

$64,244,412

573

$244,995,002

275 WI Educators

$64,034,234

546

$627,373,348

$39,245,460

$163,139,277

276 MT Missoula

$63,942,953

397

$53,533,678

$46,208,225

$221,546,802

277 MD Andrews

$63,892,117

284

$183,899,076

$8,872,672

$38,342,239

278 WI Blackhawk Community

$63,794,076

573

$132,312,532

$41,999,877

$291,985,091

279 CA Schools Financial

$63,444,924

575

$184,999,118

$20,353,495

$94,063,682

280 TX Shell

$63,357,449

586

$110,069,379

$33,750,694

$80,826,299

281 IA Linn Area

$63,247,924

453

$62,438,668

$51,492,641

282 NE SAC

$63,246,368

432

$120,696,901

$28,869,668

$135,894,779

283 WI Connexus

$62,895,691

356

$155,957,399

$37,638,382

$29,746,710

284 OR OSU

$62,407,460

296

$170,036,301

$32,407,653

$220,641,960

285 WA Salal

$62,258,066

247

$75,228,254

$54,129,491

$204,602,515

286 MD Municipal Emp. CU Of Baltimore

$62,203,692

335

$312,103,962

$52,967,607

287 FL IBM Southeast Employees

$62,072,546

388

$207,036,570

$53,563,213

$240,138,454

288 FL Pen Air

$61,914,250

348

$160,768,181

$23,457,736

$15,694,310

289 WI CitizensFirst

$61,480,813

519

$229,112,385

$27,001,176

$142,481,237

290 MN Postal

$60,813,530

425

$205,777,405

$17,315,507

$119,429,196

291 MA Central One

$60,788,938

297

$130,225,667

$48,173,906

$197,980,926

292 IN Heritage

$60,726,442

545

$94,735,510

$29,049,642

$184,301,355

293 IA DuTrac Community

$60,583,156

505

$199,885,984

$5,877,599

294 NE Liberty First

$60,490,530

450

$43,204,713

$50,911,731

295 NY Mid-Hudson Valley

$60,237,973

319

$217,607,778

$39,339,286

$249,950,349

296 CA Northrop Grumman

$59,927,287

255

$241,716,647

$334,187

$3,363,761

297 VA Chartway

$59,539,867

410

$254,666,959

$47,077,185

$89,719,413

298 HI Aloha PaciďŹ c

$59,394,018

191

$201,807,131

$53,975,285

299 KS Hutchinson

$59,299,505

922

$75,333,937

$33,888,084

300 NV Silver State Schools

$59,157,866

344

$306,359,737

$46,533,795

$175,437,483

JANUARY 2014 - PIPELINE 45

FEATURE ARTICLE

Private Capital: A Case Study by Tom LaMalfa

Where is all the private capital in the mortgage space? Follow the trail of WL Ross & Co. investments and you will get some interesting answers. 46 PIPELINE - JANUARY 2014

PRIVATE CAPITAL: A CASE STUDY

Ever since the meltdown of the mortgage market in 2007 and the subsequent government takeover of Fannie Mae and Freddie Mac in September 2008, the federal government has been the mortgage market-literally.  The Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) have accounted for 30 percent of volume, plus or minus, the past four years; Fannie Mae and Freddie Mac have been backstopped by the U.S. Treasury aka taxpayers-to the tune of $181 billion; and the Federal Reserve has been supporting the mortgage market by buying and portfolioing hundreds of billions of dollars in mortgage backed securities (MBS) and other forms of mortgage debt.  As of June 30, 2012, the Fed held $869.5 billion of MBS. Five years ago, Fed holdings of MBS were near zero.  This state of affairs has prompted no small amount of discussion in recent years as some semblance of stability has returned to the substantially weakened housing and mortgage markets. Much of the discussion has been over the proper role of government in housing.  Although political divisions remain considerable, it appears there’s a large consensus that believes the private sector must return and that government’s imprimatur needs to be rolled back substantially. When and how to accomplish this structural transformation is the looming question of the day. JANUARY 2014 - PIPELINE 47

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PRIVATE CAPITAL: A CASE STUDY

THE CONSENSUS

The need for private market restoration has been voiced repeatedly, and by both the Obama administration and Senate Democrats and House Republicans. In its February 2011 reform plan, aptly titled Reforming America’s Housing Finance Market-a Report to Congress, the administration wrote: “[W]e need to scale back the role of government in the mortgage market, and promote the return of private capital to a healthier, more robust mortgage market.” That restoration directive has been stated repeatedly. In his March 2011 testimony to the Senate Committee on Banking, Housing and Urban Affairs, Treasury Secretary Timothy Geithner said: “The administration is committed to a system in which the private market ... is the primary source of mortgage credit.” An entire section of his testimony was titled “Reducing the Government’s Role in the Housing Market.” Mortgage Bankers Association (MBA) President and Chief Executive Officer David Stevens has made much the same point. For instance, in December 2011 testimony to the House Financial Services subcommittee, titled, “Restructure System to Encourage Private Capital’s Return,” Stevens said: “[P]rivate capital must be at risk, bearing the first loss, and private capital must be the primary source of liquidity for the mortgage market.” In September 2011 testimony to the Senate Banking Committee, he said, “[T]he essential components of housing finance ... should be private-sector activities.” At the aforementioned House hearing, Rep. Scott Garrett (R-New Jersey), chairman of the Subcommittee on Capital Markets and Government-Sponsored Enterprises (GSEs), said, “Currently the federal government is guaranteeing or insuring over 90 percent of the U.S. mortgage market. Everyone on both sides of the aisle and all market participants claim that they support efforts to bring additional private capital into the secondary mortgage market .... “ Garrett has introduced legislation to accomplish that goal: the Private Mortgage Market Investment Act. It’s one of eight bills to restructure or repair mortgage finance that were proposed in the current session, all by Republicans. There were two GSE reform bills offered in the Senate but none by Democrats. At the December 2011 hearing, Garrett argued that two actions were required to have private capital re-enter this market. First, government’s involvement must be cut back. Second, steps to facilitate increased investor interest must be taken. So, let it be agreed that private capital is much wanted and needed. Given that consensus, the key question becomes: How to attract investment capital? Where

is this elusive private market? What forms does it take? Who are some of the players providing the capital? How is it being deployed? How much private capital has arrived, and when? How much private investment is needed? Will more come forward? What’s slowing or preventing private capital’s return to mortgage ﬁnance?

WL ROSS & CO.

Although there are no complete answers to many of these questions, this article puts one private capital provider under the microscope. This provider is a household name for many in the financial services sector. He is a regular host of Squawk Box on CNBC; a billionaire, according to Forbes; holds an M.B.A. from Harvard Business School; and is chairman and chief executive officer of WL Ross & Co. LLC, New York-namely Wilbur L. Ross Jr. His company’s investment story is especially interesting because it began early on, in September 2007-when the movement was out of mortgages, not in. Best known as an investor in “distressed assets,” the firm’s business is restructuring failed companies, often through leveraged buyouts. Ross and his funds have made money in steel, textiles and coal, among other industries. In one transaction, Ross invested $440 million in several steel companies, restructured and amalgamated them, then sold the entire lot to India-based Mittal Steel Company N.V. for $4.5 billion about four years later. While few deals are this lucrative, the man seems to have an eye for value. Ross has wide-ranging investments, from banking (both domestic and foreign) and financial services to auto parts and insurance. That very same eye led him to mortgages in mid-2oo7. That acquisition-for a reported $435 million-was of American Home Mortgage Corporation (AHMC), Melville, New York. Its warehouse lines frozen, the company was shuttered in June 2007. Three months later, Ross acquired the company. AHMC had been a predominately non-prime wholesale lender, largely of option-adjustable-rate mortgages (option ARMs) and various reduced documentation programs. What Ross found attractive wasn’t American Home’s origination platform, which had once (in 2006) accounted for $58,9 billion of production. Instead, value was found in its servicing platform and the human capital running it. AHMC had been built to originate and service mortgages. Its loan adminis-

Ross has wide-ranging investments, from banking (both domestic and foreign) and ﬁnancial services to auto parts and insurance.

JANUARY 2014 - PIPELINE 49

PRIVATE CAPITAL: A CASE STUDY

tration group got good at servicing difﬁcult products, of which it had many, and this was where Ross saw the gold was buried. Mortgages were rapidly becoming distressed assets, but even they need to be effectively and efﬁciently serviced.

JAMES B. LOCKHART III

Renamed American Mortgage Servicing Inc., the Coppell, Texas-based company services $74 billion, according to James B. Lockhart III, vice chairman of WL Ross & Co. This makes it the 15th-largest residential servicer nationwide, according to Mortgage Servicing News. Following stints with the Ofﬁce of Federal Housing Enterprise Oversight (OFHEO) and Federal Housing Finance Agency (FHFA), with a broad background that includes Yale University, a Harvard M.B.A., the Navy, the Social Security Administration and the Pension Beneﬁt Guaranty Corporation (PBGC), Lockhart arrived at Ross as vice chairman in September 2009, shortly after passing the FHFA directorship on to Edward DeMarco. Lockhart is an articulate executive whose answers are carefully crafted and complete. He is at the same time friendly and approachable, as well as direct and serious. According to Lockhart, Ross invests in mortgage related assets through one of several private-equity funds. Ross funds, with approximately $9 billion under management, are operated and marketed under the WL Ross name. Joint distressed mortgage funds are managed under the brand of Invesco, its parent company. Recognizing that mortgages were rapidly becoming distressed assets, it became more evident and even more important to deal with these nonperforming assets. After buying American Home and steering it toward becoming a distressed-asset servicer, Ross has acquired and amalgamated the servicing portfolios of Option One Mortgage, Ameriquest Mortgage Co. and several other smaller subprime servicers. This expanded operation continues to service loans. However, with the era of bad loans winding down, AHMSI has expanded into the correspondent space, and been rechristened as Homeward Residential Mortgage, based in Mount Laurel, New Jersey.

direct lending channels, says Lockhart. This expansion effort is intended to fund and replenish the servicing operation, now shifting to prime agency and government mortgages. Ross has also invested in the multifamily sector. With wellknown Wall Streeter Lewis S. Ranieri, Ross owns Berkeley Point Capital LLC, a servicer of $28 billion in Fannie, Freddie and FHA multifamily mortgages. Lockhart sees much promise in this sector. WL Ross funds have also invested in 10 community banks in the United States, including ﬁve Federal Deposit Insurance Corporation (FDIC) deals. Outside the United States, it has an investment in the largest mortgage operation in Ireland (the Bank of Ireland) and in Virgin Money, one of the largest mortgage companies in the United Kingdom. When asked about Ross’ expected returns on investment and investment horizon, Lockhart said that its mortgage investments were expected to return 20 percent to 25 percent on capital. This is what it hopes and expects to return on its two big mortgage investments, he says. As for how long Ross holds these two investments, Lockhart says, “[I]t depends-generally around ﬁve years, depending on price, market conditions and the opportunity presented.”

CAPITAL MARKETS COOPERATIVE

Homeward Residential is one of many new companies seeking to ﬁnd success and proﬁt in a space that BofA and others recently abandoned.

HOMEWARD RESIDENTIAL

Homeward Residential is one of many new wholesale companies seeking to ﬁnd success and proﬁt in a space that Bank of America (BofA) and others recently abandoned. Since commencing loan originations in late 2011, Homeward has funded more than $5 billion of residential mortgage loans through its correspondent and

50 PIPELINE - JANUARY 2014

Arguably, the more interesting Ross investment is a 10- year-old company headquartered in Jacksonville, Florida. The company had just celebrated its seventh birthday when Lockhart decided to invest in the Capital Markets Cooperative (CMC). CMC is a structurally unique company founded by President and Chief Executive Officer Tom Millon, CMB, in 2003. This graduate of the Wharton School of Business at the University of Pennsylvania started CMC as an entrepreneurial endeavor. He is a veteran of many years, running secondary marketing at Ohio Savings Bank. Before that, he was a partner, managing director and member of the board of directors of Tuttle & Co. Smart and well connected, Millon, and his top-flight management team grew CMC year after year before coming to the attention of Lockhart and Ross. The company’s uniqueness flows from its blending of four different businesses under one roof. Business NO.1 is the hedging advisory operation. It manages pipeline risk for dozens of its members, which it refers to as “patrons.” A second business is the correspondent operation, a storefront for purchasing loans and mortgage servicing rights (MSRs). The third business is retail mort-

PRIVATE CAPITAL: A CASE STUDY

CMC’s Million is ﬁnding that being an originator is invaluable in knowing ﬁrst-hand what his patrons face running a mortgage company in 2012.

gage banking. It’s a more recent venture. The fourth and final business is, really, the overarching framework-the co-op. Millon refers to it as “the wrapper.” To be a CMC patron, a company must engage in at least one of CMC’s core businesses. Such participation opens the door to the co-op, which provides discounts on services from an array of mortgage service providers-including Fannie Mae, CoreLogic, Xerox Mortgage Services, Wells Fargo Home Mortgage and other investors and vendors-to its 70 members. As it turned out, CMC’s 70th patron signed on as this article was being written. The newest of these patrons is Mil Financial Corporation, Columbus, Ohio. When asked why he joined the co-op, Chief Executive Officer Paul Rosen says, “CMC will help Mil Financial stay nimble. The guys there are smart and offer us another tool for perfecting our business strategy. Mil always needs smart people and good, reputable investors for our loans and servicing.” The hedging advisory manages patrons’ pipelines: It locks loans, secures investor takeouts and hedges the loans’ interest-rate risk through closing and delivery. MSR investment is a relatively new business for CMC. Its growth was sparked by the supply-demand imbalance created by the departure of several of the industry’s largest servicing buyers, including BofA, GMAC and MetLife. Due in part to the exodus of these and other participants, and other factors, the price of the servicing asset has fallen to the lowest levels this writer has ever seen. From multiples of four to five times servicing value (4 or 5 x 25 basis points = 100 to 125 basis points) in the pre-crisis aught years, prices for agency MSRs have dropped to multiples of 1.5 to 2 (37.5 to 50 basis points for a 25-basis-point servicing slice) today. Ginnie Mae MSRs carry only a slightly higher multiple. Simple analysis explains why the price of the asset is cheap. For now, supply exceeds demand and everyone knows what that means for price. Historically, MSR values have been volatile and both difficult and expensive to hedge. To shore up the price for its patrons while (hopefully) earning its keep (aka expected return), CMC has made a market for its patrons’ MSRs, thereby improving the asset’s liquidity. In this arena, CMC competes with its sister company and other MSR buyers. The newest business for CMC is retail production. This initiative was made possible by the acquisition of a top-notch player, Cunningham & Co., Greensboro, North Carolina. Family-owned, the decades-old business is managed by Henry (Hank) Cunningham, president-a highly regarded industry advocate, past chairman of the Mortgage Bankers Association’s Residential/Single-Family Board of Governors (RESBOG) and a 3o-year mortgage banking veteran.

With retail margins wide today, the CMC investment-and by extension, Ross’ investment-is looking quite promising. CMC’s Millon is finding that being an originator is invaluable in knowing first-hand what his patrons face running a mortgage company in 2012. He reports, “It has given me a renewed appreciation for what lenders go through daily.” As noted, the co-op is “the wrapper” that binds the patrons together by providing greater access and better prices than any one or handful of lenders could otherwise obtain. A high-volume business, “it exists to serve and service its patrons, passing along the discounts, bounty and goodwill that group-buying power adds,” says Millon. “It’s a Costco® or Sam’s Club® for mortgage bankers.” Lockhart says CMC’s appeal to Ross was “its large base of small and mediumsized banks, credit unions and independent mortgage companies that regularly sell [mortgages and/or servicing] to the co-op and its preferred investors.” Case in point: In July, CMC’s patrons collectively produced a record $6 billion of mortgage loans. Millon agrees, saying that CMC’s appeal to Ross was the combination of: “1) its client base; 2) its access to collateral; 3) the co-op business model; and 4) the company’s flexibility and adaptability.” CMC is a gateway to the mortgage market for Ross as well as CMC’s vendors and preferred investors. Both Lockhart and Millon see further opportunity in the mortgage arena. Acknowledging being at the forefront of private capital entering the mortgage space, Millon quips, “We were running into a burning building when nearly everyone else was running out.” “Mortgages are a good growth opportunity,” says Lockhart in a more understated way. CMC is approved to sell to the agencies; issues Ginnie Mae securities; and tends a stable of preferred investors, with BB&T, JPMorgan Chase, Wells Fargo, Fannie Mae and Freddie Mac, among them. The co-op gets special pricing from these investors thanks to both the larger volumes aggregation can offer smaller originators as well as the quality of its patrons. Ceteris paribus, larger pools have always commanded a better price. Add in the economies of scale and scope from aggregation, alongside carefully monitored lenders, and investors can justify better prices. CMC passes along the savings to its patrons, deal by deal, basis points at a time. The common denominator among patrons is fourfold: 1) You need to be an originator and close in your own name with your own funds; 2) be of a certain size, typically at least $10 million a month; 3) hold an adequate capital position; and 4) use at least one of the three principal CMC businesses. As for the value proposition for patrons and would-be patrons, says Millon: “Value is derived from the co-op model.

JANUARY 2014 - PIPELINE 51

PRIVATE CAPITAL: A CASE STUDY

It’s efficient and drives several benefits. Centralization is the core concept, thanks to the economies of scale residing there. Some patrons use our risk-management software and trading operation. Others want a stable of investors with sufficient and consistent purchasing power to acquire their loans and MSRs. Still others want these services along with more standard coop benefits, like savings on DU [Desktop Underwriter®] fees, investor charges and business supplies.” He adds, “In addition to direct access to Ginnie, Fannie and many individual wholesalers, the co-op has a group of portfolio investors who have various product needs, such as for jumbos and ARMs [adjustable-rate mortgages]. Among CMC’s investor partners are Astoria Federal Savings Bank and Bank of the Internet. They have an appetite for jumbo ARMs, especially 3/1S and 5/1S.” As for how CMC differs from other correspondent operations, such as Stearns Lending Inc., Sun West Mortgage Co. Inc. or PennyMac, Millon says: “1) Our ability to buy MSRs separates us from half our competitors; 2) we have a very wellcapitalized shareholder behind us; and 3) CMC is for members only.” CMC expects Ross to measure the company according to its performance, growth and market share. Along with shareholder value, market share is deemed a “key metric,” says Millon. The company’s major competitors vary, depending on which of its businesses is under review. Says Millon: “On the co-op side, it’s Lenders One [which was sold to Altisource Portfolio Solutions in 2010 for about $50 million]. On the capital markets and riskmanagement side, Compass Analytics, MIAC [Mortgage Industry Advisory Corporation] and Secondary Interactive are top guns. In retail, it’s everyone operating in our market areas-too many to count. In correspondent, there are lots of competitors, but fewer than needed to fill the hole some big departures have dug.”

PRIVATE-SECTOR INTEREST

Millon sees private capital entering the mortgage market through investments in MSRs and non-agency-largely jumboswhole loans and securities. As a result, CMC operates in both these spheres: as facilitator or purchaser of MSRs and whole loans. CMC may either facilitate the sale of whole loans and MSRs to its preferred investors, or hold MSRs on its balance sheet, hedged and subserviced. Lockhart and Millon view investment in MSRs as being in its infancy. “We expect 20 or 30 others, including REITs [real estate investment trusts], to enter the MSR market in the next several years,” says Millon.

52 PIPELINE - JANUARY 2014

“CMC is talking with several REITs and private labels, explaining why we’re an excellent source of collateral for them. We can save them the time and expense of building out an origination platform. We have one, it’s tested and it produces high-quality mortgages. Plugging into CMC is cost-effective.” Lockhart views MSRs as similarly attractive investments. “The collapsed market value of MSRs reflects the prevailing uncertainty and the pullback by BofA, MetLife and other large wholesalers.” A result is finding both of Ross’ investments in mortgage finance buying MSRs and building servicing portfolios. Simply put, Millon and Lockhart both wonder how prime credits and 15 percent-plus cash-on-cash yields can be a bad thing, especially with today’s low interest rates. Moreover, says Lockhart, “Basel Ill’s proposed capital rules portend having a Significant negative impact on big banks.” Not so for nonbanks, which will now have that as an advantage over their bank competitors. And, adds Lockhart, “Dodd-Frank [Wall Street Reform and Consumer Protection Act] is heavy-handed.” This is another negative for banks, but only indirectly affects Homeward and CMC, and then largely in terms of compliance with new servicing rules.

“We expect 20 or 30 others, including REITs [real estate investment trusts], to enter the MSR market in the next several years,” says Millon.

PRIVATE-MARKET BLOCKAGES

Asked about impediments to additional private capital, government involvement was cited for “creating distortions, especially in pricing risk,” says Lockhart. He has no quarrel with the Consumer Financial Protection Bureau’s (CFPB’s) mortgage servicing standards, but is concerned about the long-term impact of an unchecked CFPB. He says he “welcomes clear standards and inspections,” but admits, “There’s lots going on and it’s particularly difficult with all the new rules and demands from the states, federal agencies, the Federal Reserve and CFPB. We may need QM [Qualified Mortgage] and QRM [Qualified Residential Mortgage], but there are too many cooks in the kitchen.” Lockhart sees the uncertainty created by this regulatory onslaught reflected, at least in part, by the reluctance of more private money to enter the space, given current robust returns. Millon and Lockhart agree on mortgages’ investment appeal-quality credit and collateral, longer-term durations and high yields compared with alternative investments. In a zero-interest-rate epoch, this appears a winning combo to them. Lockhart wasn’t hesitant when asked why life insurance companies aren’t big

PRIVATE CAPITAL: A CASE STUDY

buyers of mortgages. “Mortgages are underpriced, and they are underpriced because government is and has been doing the pricing,” he says. Meanwhile, he adds: “Community banks are looking for assets, especially ARMs. Somewhat surprisingly, they are even discussing purchasing 10and Is-year FRMs [fixedrate mortgages] for portfolio.” To restructure the mortgage finance market, Lockhart says we first need to deal with Fannie Mae and Freddie Mac. “The 900-pound gorilla must be dealt with before the industry can move forward,” he says. “Until then, all these new regulations won’t be helpful.” He adds, “We need a serious dialogue on how to decrease government dependency. It’s my view the market probably needs government support, catastrophic backing, but no portfolio. I’d make government insurance countercyclical; insurance costs would increase or decrease depending on market trends. And I’d make insurance risk-based.”

TOMORROW’S INVESTORS

Treasury Secretary Timothy Geithner said: “The administration is committed to a system in which the private market ... is the primary source of mortgage credit.”

CMC complements these ideas in real time. Millon’s vision, like Lockhart’s, is for a vigorous conduit for non-agency products that pools, hedges and issues securities or whole loans to REITs and other nontraditional mortgage investors. “Recycling funds lowers these costs and increases their liquidity; this is the beauty and essence of secondary markets,” says Millon. Millon sees a growing role for CMC as a facilitator for private capital in its various forms-REITs, hedge funds, asset managers. “They are tomorrow’s investors. They have the capital and need good investments. Mortgages meet the test,” he says. Moreover, having Ross’ stamp on the company doesn’t hurt. “It creates a cachet and enhances CMC’s history of growth and success,” Millon says. Seeing this trend of increasing interest in mortgages among non-traditional financial intermediaries, CMC has quietly but quickly been building its future funding platform. State-of-theart technology is a major component of the build-out. All summer, consultants have been in and out of CMC’s offices running checks, offering tips and suggestions, and writing programs for the platform’s architecture. Compliance guidelines are an important part of the system. Says Millon, “Our platform is being tailored to meet the many needs of our patrons and end investors. It will offer both groups tremendous flexibility.” CMC’s technology incorporates pipeline risk-management software, servicing analytics and a unique and sophisticated

pricing engine, and includes Ellie Mae Inc.’s Encompass® system for CMC’s retail mortgage banking and its correspondent operation. “The market views CMC as a cut abovean attractive group of lenders and a terrific source of solidly performing collateral,” says Millon. “Our capital market structure and nature, combined with CMC’s adaptability, enhances our patrons’ strong loanperformance metrics. We strive to be the preferred partner of our patrons and preferred investors.” Millon reports that CMC’s goals for the next 12 months are “to expand membership in the co-op to 100; to complete the build-out of the funding platform; to enrich our risk-management analytics package; and to move deeper into servicing analytics. All the while, we hope to expand our co-op offerings by attracting new investors and vendors. And despite the lackluster economy, our core business is booming,” he says. Wondering if Ross could expand its investment in CMC, Millon replied, “Of course, as a shareholder it could purchase more shares, lend us money, form a private pool for CMC to manage assets. There are lots of ways.”

BACK TO THE BEGINNING

We’ve come almost full circle in this exploration of the role of private capital in the mortgage space: First, recognizing the consensus opinion across the political spectrum that much more privatization of the mortgage market is wanted and necessary. Second, noting that some private capital has already entered the industry. Third, highlighting that one of the early entrants into the space following the meltdown was WL Ross & Co. Fourth, establishing that Ross may have invested as much as $500 million into residential mortgages, most uniquely in the form of CMe. Fifth, noting both legal and structural obstacles exist that impede further private investment in mortgages. Sixth, explaining that the need for reform is ripe if the hopes and objectives of the consensus are to prevail. And ﬁnally, pointing out that the private sector can become the predominant part of the mortgage market once Congress lifts these impediments. Tom LaMalfa is a 34-year veteran of mortgage market research whose focus in recent years has been on federal housing policy. He is president of TSL Consulting in Cleveland Heights. Ohio. He can be reached at tom.lamalfa@gmail.com. © 2013 Mortgage Banking Magazine - Reprinted with permission

JANUARY 2014 - PIPELINE 53

FEATURE ARTICLE

SPECIAL REPORT

Mortgages and Credit Union Performance: 1980–2011 Luis G. Dopico, PhD, Macrometrix; James A. Wilcox, PhD, Haas School of Business, UC Berkeley

Mortgages have become a signiﬁcant part of credit unions’ lending portfolio. More mortgages are a net beneﬁt to credit unions: They tend to raise ROA slightly and increase asset growth while also nudging up noninterest expense and earnings volatility. 54 PIPELINE - JANUARY 2014

MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

redit unions change with the times. From worker and personal loans to auto loans, mortgages, and credit cards, for the past 100–years they have had to follow the sometimes ﬁckle borrowing demands of American consumers. Today, credit unions hold a quarter of their assets in residential mortgages.

WHAT IS THE RESEARCH ABOUT?

Credit unions follow consumers, yes, but what does that mean for their performance? This report charts the trends from the past three decades and reveals that mortgages have persistent positive effects on performance:  Credit unions’ direct holdings of mortgages grew rapidly over the past three decades, from only $3–billion–(B) in 1980 to $236B at the end of 2011. During that time, those holdings averaged 14% annual growth.  Mortgage holdings grew especially, at about 22% annually, during the 1980s. After the 1980s and until the financial crisis, growth slowed to 11%. From 2008 through 2011, nationally, credit unions still added mortgages at a 4% annual growth rate.  The performance of credit unions fluctuated with the size and performance of residential real estate markets. As they ebbed and flowed over the past three decades, credit unions that had larger shares of their assets in mortgages were, not surprisingly, particularly affected.  The long-running and rapid growth of credit unions’ holdings of mortgages since the 1970s can be expressed as the sum of the average annual growth rates of nominal GDP (or the economy, 5%), of credit union assets relative to the economy (4%), and of credit union mortgages per their total assets (“mortgage share,” 5%). Of these three, mortgage share is what management can most control.  Credit unions’ mortgage share rose fairly steadily from 5% in 1980 to 24% in 2011. On average, declines in mortgage share were rare and small, and occurred only when either macroeconomic or real estate conditions deteriorated considerably, as in the early 1980s and the early 1990s, and since the onset of the financial crisis.  As the number of smaller credit unions shrank and remaining credit unions grew in size, the percentage of all credit unions that held any mortgages rose from 17% in 1980 to 61% in 2011. By 2011, credit unions that held no mortgages accounted for only 3% of all credit union assets.  Whether the entire 1980–2011 period, the period since the onset of the crisis, or any prior experience can be directly used as a guide to the future effects of mortgages on performance is nowhere near obvious. If we are now in a “new normal,” then assessing future effects will be challenging.

How large the effects of the crisis will be on borrowers’ conditions and attitudes and how long they will last are not clear. Also not clear is how differently the regulations and regulators will impinge on operations. And, even apart from the crisis and its aftermath, the extent to which technology advances and the broader economy and ﬁnancial markets advance, or retreat, is always difﬁcult to foresee.

WHAT ARE THE CREDIT UNION IMPLICATIONS?

 Averaged over the past three decades, individual credit unions that had more of their assets in mortgages had slightly higher returns on assets (ROAs) and higher inﬂation-adjusted asset growth.  Having larger mortgage shares has detectable, but not large, effects on credit unions’ performances. On average, from 1980 to 2011, credit unions that boosted their mortgage share by 10% (e.g., from 15% to 25% of assets) raised their ROAs by 1–basis point (bp), they had higher costs as noninterest expenses per assets rose by 9–bps, and their inﬂation-adjusted assets grew nearly 1–percentage point faster. Holding 10% more of assets in mortgages also raised delinquent loans per assets by 9–bps, raised provisions for loan losses by 1–bp, and raised our measure of earnings volatility by 2–bps.  The effects of mortgage share on credit union performance were larger more recently. Beginning in 2000, instead of the average 1–bp boost to ROAs that we estimated for the entire 1980–2011 period, a 10% increase in mortgage share raised ROAs by an estimated 6–bps (e.g., from 0.89% to 0.95%).

This research shows that credit unions that hold more mortgages will be, on average, more proﬁtable and grow more quickly.

ACUMA would like to thank the Filene Research Institute for graciously allowing us to reprint this report summary. The full report as well as many other interesting credit union related articles may be found under the Research tab at www.ﬁlene.org. Report Copyright © 2013 Filene Research Institute. All rights reserved. Reprinted with permission JANUARY 2014 - PIPELINE 55

MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

priately and those adjustments improved their performance CHAPTER 1 relative to what it would have been without adjusting, industry-wide performance measures, such as ROA, might show INTRODUCTION: RUNNINGhigher TO STAND shares are associated with slightly costsSTILL (in the form of noninterestlittle expense per movement. Nonetheless, adjustments were imperative

This study documents how much the share of credit union remain competitive; absent adjustments, credit union perassets), withassets slightly troubledrose loans thedecades. form of delinquent loans,toprovisions for heldmore in mortgages in (in recent This study also formance would have deteriorated. the size of the connections between mortgage loan losses,estimates and net charge-offs, each per assets), and with slightlyshare more volatile earnings These competitive forces help explain what otherwise credit standard union performance. surprisingly, we found (in the formand of higher deviationsNot of ROA). However, on thethat more desirable might be aside, puzzle: Given that mortgage shares at credit unions booms and busts in real estate markets especially help and hurt increased significantly in recent decades, and given that we eswe found that, in general, credit unions that boost their mortgage shares slightly raise their credit unions that have larger mortgage shares. We also analyzed timated that having larger mortgage shares tended to improve the entire 1980–2011 period, when unusually good and bad conROAs and raise their (inflation-adjusted) asset growth. ditions in real estate markets averaged out. We found that larger performance, why did we not see industry-wide performance mortgage shares are associated with small, but detectable and improve in recent decades? Part of the answer could be that other factors relevant to credit union performance also Chapter 4 summarizes our on findings andofdraws creditmany unions. positive, effects measures creditsome unionimplications performance,for such changed. But what is likely is that credit unions, like any busias returns on assets (ROAs) and inflation-adjusted asset growth. Several factors that are important to real estate markets ness that operates in competitive and changing markets, had changed substantially over the past three decades. Macroeco- to run to stand still. Their adjustments allowed them to stay nomic factors, such as interest, inflation, and unemployment competitive, and maybe to become even stronger competitors rates, moved up, but more important, they moved down, dra- to each other and to banks. And, indeed, our analysis suggests matically. Tax, regulatory, and other relevant public policies that credit unions that raise their mortgage share do tend to CHAPTER 2 shifted back and forth. Advances in technology and in credit slightly improve their performance. Chapter 2 documents how broad and deep mortgage lendanalysis also affected real estate financing and markets. Toing was at credit unions over the years 1980–2011. We show gether, these factors had important effects on both the suphow the growth in mortgages at credit unions nationally can ply of mortgages by credit unions and the demands by credit be accounted for by (1) the growth of the economy, which is union members for mortgages. These changes enabled and encouraged credit unions outside the control of credit unions, (2) the growth of credit to raise their mortgage shares. Standing still while markets unions relative to the economy, and (3) the growth of the share moved invited deteriorating performance. Failing to adjust of credit union assets that are held in mortgages. And, we detail how differently, for credit unions of different sizes, mortappropriately to the significant in realgrew estaterapidly. marketsFigure 1 Over the past three decades, mortgages at changes credit unions shows the gage shares developed over the years 1980–2011. 1 meant credit unions would fail to serve members sufficiently; From outstanding dollar balances of first mortgages held by credit unions (“mortgages”). In Chapter 3, we present estimates of the magnitude of the failing to adjust also raised the risk that credit unions themconnections between mortgage share and several measures of 1980 through 2011, mortgages at credit unions averaged 14% growth annually, as the total selves would fail. The always-keen competition in financial performance at individual credit unions. Our estimates suggest services meantrose thatfrom credit to stay sensibly of credit union mortgages justunions $3B to needed $236B. Mortgage balances grew especially that macroeconomic and real estate market conditions have large in step with market during developments—just to preserve rapidly, at about 22% annually, the 1980s. From the end ofperforthe 1980s until the onset mance. As a result, even when credit unions adjusted appro- effects on performance, especially ROAs. Not surprisingly, booms andstill busts in at real estate markets help and hurt performance at of the financial crisis, mortgages held by credit unions grew more slowly but rose credit unions that have larger mortgage shares. Over periods long enough to approximate average macroeconomic and FIGURE 1 FIGURE 1 real estate conditions, however, we found several notable patterns. On the less desirMORTGAGES AT CREDIT UNIONS, 1980–2011 able side, we found that larger mortgage 250 shares are associated with slightly higher 236.1 costs (in the form of noninterest expense per assets), with slightly more troubled 200 loans (in the form of delinquent loans, provisions for loan losses, and net charge-offs, 150 each per assets), and with slightly more volatile earnings (in the form of higher standard deviations of ROA). However, 100 on the more desirable side, we found that, in general, credit unions that boost their 50 mortgage shares slightly raise their ROAs and raise their (inflation-adjusted) asset 3.2 growth. 0 Chapter 4 summarizes our findings 2000 2005 2010 1980 1985 1990 1995 and draws some implications for credit Source: NCUA (2012) unions. Source: NCUA (2012).

The Rise of Mortgage Shares at Credit Unions

Credit union mortgages (in billions of dollars)

MORTGAGES AT CREDIT UNIONS, 1980-2011

56 PIPELINE - JANUARY 2014 PAGE 8

THE RISE OF MORTGAGE SHARES AT CREDIT UNIONS

FILENE RESEARCH INSTITUTE

an average rate of 11% per year. Since the onset of troubles in real estate markets and the 2

broader economy, mortgages have grown less than 4% annually.

forPERFORMANCE: the Growth1980–2011 of Mortgages at Credit Unions MORTGAGESAccounting AND CREDIT UNION The growth of mortgages over any time period can be associated with the sum of the growth rates of its components. This is similar to a financial analyst’s use of a “DuPont 3 equation.” Though this method does not explain why the components changed or even the

causal connection of the components to mortgage growth, it can be used to disaggregate mortgage growth into components.

CHAPTER 2 Figure 2, we have disaggregated THE RISE OF MORTGAGEIn SHARES AT CREDIT UNIONS mortgage growth over the years

Over the past three decades, mortgages at credit unions grew rapidly. 1980–2011 Figure 1 shows outstanding into thethe sum of three dollar balances of ﬁrstcomponents, mortgages held by credit unions each expressed as an (“mortgages”). From 1980 through 2011, mortgages at average annual growth rate. Here credit unions averaged 14% growth annually, as the total of credit union mortgages just $3B to the $236B. is onerose wayfrom to disaggregate Mortgage balances grew especially rapidly, at about 22% growth rate of mortgages at credit annually, during the 1980s. From the end of the 1980s until the onset of the unions, ﬁnancialM: crisis, mortgages held by credit unions grew more slowly but still rose at an average rate of 11% per year. Since the onset in –real M = (GDP) + (Aof– troubles GDP) + (M A) estate markets and the broader economy, mortgages have grown less than 4% annually. The equation above shows that the growth of mortgages, M, equals

ACCOUNTING FOR MORTGAGE GROWTH AT CREDIT UNIONS ACCOUNTING FOR MORTGAGE GROWTH AT CREDIT UNIONS, 1980–2011 FIGURE FIGURE 2

1980 (1)

2011 (2)

Average annual growth rate (%), 1980–2011 (3)

$3.2B

$236.1B

13.9

$2,915B

$15,294B

5.4

2. Credit union assets / GDP

2.1

6.4

3.6

3. Credit unions’ mortgages / assets (credit union mortgage share)

5.2

24.2

4.9

0. Mortgages at credit unions 1. GDP

Sources:BEA BEA (2012); NCUA (2012) Sources: (2012); NCUA (2012).

they would have grown less than half as fast as they actually

ACCOUNTING FOR THE GROWTH OF MORTGAGES AT did of (14%). the growth rate of the economy (in the form gross domestic product [GDP]), plus the Row 2 shows that credit union assets grew much faster CREDIT UNIONS growth rate of credit union assets relativethan to that the economy, A – grew GDP, (by plus3.6%). the growth the of economy as a whole That came both

The growth of mortgages anyunion time period can be asso- tofrom rate ofover credit mortgages relative the growth rate of credit union assets, M –more A. asset and lithe economy’s having become much ciated with the sum of the growth rates of its components. This ability intensive and from credit unions, growing share over is similar to a financial analyst’s use of a “DuPont equation.” the years 1980–2011 of total national financial assets and liabilRows 0–3 in Figure 2 data that pertain to mortgages held by credit unions, to GDP, Though this method does not explain why contain the components ities. Credit union assets relative to all depository assets probchanged or even the to causal connection of the components the ratio of credit union assets relativeably to GDP, the ratio of credit union mortgages roseand for to several reasons. Among them are that (1)–more to mortgage growth, it can be used to disaggregate mortgage consumers discovered better loan and deposit interest rates to assets. Columns 1 and 2 in Figure 2 show the levels of their dollar amounts or ratios in growth into components. at credit unions (CUNA 2012), (2) liberalized rules for fields of 1980 and in 2011.mortgage For eachgrowth row, column 3 shows the average annual growth rate over the In Figure–2, we have disaggregated over membership made joining credit unions easier (Burger and Da4 the years 1980–2011 into the sum of three components, each exat Feinberg an average years 1980–2011 for each level or ratio. Row 1 shows that GDP cingrew 1991; andannual Kelly 2003), and pressed as an average annual growth rate. (3) some members who preferred murate of 5.4%. Had credit union mortgages grown at the same rate as the economy overall, Here is one way to disaggregate the growth tual or cooperative financial institutions theyunions, wouldM: have grown less than half as fast as they actually did (14%). rate of mortgages at credit became credit union members after the number of mutual thrifts dropped draM = (GDP) + (A – GDP) (M – A)that credit union assets grew much faster than matically overas this period grew (Wilcox 2006). Row+2 shows the economy a whole The equation above shows that the Row 3 shows that the share of credit (by 3.6%). came both from the economy’s having become much more asset- and growth of mortgages, M, equals theThat growth union assets held in mortgages rose from rate of the economy (inliabilitythe form of grossand from credit unions, growing share overonly intensive the 5% years of in total in 1980–2011 1980 to 24% 2011. As Coldomestic product [GDP]), plus the growth umn 3 shows, credit unions’ national financial assets and liabilities. Credit union assets relative to all depository assets mortgage rate of credit union assets relative to that of share, M – A, grew by an average of 4.9% probably rose for consumers discovered the economy, A – GDP, plus the growth rateseveral reasons. Among them are that (1) more annually over the years 1980–2011. Thus, of credit union mortgages relative to the the increase in mortgage share, the comgrowth rate of credit union assets, M – A. ponent (as presented in Figure 2) that Rows–0–3 in Figure–2 contain data that individual credit unions can most readily PAGE 9 THE RISE OF MORTGAGE SHARES AT CREDIT UNIONS FILENE RESEARCH INSTITUTE pertain to mortgages held by credit unions, control, accounted for about 35% of the to GDP, to the ratio of credit union assets total growth of mortgages over the years relative to GDP, and to the ratio of credit 1980–2011. union mortgages to assets. Columns–1 and 2 in Figure–2 show the levels of their dolTHE INCREASE IN MORTGAGE SHARE, THE lar amounts or ratios in 1980 and in 2011. COMPONENT THAT INDIVIDUAL CREDIT For each row, column–3 shows the average UNIONS CAN MOST READILY CONTROL, annual growth rate over the years 1980– ACCOUNTED FOR ABOUT 35% OF THE 2011 for each level or ratio. Row–1 shows that GDP grew at an average annual rate of TOTAL GROWTH OF MORTGAGES OVER THE 5.4%. Had credit union mortgages grown YEARS 1980–2011. at the same rate as the economy overall,

These charts speak volume’s and should leave no doubt that mortgage loans are a key ingredient for growth and prosperity for the future of ANY size credit union. Bob Dorsa

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MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

MORTGAGE SHARE

Second, for the years 1986–2011, when we had data both for mortgages and for total real estate loans, we found little differFigure 3 through Figure 7 show data for mortgage share over ence in our estimates when we used total real estate loans in time and by credit union asset size. The figures also show the numplace of mortgages. bers of credit unions that held no mortgages or that held some It is rules beyond better loan and deposit interest rates at credit unions (CUNA 2012), (2) liberalized forthe scope of this report to evaluate the myriad mortgages. Figure 7 also shows the numbers of credit unions that reasons that have fields of membership mademortgages joining credit unions (Burger and Dacin 1991; Feinberg been suggested for why credit unions, and so started holding (i.e., went fromeasier no to some mortgages) many other investors here and abroad, raised their mortgage and the numbers that stopped holding mortgages. and Kelly 2003), and (3) some members who preferred mutual or cooperative financial share so much after the early 1980s. We can, however, point to The red line in Figure 3 shows that the mortgage share some of the key institutions became credit union members after the number of mutual thrifts dropped dra-reasons that credit unions in particular likely rose a lot over the years 1980–2011. It increased rather steadily increased their mortgage share. Financial deregulation likely matically over this period (Wilcox 2006). from about 5% in 1980 to more than 24% in 2011. The mortremoved binding constraints on credit union mortgage shares. gage share ebbed occasionally and usually by small amounts, Federal legislation had long discouraged federal credit unions especially when conditions in the macroeconomy or in real Row 3 shows that the share of credit union assets held in mortgages rose from 5% in fromonly making longer-term loans such as mortgages. For instance, estate markets deteriorated considerably. The mortgage share Congress had previously capped the maturities for secured loans 1980 to 24%declined, in 2011. As Column 3 shows, credit unions’ mortgage share, M – A, grew by an for example, from 5.2% in 1980 to 3.4% in 1982 and at federal credit unions, lifting the cap from 5 to 10 years only fromannually 25.7% in over 2008the to 24.2% 2011. average of 4.9% years in 1980–2011. Thus, the increase in mortgage share, as recently as 1968 (Public Law 90-375). In 1977, Congress auFigure 3 also shows data for other real estate loans (the the component (as presented in Figure 2) that individual credit unions canthorized most readily federal credit unions to hold home improvement loans green line) and the sum of other real estate loans plus mort30-year mortgages (Public Law 95-22; CUNA 1981). Nonecontrol, accounted fortotal about 35% of the total growth of mortgages over theand years 1980–2011. gages, i.e., real estate loans (the blue line), over the years theless, many states had long permitted state-chartered credit 1986–2011, each as a share of assets. The share of other real unions to hold mortgages. A report by the US Bureau of Federal loans was always far smaller than the (first) mortgage Credit Unions, State-Chartered Credit Unions in 1960, noted The increaseestate in mortgage share, the component that individual share. Also, the share of other real estate loans rose much less that, of the 26 states that reported data for real estate loans held 1986 than the share for mortgages. credit unionssince can most readily control, accounted for about 35% by credit unions, more than one-fifth of loans in state credit Nonetheless, the two periods of decline in total real estate of the total growth of mortgages over the years 1980–2011.unions were secured by real estate (Gardner 1961). loans as a share of credit union assets, in the early 1990s and after the onset of the recent financial crisis, resulted primarily from declines not in the (first) mortgage share of credit union FINANCIAL DEREGULATION IN THE 1970S REMOVED BINDING CONSTRAINTS ON CREDIT UNION MORTGAGE SHARES. assets but of other real estate loans. For two reasons, we focused primarily on first mortgages Figure 3 through Figure 7 show data for mortgage share over time and by credit union rather than on total mortgages. First, data for other real estate Deregulation was unlikely the sole reason for rising mortasset size. The figures alsobecome show the numbers of credit that held nogage mortgages loans did not available until 1986. unions Thus, for 1980– shares atorcredit unions. Soon after the ban on federal credit 1985, the years of the tumultuous conditions in realof estate marunions’ holding long-term mortgages was lifted, mortgages as a that held some mortgages. Figure 7 also shows the numbers credit unions that started kets and in credit unions, we had data only for first mortgages. share of credit union assets rose. All else constant, however, we would expect that share to plateau once credit unions had fully adjusted to their FIGURE 3 new powers. The continuing increases in FIGURE 3 shares thereafter attest to stimuli other MORTGAGES, OTHER REAL ESTATE LOANS, AND TOTAL REAL ESTATE LOANS AS A than just deregulation. PERCENTAGE OF CREDIT UNION ASSETS, 1980–2011 Declining nominal and real inter40 est rates over the past three decades 37.6 were likely to be a powerful stimulus to 35 32.6 demands for homeownership and for mortgages and thus to mortgage share 30 at credit unions. But the rate declines 25.7 24.2 25 did not generate increases in mortgage 22.3 share at banks that were as large as those 20 at credit unions. Another potentially powerful stimulus to mortgage shares at 15 12.8 credit unions, even relative to banks, was 12.3 10 the stiffer competition that credit unions 12.1 7.4 9.5 5.2 faced from banks and from securitized 8.4 5 markets for auto loans and credit cards. 4.9 To the extent that banks and others 0 turned toward auto and credit card loans 1990 1995 2000 2005 2010 1980 1985 and away from other loans such as mortgages, they created incentives for credit Total real estate loan share Mortgage share Other real estate loan share unions to do the converse. Source: NCUA (2012)

Mortgage Share

Percent

REAL ESTATE LOANS AS APERCENTAGE OF CREDIT UNION ASSETS, 1980-2011

Source: NCUA (2012).

58 PIPELINE - JANUARY 2014

MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

NUMBER AND ASSETS OF CREDIT UNIONS SIZE: 1980 - 2011 NUMBER AND ASSETS OF CREDIT BY UNIONS BY SIZE: 1980, 1990, 2000, 2008, AND 2011 FIGURE 4 FIGURE

1980 (1)

2011 (5)

NUMBER, ASSETS, AND MORTGAGE SHARE OF CREDIT UNIONS BY SIZE

Figure 4 presents the number and assets of credit unions classiﬁed by their size. To adjust for inﬂation, we set boundaries between asset size ranges in constant, 2011 dollars. We use the terms below to indicate the size of credit unions:  Tiny credit unions had assets of less than $1M.

1990 (2)

2000 (3)

2008 (4)

7,170

2,803

1,237

681

537

2. $1M–<$10M

8,088

6,298

4,101

2,535

2,086

3. $10M–<$100M

2,503

4,015

3,991

3,367

3,185

 Very small credit unions had assets of at least $1M but less than $10M.

258

704

1,046

1,227

1,249

155

183

 Smallish credit unions had assets of at least $10M but less than $100M.

18,023

13,840

10,439

7,965

7,240

A. Number of credit unions 1. <$1M

4. $100M–<$1B 5. ≥$1B 6. All credit unions B. Percentage of credit unions by size 7. <$1M

8. $1M–<$10M

9. $10M–<$100M

10. $100M–<$1B

11. ≥$1B

0.02

0.1

100

14. $1M–<$10M

15. $10M–<$100M

126

133

117

115

16. $100M–<$1B

170

287

363

376

137

391

473

158

362

575

884

974

12. All credit unions C. Assets (in billions of dollars, inflation adjusted) 13. <$1M

17. ≥$1B 18. All credit unions

0.6

0.3

D. Percent of assets by size

0.4

0.1

0.03

20. $1M–<$10M

21. $10M–<$100M

22. $100M–<$1B

100

19. <$1M

23. ≥$1B 24. All credit unions

Sources:BLS BLS (2012); NCUA (2012) Sources: (2012); NCUA (2012).

PIPELINE JANUARY 2014 PAGE 1360 THE RISE OF MORTGAGE- SHARES AT CREDIT UNIONS

 Medium-sized credit unions had assets of at least $100M but less than $1B.  Large credit unions had assets of at least $1B. Figure 4 reminds us that tiny and very small credit unions formerly accounted for the overwhelming majority of the number of credit unions. In 1980, 7,170 credit unions were tiny and 8,088 were very small; together they were 85% of the total of 18,023 credit unions. Then, tiny and very small credit unions had 2% and 18% of total credit union assets. Their numbers and asset shares have declined dramatically since then. By 2011, they made up 7% and 29% of credit unions and had only 0.03% and 1% of total credit union assets. Medium credit unions have had the most stable share of total credit union assets: 33% in 1980, 50% in 2000, and 39% in 2011. Asset share fell the most for smallish credit unions: from 44% in 1980 to 12% in 2011. The share of assets held by large credit unions rose the most, skyrocketing from 4% in 1980 to 49% in 2011. Because their average size rose so substantially, the decline in the total number of credit unions (from 18,023 in 1980 to 7,240 in 2011) did not result in fewer members, fewer assets, or fewer deposits or even a decline in total credit union assets relative to GDP. Figure 5 shows mortgages and mortgage share by size of credit union. Panel A displays the inﬂation-adjusted holdings of mortgages by credit union size. Panel B scales the data in panel A by FILENE RESEARCH INSTITUTE

MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

the mortgages held by all credit unions in each year. Panel B shows that the two smallest sizes of credit unions have never held any appreciable percentage of total credit union mortgages. Medium credit unions’ share of total credit union mortgages was relatively stable: 49% in 1980, 57% in 1990, and 37% in 2011. Like the shares of assets, the share of all credit union mortgages at smallish credit unions plummeted: from 38% in 1980 to 7% in 2011. The share in large credit unions, in contrast, surged from 7% in 1980 to 56% in 2011. Panel C shows that mortgage shares have typically been larger at larger credit unions. It also shows that shares rose fairly steadily over time for most size ranges. By 2011, the two largest sizes of credit unions had mortgage shares of about one-fourth, which was a very substantial reordering of lending priorities from where they had been in 1980. For instance, mortgage shares for large credit unions increased from 10% in 1980 to 28% in 2011. Mortgage shares for smaller credit unions also rose, but less dramatically. Panel D shows the percentage of credit unions that had any mortgages at all. Larger credit unions have long held mortgages. Since 1990, 90% or more of medium and large credit unions have held mortgages. Increasingly, smallish credit unions have held mortgages, with 79% of them holding mortgages in 2011. By contrast, there was little tendency among credit unions of the two smallest sizes to raise their low participation rates in mortgage markets. Figure 6 presents the percentage distributions of mortgage shares by credit union sizes. We term the ranges of mortgage shares as follows:  Zero: credit unions held no mortgages.  More than zero but less than 10% of assets: very low mortgage share.  At least 10% but less than 20% of assets: low mortgage share.  At least 20% but less than 40% of assets: large mortgage share.  At least 40% of assets: very large mortgage share.

FIGURE 5

MORTGAGES AND MORTGAGE SHARES, BY SIZE OF CRE DIT UNION: 1980-2011

MORTGAGES AND MORTGAGE SHARES, BY SIZE OF CREDIT UNION: 1980, 1990, 2000, 2008, AND 2011 1980 (1)

1990 (2)

2000 (3)

2008 (4)

2011 (5)

A. Mortgages (in billions of dollars, inflation adjusted) 1. <$1M

0.015

0.007

0.002

0.001

0.0004

2. $1M–<$10M

0.5

0.8

0.5

0.4

0.3

3. $10M–<$100M

4. $100M–<$1B

5. ≥$1B

0.5

121

131

6. All credit unions

101

227

236

B. Percentage of total credit union mortgages, by size of credit union 7. <$1M

0.2

0.02

0.002

0.0005

0.0002

8. $1M–<$10M

0.2

0.1

100

9. $10M–<$100M 10. $100M–<$1B 11. ≥$1B 12. All credit unions

C. Mortgage share as a percentage of credit unions’ portfolios 13. <$1M

0.5

0.6

0.3

0.2

14. $1M–<$10M

1.8

3.3

2.8

3.6

3.4

15. $10M–<$100M

16. $100M–<$1B

20. $1M–<$10M

21. $10M–<$100M

22. $100M–<$1B

23. ≥$1B

100

24. All credit unions

17. ≥$1B 18. All credit unions D. Percentage of credit unions with mortgages 19. <$1M

Sources:BLS BLS(2012); (2012); NCUA (2012) Sources: NCUA (2012).

JANUARY 2014 - PIPELINE 61 PAGE 15

THE RISE OF MORTGAGE SHARES AT CREDIT UNIONS

FILENE RE

MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

MTG HOLDING CUS, FIGURE 6 PERCENTAGE OF CREDIT UNIONS,SHARE BY MORTGAGE SHARE AND BY SIZE: BY MTG AND SIZE 1980, 1990, 2000, 2008, AND 2011 FIGURE 6

Mortgage share (%)

1980 (1)

1990 (2)

2000 (3)

2008 (4)

2011 (5)

A. Percentage of all credit unions 1. =0

2. >0–<10

3. 10–<20

4. 20–<40

5. ≥40

0.4

B. Percentage of small credit unions (<$100M) 6. =0

7. >0–<10

8. 10–<20

9. 20–<40

0.4

10. ≥40

C. Percentage of medium credit unions ($100M–$1B) 11. =0

12. >0–<10

13. 10–<20

14. 20–<40

15. ≥40

D. Percentage of large credit unions (≥$1B) 16. =0

17. >0–<10

18. 10–<20

19. 20–<40

20. ≥40

E. Percentage of all credit union assets 21. =0

22. >0–<10

23. 10–<20

24. 20–<40

25. ≥40

Sources: BLS (2012); NCUA (2012)

Sources: BLS (2012); NCUA (2012).

- JANUARY 2014 62 THE PIPELINE RISE OF MORTGAGE SHARES AT CREDIT UNIONS

PAGE 16

THE PERCENTAGE OF CREDIT UNIONS THAT DID NOT HOLD MORTGAGES FELL SUBSTANTIALLY FROM 83% IN 1980 TO ONLY 39% IN 2011. Figure 6 shows that the percentage of credit unions that did not hold mortgages fell substantially from 83% in 1980 to only 39% in 2011. Simultaneously, the percentage of all credit unions with large or very large mortgage shares rose steadily, from 2.4% in 1980 to 23% in 2011, and rose steadily with asset size. The percentage of medium credit unions with large or very large mortgage shares rose steadily from 11% in 1980 to 52% in 2011. Among large credit unions, the percentage with large or very large mortgage shares rose over the same period, from 25% to 65%. Medium and large credit unions account for increasing percentages of total credit union assets. Panel E shows that only a tiny percentage of credit union assets are now in institutions without any mortgages. In contrast, 60% of assets are in credit unions that have large or very large mortgage shares. Thus, while mortgages have become a more integral part of an increasing number of credit unions, they have become especially and increasingly important to larger credit unions.

MORTGAGES HAVE BECOME A MORE INTEGRAL PART OF AN INCREASING NUMBER OF CREDIT UNIONS, BUT THEY HAVE BECOME ESPECIALLY AND INCREASINGLY IMPORTANT TO LARGER CREDIT UNIONS.

CUS THAT STARTED OR STOPPED HOLDING MORTGAGES

Over the years, some credit unions stopped holding mortgages, either because they stopped originating them or because they sold their holdings and the mortgages that they originated. Over recent decades, many more credit unions began to hold mortgages, mostly because they also began originating them. Figure 7 presents the number of continuing credit unions in recent decades that started (or stopped) holding mortgages. The percentage of credit unions holding mortgages increased steadily, from 17% in 1980 to 61% in 2011. However, because the numbers of credit unions were shrinking (shown in Figure 4), the rising percentage translated into more modest increases in the numbers of credit unions that held mortgages. We explored how much the (national or aggregate) mortgage share increased due to more credit unions holding mortgages and how much it increased because individual credit unions increased their mortgage shares. To begin, we calculated the number of continuing credit unions that started or stopped holding mortgages. For each pair of years (e.g., 2010 and 2011) that each credit union operated, we noted whether it held no mortgages in the ﬁrst year but held mortgages the next year; that is, the credit union started holding mortgages (column 1 of Figure 7). Similarly, we noted whether each credit union held mortgages the ﬁrst year but not the next year; that is, the credit union stopped holding mortgages (column 2 of Figure 7). We then tabulated the net change in the number of continuing credit unions that held mortgages (column 3), that FILENE RESEARCH INSTITUTE

MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

is, the number starting minus the number stopping. We also calculated the net percentage of credit unions that started holding mortgages (column 4), that is, the net number starting to hold mortgages divided by the number of all credit unions. The gross and net numbers of continuing credit unions that started and stopped holding mortgages steadily declined over the years 1980–2011. So did the percentage of additional mortgage holders. For example, the net percentage of continuing credit unions that started holding mortgages reached 6.0% and 3.7% in 1986 and 1987 but fell to an average of about 0.5% during the 2000s. The decline in credit unions starting to hold mortgages resulted partly from the shrinking numbers of remaining credit unions that did not hold mortgages and, thus, that could start doing so. We included only continuing credit unions in Figure 7 so that the data would be directly comparable across the columns. Because some credit unions disappeared each year—for example, due to liquidations or mergers—the net number of continuing credit unions that started to hold mortgages (column 3) differs from the change in the number of all credit unions that held mortgages (column 5). In 1986, for example, 947 more continuing credit unions started holding mortgages than stopped, but the number that held mortgages rose by only 786 (from 3,052 in 1985 to 3,838 in 1986). Taken together, Figure–5 and Figure–7 show that the rise in the aggregate mortgage share over recent decades was mostly due to “established” credit unions raising their mortgage shares, rather than to credit unions’ starting to hold mortgages. Panel A in Figure–5 shows that mortgages held at all credit unions rose by $190B, from $46B in 1990 to $236B in 2011, mostly due to the increase of $185B at medium and large credit unions, from $33B in 1990 to $218B in 2011. Panel D in Figure–5 shows that the increase in mortgages at medium and large credit unions was not due to their starting to hold mortgages, as nearly all of them were already holding mortgages by 1990. Instead, panel C shows that the increase in mortgages held at credit unions mostly stemmed from the rise in medium and large credit unions’ average mortgage share, from about 15% to about 25%, at the same time that assets shifted from smallish to larger credit unions. Indeed, row–21 of Figure–5 shows that most credit unions that started to hold mortgages were smallish. Row–3 of Figure–5 shows, in turn, that smallish credit unions accounted for a quite small fraction of the rise in mortgages held.

CHAPTER 3 THE EFFECTS OF MORTGAGES ON CREDIT UNION PERFORMANCE

Here we present estimates of the effects of larger mortgage shares on individual credit unions. The effects vary substantially with conditions in real estate markets and in the macroeconomy more generally. Not surprisingly, larger mortgage shares hurt credit union performance when real estate markets are troubled and help when they are stronger. Over the long term, larger mortgage shares tend to be associated with somewhat higher costs (noninterest expense per assets), with slight-

CREDIT UNIONS, THAT HELD� � MORTGAGES, 1980-2011

FIGURE 7

��

�

��

�

��

�

��

�

Sources: BLS (2012); NCUA (2012)

JANUARY 2014 - PIPELINE 63

decades, credit union ROAs often moved far above and below their long-term average of 0.89. For example, the large downdraft in ROA due to the recent housing and financial crises coincided with historically large mortgage share. Another noticeable, though smaller, decline in ROA occurred in 1980, when mortgage share was very low. On the other hand,

MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011 the sharp rise in ROA in the early 1990s coincided with moderate mortgage share. Thus, the data do not immediately suggest that mortgage share raised credit union ROA. We strove to untangle the separate effects of larger mortgage shares on ROA, and credit union performance generally, from the other factors that likely also affected performance. To do so, we analyzed data for individual credit unions and for the other factors.

We strove to untangle the separate effects of larger mortgage shares on ROA, FIGURE 8 and credit union performance generally, FIGURE 8 from the other factors that likely also CREDIT UNION ROA AND MORTGAGE SHARE, 1980–2011 affected performance. To do so, we analyzed data for individual credit unions 30 1.50 and for the other factors. 25.7 Figure–9 presents statistical estimates 25 1.25 based on annual (as of December–31 for each year) data for 21,104–individual 20 1.00 ROA credit unions that operated sometime 0.89 during the years 1980–2011. We had a 15 0.75 total of 379,198–observations, ranging 0.66 from 18,016 in 1980 to 7,173 in 2011.18 10 0.50 Mortgage share To obtain the estimated effects of Similarly, they also controlled for the effects, however much they were delayed,mortgage of the 1977 share and other factors, we re5 0.25 legislation that permitted federal credit unions to engage in mortgage lending. gressed each of several commonly used 3.4 measures of credit union performance on 0 0.00 them. We analyzed the following perfor–0.02 Whether larger mortgage shares helped credit union performance seemed likely to depend mance measures: net income, noninter–5 –0.25 on conditions in mortgage and housing markets. Devoting more assets to mortgages and real asset growth, delinquent est expense, 1990 1995 2000 2005 2010 1980 1985 provisions for loan losses, and net then having house prices rise a great deal almost certainly guaranteed strongerloans, perforSource: NCUA (2012) charge-offs, each expressed as a percentSource: NCUA (2012). mance. To allow for effects on performance that changed with conditions in mortgage and age of assets. We analyzed both the level ly more problem loanswe (delinquent provisions for loan housing markets, included loans, a separate mortgageshare variable for each yearand during the the volatility of net income per assets PAGE 21 THE EFFECTS OF MORTGAGES ON CREDIT PERFORMANCE FILENE RESEARCH INSTITUTE losses, and net UNION charge-offs, each per assets), and with slightly (or ROA). As our measure of volatility for each year, we used years 1980–2011. We computed each of those 32 variables as the product of the dummy varimore volatile performance (e.g., larger standard deviations of the ROA of that year and the five previous years to calculate able for that year (e.g., indicate the annual forlong 1980) and each credit union’s mortgage ROA). Nonetheless, ouralone estimates that,dummy over the the standard deviation of (annual) ROA. 21 term, larger mortgage share that year. shares help credit unions: Larger mortWe used the following independent, or control, variables to gage shares tend to be associated with slightly higher ROAs analyze whether they affected performance: the log of real asset and with higher inflation-adjusted asset growth rates. size, a dummy variable for each year (henceforth: annual dumBelow, we present abridgeddata results from our regressions. focus on the annual effects of At first glance, the aggregate for recent decades do not We mies), and annual mortgage shares. We included asset size as a 22 pointmortgage to large share increases in mortgage being associated on key measuresshares of credit union performance. control variable because prior research has clearly established with improved credit union performance. Figure–8 presents aggregate, annual data for credit union ROA and mortgage Figure 9 presents the average of mortgage FIGURE 9 share (repeated from Figure–3) for effects 1980–2011. It shows that share the long-running rise inperformance mortgage share hasthe notentire transon credit union over FIGURE 9 ESTIMATED EFFECTS OF MORTGAGE SHARE ON CREDIT lated1980–2011 into a similar riseFor in each ROA. performance For example, measure mortgage UNION PERFORMANCE (ABRIDGED RESULTS), 1980–2011 period. share peaked at 25.7% in 2008, but that coincided with the in the we show estimated effect of a lowest ROAfigure, (–0.02%) of the the entire 1980–2011–period. Average effect of a 10% Over long term, larger mortgage shares help credcreditthe union’s having raised its mortgage share increase in mortgage share it unions: to be associated by 10%Larger (e.g., mortgage from 15% shares to 25%tend of assets). We 1. ROA 0.01 with slightly higher ROAs and with higher inflation-adestimated that ROA justed asset growth rates.rose by 0.01% (1 bp), e.g., it

CREDIT UNION ROA AND MORTGAGE SHARE, 1980�2011

ROA (%)

Mortgages per assets (%)

MTG SHARE AND CU PERFORMANCE

The ﬁgure also 0.90% highlights that instead aggregate would average of assets of mortgage the longshareterm could hardly have been the only factor that drove average of 0.89%; noninterest expense per ROA. Despite the upward trend in mortgage share over rose by 0.09%, e.g., 3.27% insteadfar theseassets three(costs) decades, credit union ROAs often moved above below long-term average of(inflation0.89. For examofand 3.18%; thetheir annual growth rate of ple, the large downdraft in ROA due to the adjusted) assets rose by 0.98%, e.g., recent 6.85%housing and ﬁnancial crises coincided with historically large mortof 5.87%; delinquent loans per assets rose gageinstead share. Another noticeable, though smaller, decline in ROAby occurred 1980, wheninstead mortgage was very low. 0.09%,ine.g., 1.04% of share 0.95%; proviOn the other sharp in ROA inby the0.01%, early 1990s sions forhand, loan the losses perrise assets rose coincided with moderate mortgage share. Thus, the data e.g.,immediately 0.39% instead of 0.40%; net charge-offs do not suggest that mortgage share raised credit union ROA. e.g., 0.51% instead of 0.50%; and rose by 0.01%, the volatility of ROA rose by 0.02%, e.g., 0.73%

64 PIPELINE - JANUARY 2014 instead of 0.71%.

2. Noninterest expenses per assets

0.09

3. Asset growth (real)

0.98

4. Delinquent loans per assets

0.09

5. Provisions per assets

0.01

6. Net charge-offs per assets

0.01

7. Volatility of ROA

0.02

Note: The effects of mortgage share on ROA, noninterest expense, delinquent loans, and provisions are estimated for 1980–2011, on asset growth for 1981–2011, on net charge-offs for 1982–2011, and on volatility for 1985–2011.

MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

a correlation between asset size and credit union performance Figure–9 presents the average effects of mortgage share on (see Wilcox 2007 and 2008). credit union performance over the entire 1980–2011 period. We also allowed for potentially important, otherwise im- For each performance measure in the figure, we show the esmeasurable, persistent differences across credit unions that timated effect of a credit union’s having raised its mortgage affect performance. By including “fixed effects” when we es- share by 10% (e.g., from 15% to 25% of assets). We estimated timated the effects of mortgage share and other independent that ROA rose by 0.01% (1–bp), e.g., it would average 0.90% of variables, we controlled for factors like the composition of a assets instead of the long-term average of 0.89%; noninterest Figure 10 presents our estimates the effects, year by year, mortgage share on credit credit union’s field of membership and charter type. The fixedexpense per assetsof(costs) rose by 0.09%, e.g.,of 3.27% instead effects technique also controlled for other, long-term differencof 3.18%; the1980–2011. annual growth rate (inflation-adjusted) assets union ROA during the years There weofsee that the estimated effects change es that might have varied by location, such as population den- rose by 0.98%, e.g., 6.85% instead of 5.87%; delinquent loans considerably through time, rising and falling with business cycles and generally trendsity, regulations, taxes, and competition from banks and other per assets rose by 0.09%, e.g., 1.04% instead of 0.95%; proupward. estimates indicate that mortgage reduces ROA more credit unions. For example, that one credit unioning is located in Ourvisions for loan losses perhaving assetslarger rose by 0.01%, shares e.g., 0.39% an urban area, is in the Northeast, has a federal charter with the of instead of 0.40%; net by 0.01%, 0.51% during periods macroeconomic andcharge-offs real estaterose troubles, such e.g., as recessions in the related powers and restrictions, and has a growing, community instead of 0.50%; and the volatility of ROA rose by 0.02%, e.g., macroeconomy (1980, 1981–1982, 1990–1991, 2007–2009, and perhaps 2001) and when real field of membership could importantly affect its average per- 0.73% instead of 0.71%. markets suffer (the late 1980s). In addition to, and apart from, those fluctuations, formance. That credit union might have long-termestate advantages that make its average performance different (for our better or foralso suggest that the ROA-raising effects of holding mortgages tended to grow results worse) from that of a credit union that is located in a rural part over time. To highlight this shift, we use dotted lines in Figure 10 to indicate the average of the Midwest, has a state charter, and has a shrinking field of Figure 10 presents our estimates of the effects, year by year, size for three periods of theshare effects moving anROA additional membership whose members are closely tied to agriculture. of mortgage onofcredit union during 10 percentage the years 1980–points of a credit Including annual dummies controlled for (economy-side) 2011. There we see that the estimated effects change considerunion’s assets into mortgages. Our estimates imply that ROA would have been 6 bps lower factors that changed from year to year and had effects that ably through time, rising and falling with business cycles and during the 1980s, 2 bps higher during the 1990s, and 6 bps higher during the 2000s. During were common across credit unions. Among the factors that generally trending upward. Our estimates indicate that having theinyears 1980–2011, union ROAsreduces averaged 89 bps. estimates were likely to have had such effects were changes interest larger credit mortgage shares ROA more Thus, duringour periods of imply that, in rates, the national unemployment rate, any national real estate macroeconomic real estate troubles, suchthe as recessions in of 89 bps would recent years, credit unions thatand otherwise would have had average ROA market developments, and legislative and regulatory factors the macroeconomy (1980, 1981–1982, 1990–1991, 2007–2009, be expected to average ROAs of 95 bps if they had 10 percentage points more of their assets that changed over time. Thus, the annual dummy for 1997 and perhaps 2001) and when real estate markets suffer (the in mortgages. late 1980s). In addition to, and apart from, those fluctuations, controlled for all of the effects on credit union performance on average in 1997; the annual dummy for 2008 did the same our results also suggest that the ROA-raising effects of holding for that year. The annual dummies, then, controlled for the mortgages tended to grow over time. To highlight this shift, we In recent years, credit unions that otherwise would have had the effects, regardless of what year they were felt, on credit union use dotted lines in Figure 10 to indicate the average size for performance on average of the 1998 passageaverage of CUMAA ROA Simi- of three periodswould of the effects of moving an to additional 10 percent89 bps be expected average ROAs of larly, they also controlled for the effects, however much they age points of a credit union’s assets into mortgages. Our esti95 bps if they had 10 percentage points more of their assets in were delayed, of the 1977 legislation that permitted federal mates imply that ROA would have been 6 bps lower during the credit unions to engage in mortgage lending.mortgages. 1980s, 2 bps higher during the 1990s, and 6 bps higher during Whether larger mortgage shares helped credit union performance seemed likely to depend on conditions FIGURE 10 in mortgage and housing markets. FIGURE 10 Devoting more assets to mortgages ESTIMATED EFFECTS OF MORTGAGE SHARE ON ROA, 1980–2011 and then having house prices rise a great deal almost certainly guaranteed 0.02 stronger performance. To allow for effects on performance that changed with conditions in mortgage and hous0.01 ing markets, we included a separate mortgage-share variable for each year during the years 1980–2011. We com0.00 puted each of those 32 variables as the product of the dummy variable for that year alone (e.g., the annual dum–0.01 my for 1980) and each credit union’s mortgage share that year. Below, we present abridged results from our regressions. We focus on the –0.02 annual effects of mortgage share on key 1980 1985 1990 1995 2000 2005 2010 measures of credit union performance.

ROA

Effect of a 1% increase in mortgage share

CREDIT UNION ROA AND MORTGAGE SHARE, 1980�2011

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MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

the 2000s. During the years 1980–2011, credit union ROAs averaged 89 bps. Thus, our estimates imply that, in recent years, credit unions that otherwise would have had the average ROA of 89 bps would be expected to average ROAs of 95 bps if they had 10 percentage points more of their assets in mortgages.

IN RECENT YEARS, CREDIT UNIONS THAT OTHERWISE WOULD HAVE HAD THE AVERAGE ROA OF 89 BPS WOULD BE EXPECTED TO AVERAGE ROAS OF 95 BPS IF THEY HAD 10 PERCENTAGE POINTS MORE OF THEIR ASSETS IN MORTGAGES. What has been established so far? First, troubles in real estate markets and the macroeconomy have consistently hurt the performance of credit unions; the more mortgage-intensive they were, the more credit unions’ performance suffered as a result. Second, even apart from the effects of those troubles, the effects on credit union performance per unit of mortgages held can change; they have before and likely will again. Third, apart from the sometimes substantial effects of ﬂuctuations in real estate markets and the macroeconomy, the effects of mortgages on credit union performance have grown increasingly positive over these three decades. And fourth, larger mortgage shares guarantee neither inordinately higher nor lower earnings. As Figure 9 showed, when we included all 32 years in our analysis, the estimated average effect of larger mortgage shares on ROA was only 1 bp: positive, but very small, and indeed perhaps misleadingly small, for reasons that we discussed earlier.

“Instead of robust reﬁnancing activity and weak purchasemoney originations and relatively few mortgages added to balance sheets, reﬁnancing volumes may well decline in the coming years while originating and holding purchasemoney mortgages on balance sheets rebounds.”

This prediction will soon become a wellrecognized fact! Bob Dorsa

VOLATILITY OF EARNINGS

Credit union performance includes not only ROA and costs but also risks. Choosing riskier lending and business strategies may raise both the average level and the volatility of ROA. Earlier we showed that credit unions with larger mortgage shares have larger ROAs on average. Among the indicators of lending risks, and especially outcomes, are loan delinquency, provision, and chargeoff rates. Another indicator of a credit union’s risk is the volatility of its earnings. To measure an individual credit union’s earnings volatility, we used the standard deviation over the most recent and ﬁve previous years of its annual ROA (henceforth: volatility) during the years 1985–2011.33 Figure 11 presents our estimates of the effects by year of

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mortgage share on earnings volatility. The ﬁgure shows that credit unions with larger mortgage shares exhibit not only larger average ROAs but also more volatile, or risky, ROAs. Credit unions with larger mortgage shares exhibit ROAs that are both slightly larger and, in almost every year, slightly more volatile. During the years 1985–2011, credit unions averaged ROAs of 88–bps and volatilities of 71–bps. We estimated that, on average, credit unions with 10% higher mortgage shares would have had ROAs that were 0.01% (or 1–bp) larger and volatilities that were 0.02% (or 2–bps) larger. Thus, credit unions with 10% larger mortgage shares are estimated to have had earnings volatility of 73–bps instead of 71–bps.

CHAPTER 4 SUMMARY AND IMPLICATIONS

Credit unions have responded to the significant changes in real estate and financial markets over the past three decades. As the structure of consumer liabilities, competitors’ offerings, and legislation changed, credit unions became much more heavily involved in mortgages. Outstanding balances on credit union holdings of first mortgages grew from only $3B in 1980 to $236B in 2011. We can account for the resulting average annual growth rate of mortgage holdings of 13.9% with macroeconomic factors (5.4%), the growth of credit unions relative to the size of the economy (3.6%), and the shift of credit union assets to mortgages (4.9%). That shift has been steady and striking: The share of credit union assets in mortgages rose from 5% in 1980 to 24% in 2011, with but few small declines. We estimated the effects of larger mortgage shares on credit union performance. Our results are perhaps largely unsurprising. Over shorter periods, troubles in real estate markets and the economy more generally hurt credit unions that hold more mortgages. Over the longer term, we estimated that larger mortgage shares are associated with somewhat higher costs (noninterest expense per assets), with slightly more troubled loans (delinquent loans, provisions for loan losses, and net charge-offs), and with slightly more volatile earnings. Nonetheless, we estimated that, over the longer term, credit unions with larger mortgage shares exhibit slightly higher ROAs and higher inflation-adjusted asset growth. Although credit unions’ mortgage shares rose substantially from 1980 to 2011, performance has not trended upward. How can mortgage holdings have risen so much and helped performance, but yet performance on average has hardly changed at all? The answer is “competition.” In effect, credit unions had incentives to do more mortgage lending. They responded. In fact, credit unions (and other lenders) responded sufficiently that competition drove out the excess returns to engaging in mortgage lending. Therefore, credit unions that did not respond to the stronger incentives with more mortgage holdings would have shortchanged their members in two ways. First, they would not have met their members’ product demands. Second, they would not have produced appropriate financial returns, in the forms of borrowing, lending, and earnings rates.

MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

“Credit unions needed to run faster, Though they have repeatedly fallen IN EFFECT, CREDIT UNIONS HAD INCENTIVES TO DO MORE or at least better, below what had been forecast, mortgage MORTGAGE LENDING. THEY RESPONDED. IN FACT, CREDIT rates the nowthree (again) seemofunlikely to fall As Figure 14 shows, periods larger estimated effects sharestill.” on loan justof mortgage to stand UNIONS (AND OTHER LENDERS) RESPONDED SUFFICIENTLY much further for much longer. Instead,

delinquency rates coincided with lower growth rates of (real) house prices, the early 1980s, THAT COMPETITION DROVE OUT THE EXCESS RETURNS TO most analysts foresee31mortgage rates risthe early 1990s,ing andinthe 2000s. thelate near future, perhaps by two ENGAGING IN MORTGAGE LENDING.

The statement is profound and should be marked with a huge banner displayed in the Executive Suite of EVERY Credit Union!

to three percentage points over the next years. Todelinquency the extent that mortgage If they did not respond to their members’ demands for few As noted above, larger loan rates need not lead to larger charge-off rates. mortgage products, credit unions would lose members and rates stabilize and then rise, incentives Indeed, our estimates imply that credit unions with 10% larger mortgage shares have their business and generate lower ROAs. In that regard, as is to refinance will decline and refinancing volumes are likely drop considerprovision and charge-off rates thattoare, onoff average, only 0.01% (1 bp) larger (e.g., 0.40% so often the case in financial markets and business generally, 32refinancing can generate ably. While credit unions needed to run faster, or at least better, just to instead of 0.39% of assets). If and when real estate markets again seriously deteriorate, stand still. Credit unions that did respond were rewarded, not fee income, because it doesn’t add to credit unions that have larger mortgage shares will naturally be more adversely affected. over the longer term with ROAs that were higher than histori- the aggregate amount of mortgages outstanding would not expectthe it to affect implication of our estimates is that AsAwith the other resultswe discussed above, general cal standards, but by not having their ROAs decline. measure mortgage holdings much on average. of performance that is broader than ROA, for example, might the long-term effects of larger mortgage shares on credit union performance, such as net Along with the broader economy, add the benefits of credit unions’ offering more mortgages to charge-offs, arehousing rather small. and mortgage markets have more members. A broader measure would likely show perforbeen recuperating, albeit too slowly, mance improvements above those that ROA captures. from the excesses of the 2000s and the AS IS SO OFTEN THE CASE IN FINANCIAL MARKETS AND BUSI- dislocations caused by the financial crisis. Foreclosures are waning, incomes NESS GENERALLY, CREDIT UNIONS NEEDED TO RUNCredit FASTER, OR performance union includes onlyup, ROA and costs but also risks. Choosing riskier and house prices are not moving expecAT LEAST BETTER, JUST TO STAND STILL. tations for house prices have become lending and business strategies may raise both the average level and the volatility of ROA. more realistic and moderate, houseEarlier we showed that credit unions with larger mortgage shares have larger ROAs on At the same time, we should not conclude that more will al- holds have restrained their spending to average. Amongstrengthen the indicators lending risks, and ways be better. We are not suggesting that any credit union shift their of financial positions, andespecially outcomes, are loan delinits assets. Rather, our findings reinforce old lessons. Businesses lower mortgage ratesrates. have Another boosted affordability. quency, provision, and charge-off indicator of a credit union’s risk is the survive and thrive by responding to the demands of customers An often overlooked but very large and reliable stimulus to volatility of its earnings. To measure an individual credit union’s earnings volatility, we and by responding to opportunities to better serve them. Just as mortgage volumes has been and will continue to be the growing usedand thetechstandard deviation over the most recent andby five previous years they have in the past, customers, markets, regulations, US population, which each year increases about 3 million peo-of its annual ROA 33 nology will inevitably and unpredictably change in the future. volatility) ple, all ofduring whom the needyears shelter. As the recuperation continues,our as estimates of Figure 15 presents (henceforth: 1985–2011. And, as they have in the past, credit unions that respond to the millions more pursue homeownership, and especially when the the effects by year of mortgage share on earnings volatility. The figure shows that credit associated challenges and opportunities will perform better. job market catches up with the rest of the economy, households Credit unions are likely to face strong crosscurrents in will increasingly be willing and able to take on mortgages to buy mortgage lending in coming years. These crosscurrents may move in just the opposite direction of the crosscurrents FIGURE 15 FIGURE 11 of the past five years. Instead of robust ESTIMATED EFFECTS OF MORTGAGE SHARE ON THE VOLATILITY OF EARNINGS (SIX-YEAR refinancing activity and weak purchase- STANDARD DEVIATION OF ROA), 1985–2011 money originations and relatively few 0.006 mortgages added to balance sheets, refinancing volumes may well decline in the coming years while originating and 0.004 holding purchase-money mortgages on balance sheets rebounds. Since the early 1980s, mortgage rates 0.002 have fallen from double digits to levels that would scarcely have been imagin0.000 able even a few years ago. In the middle of 2013, it has become common to hear of mortgages being originated with interest –0.002 rates of under 4%, and even under 3%. These large declines in the recent past and the prospect of higher rates in the –0.004 future have fueled robust refinancing vol1985 1990 1995 2000 2005 2010 umes for the past couple of years.

Volatility of Earnings

Bob Dorsa

Effect of a 1% increase in mortgage share

ESTIMATED EFFECTS OF MORTGAGE SHARE ON VOLATILITY OF EARNINGS

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THE EFFECTS OF MORTGAGES ON CREDIT UNION PERFORMANCE

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FILENE RE

MORTGAGES AND CREDIT UNION PERFORMANCE: 1980–2011

houses. As they do, credit unions, as well as banks and other lenders, are likely to see better opportunities to add purchase-money mortgages to their balance sheets. There is no way to know if, how, or when the federal government will change the role of Fannie Mae and Freddie Mac in housing markets. These two government-sponsored enterprises were major players in mortgage markets before the crisis. Since the crisis erupted, although they have been under government conservatorship, they have provided even larger shares of mortgage credit. Another federal housing agency, the FHA, has also been especially active since the crisis. Eventually, these three federally related sources may well become smaller players in national mortgage markets, which will provide incentives for credit unions, banks, and others to hold more mortgages. If, how, and when they will retreat, not only from their crisis-related hyperactivity but also from their perhaps overly active involvement in mortgage markets in the 2000s, remains to be determined. To the extent that they do retreat from their hyperactivity and their overactivity, this will provide opportunities for credit unions to advance.

ABOUT THE AUTHORS LUIS G. DOPICO, PHD, MACROMETRIX Luis G. Dopico is a consultant for Macrometrix in High Point, North Carolina, and a frequent researcher with the Filene Research Institute. He earned a BA in economics and mathematics from the University of Southern Mississippi and a PhD in economics from Auburn University in Alabama.

JAMES A. WILCOX, PHD HAAS SCHOOL OF BUSINESS, UC BERKELEY James A. Wilcox is a professor at the Haas School of Business at the University of California, Berkeley. At Haas, Jim has been the chair of the Finance Group and is currently the chair of the Economic Analysis and Policy Group.

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ABOUT FILENE

“An often overlooked but very large and reliable stimulus to mortgage volumes has been and will continue to be the growing US population...”

ACUMA agrees and adds that these new families will reﬂect the nation’s growing ethnic diversity. With this in mind CUs need to revisit their membership marketing strategies. Who better than local Realtors as select surrogates to carry the Credit Union message to the homebuying and building marketplace. Bob Dorsa

Filene Research Institute is an independent, consumer finance think and do tank. We are dedicated to scientific and thoughtful analysis about issues affecting the future of credit unions, retail banking, and cooperative finance. Deeply embedded in the credit union tradition is an ongoing search for better ways to understand and serve credit union members. Open inquiry, the free flow of ideas, and debate are essential parts of the true democratic process. Since 1989, through Filene, leading scholars and thinkers have analyzed managerial problems, public policy questions, and consumer needs for the benefit of the credit union system. We support research, innovation, and impact that enhance the well-being of consumers and assist credit unions and other financial cooperatives in adapting to rapidly changing economic, legal, and social environments. We’re governed by an administrative board made up of credit union CEOs, the CEOs of CUNA & Affiliates and CUNA Mutual Group, and the Chairman of the American Association of Credit Union Leagues (AACUL). Our research priorities are determined by a national Research Council comprised of credit union CEOs and the President/CEO of the Credit Union Executives Society. We live by the famous words of our namesake, credit union and retail pioneer Edward A. Filene: “Progress is the constant replacing of the best there is with something still better.” Together, Filene and our thousands of supporters seek progress for credit unions by challenging the status quo, thinking differently, looking outside, asking and answering tough questions, and collaborating with like-minded organizations. Filene is a 501(c)(3) not-for-profit organization. Nearly 1,000 members make our research, innovation, and impact programs possible. Learn more at filene.org. “Progress is the constant replacing of the best there is with something still better!”—Edward A. Filene © 2013 Filene Research Institute - All rights reserved. Reprinted with permission

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