ANCHORAGE, Alaska -- For those credit unions that don't consider a mortgage program a core product, time and excuses may be fast running out.
Turnkey programs of varying scale and expertise have been available from outside vendors and CU-owned regional CUSOs for some time. For credit unions large enough to mount their own operation there was no impediment but marketing for increased penetration. Yet the CU mortgage portfolio has barely budged beyond 2%.
Now, a national credit union backed operation is making its debut that could leave CUs that send members elsewhere for a mortgage with little more than an unanswered question: why?
A Freddie Mac/CUNA alliance, partnered with Alaska USA Federal Credit Union, have agreed to offer a full-range of mortgage lending services to credit unions, secondary market strategies and support without the need to add and/or train dedicated mortgage staffers, build infrastructure or buy new technology. In other words, no large capital amount required, just the desire to see that any credit union, no matter its size, can put its members into the right home loan. Minimal start-up costs, diverse product selection and transparent online applications, service and support will bring a significant return with every closed loan, they say.
Lorran Skinner is Alaska USA's chief lending officer and is responsible for Alaska USA mortgage and real estate services. He was instrumental in the development of the Correspondent Mortgage Services Program. He noted proudly that Alaska USA FCU was the first federally chartered credit union in the country to legally make a long-term mortgage loan. "That was back in 1978 when Alaska USA closed its first mortgage loan right at 12:01 a.m. We had all the paperwork ready ahead of time. So, Alaska USA has been in mortgages as long as any federal credit union."
The CU had considered the idea of loan aggregation for some time," said Skinner. "Alaska USA is experienced in the process, since it operates a separate, wholly-owned mortgage company and has operated several joint venture mortgage companies in the past. It has also been encouraged to pursue aggregation by Freddie Mac, as a way to augment loan delivery volume, which can result in improved overall pricing."
In 1992 the CU began a wholly owned CUSO called Alaska Home Mortgage, Inc., which later changed to an LLC named Alaska USA Mortgage Co. LLC. "At first we weren't sure if associating the credit union's name would put off realtors or not, but the association turned out to be a plus. We employ commissioned originators in the mortgage company and serve our members primarily, but the credit union's field of membership is broad, so most nonmembers who apply become members in the process," said Skinner. All fixed-rate loans are sold to the secondary market.
Before 1992, Alaska USA had a limited market share in mortgages. They found that most inexperienced homebuyers, including loyal members, tended to get mortgage loans from the person or institution recommended by their realtor. "Most people relied heavily on their realtor," said Skinner.
"We branched out with joint venture companies with some of the state's largest real estate firms," Skinner said, but they have since divested of those due to competitive issues. "Now, Alaska USA is among the largest originators of mortgages in Alaska, and it also originates in the state of Washington, which is also growing." The credit union has developed longstanding relationships with both Fannie Mae and Freddie Mac and sells a lot of mortgages servicing released. The credit union's current mortgage servicing portfolio is $2.4 billion, and originates between $550 and $600 million per year in new mortgage loans.
Alaska USA also originates VA and FHA mortgage loans, securitizes those loans into Ginnie Mae securities and sells them directly to the bond markets. Alaska USA sells most conventional mortgages direct to Freddie Mac and Fannie Mae, but also deals with Countrywide, Wells Fargo, and various other secondary markets for niche products.
Skinner said that Alaska USA saw an opportunity in the CU space when CUNA Mortgage was sold to PHH. "We knew that not all credit unions would want to continue the relationship with PHH, and we saw the opportunity for a CU oriented entity to offer loan aggregation and fulfillment services. We wanted to offer a turnkey operation for CUs without the size, experience or internal infrastructure to start their own mortgage programs. We knew Alaska USA had sufficient expertise and thought we could leverage that."
First Thoughts, Expanded
Initially, Skinner admitted that he believed most of the opportunities would come from CUs that weren't in the mortgage business because they lacked the size and specialized expertise that an efficient mortgage lending operation requires. However, since the development of the program, they've made contact with CUs that are already in mortgage lending but are looking for ways to be more efficient, reduce costs and improve the bottom line.
He said the new program offers an efficient and economical way to originate mortgages and make a net return that's comparable to or better than what most internal operations can produce. It also offers credit unions that want to offer mortgage loans to their members a way to enter mortgage lending in a safe way without having to make a huge commitment in time, effort and resources. "I'd say our target includes small to medium sized CUs that are current originators, as well as those that aren't but want to offer mortgages to their members. Some larger credit unions may also find this approach worth considering from an efficiency and cost effectiveness standpoint," Skinner said.
The way the program has been structured, Alaska USA can handle the entire front end, including all member contact, or the correspondent credit union can choose to handle the member contact itself. If a credit union wants to handle the application origination part, they'd need some people with an adequate level of expertise to handle the initial application. They needn't be total experts who could complete the transaction, but trained well enough to be able to answer a member's initial questions. Alternatively, they can leave the whole process to Alaska USA.
Alaska USA will provide a Web site that is privately labeled for the participating CU where an application can be done by the member or by a CU rep. Or a CU rep can direct a borrower to a call center, where the application can be taken over the phone, and where all the borrower's questions can be answered. This call center is located in the United States and can handle English or Spanish speaking callers.
"Closings will take place all over the country, obviously," said Skinner. "The credit union is contracting with a number of vendors right now to handle the back room operations like processing, escrow closing services, inspections, appraisals and so on. But all of it will be transparent to the member."
The competition in this space would be PHH and some others like CU Members Mortgage, and perhaps several regional mortgage CUSOs. "Programs like Prime Alliance have a system to originate but it's not a true turnkey service," he said. "The credit unions would still need to have some expertise to build their internal operations when using a system like that. However, Skinner claims that Alaska USA's program offers safe efficient services from a credit union perspective with no real expertise required on the part of the participant.
Back to the Future
Freddie Mac wanted to increase its CU position following the sale of CUNA Mortgage to PHH, and they approached a number of large CUs to see if they were interested in doing loan aggregation services, explained Skinner. Freddie Mac has an existing relationship with CUNA, which came from the desire to help CUs get more into the mortgage arena. Alaska USA accepted their invitation to talk about it. The Correspondent Mortgage Lending Services Program is partly the result of that discussion and had been in development for several months.
The challenge with mortgage lending is to take a complex transaction and make it as simple as possible, which isn't an easy task, Skinner allowed, given the process and execution of all the steps that go into it. From Alaska USA's point of view, mortgage lending is really five different businesses in one, and expertise is required in every one if it is to be done well. The steps are:
- Origination--Taking the application, matching the correct program to the borrower, providing the necessary documentation and disclosures, processing the file and coordinating the closing (what a mortgage company typically does).
- Secondary Marketing--Establishing relationships with markets that acquire mortgage loans, and developing a sales process, which requires a whole different layer of expertise (getting the best prices, having the right software programs, hedging risk).
- Operations--The underwriting, closing, post-closing and shipping processes.
- Servicing--a specialized industry in itself; administration of the loan, processing escrow payments for insurance and taxes, making payments to investors, etc.
- Portfolio Lending--Holding the long-term mortgage loan as a credit union asset. Essentially, becoming an investor with all the risks (interest rate risks, credit risks, etc.) that go with being an investor. A credit union has to pay attention to its asset and liability management plan in order to portfolio long-term mortgage loans without excessive risk.