With Motivation, CU Secondary Market Could Launch by Second-Quarter 2009
SEATTLE -- According to a white paper that will be presented here Oct. 16, not only could the credit union industry organize and capitalize its own secondary mortgage market, initial programs could begin as early as second quarter 2009.
Dan Green, executive vice president of strategy at mortgage CUSO Prime Alliance Solutions, is one of the authors of the paper that explores the potential of a credit union equivalent to Fannie Mae. The study was sponsored by the CU Housing Round Table, an informal group headed by Prime Alliance, majority-owner BECU and Callahan and Associates.
The paper, entitled "Housing Finance: A New Role For Credit Unions," was initiated in the heady days of late 2006, when the group's primary concern was running out of capital to finance a robust mortgage market.
"The thought at the time was, if we're successful at getting to a 10% market share, our balance sheets won't hold it, so we have to figure out what to do with all these loans," Green said.
The topic fits into the group's annual research theme: creative credit union balance sheet solutions. However, given this year's headlines, the idea of a credit union-controlled secondary market has taken on new meaning, with liquidity being only one challenge.
Green said he's updated the paper's numbers and recommendations as the financial landscape has changed. Not all traditional strategies are available anymore, either. For instance, many go-to independent investment banks aren't available for the project anymore, and the future of Fannie and Freddie has too many unknowns, he said.
Thanks to a strong history of cooperation, a secondary market doesn't necessarily mean securitization. In fact, Green said he thinks the industry might be better served with an organized mortgage participation loan network.
"Loan participation between credit unions has been around a very long time, even for mortgages, but there hasn't been any formal exchange for that," Green said, adding that his paper explores using existing participation systems, like those at corporates.
Credit unions can also exercise the option of selling whole loans to each other, using the participation network.
"I don't think we'll end up with any one particular idea, and this paper doesn't say 'this is how you should do it,'" Green said. "It just presents the broad range of options, and the next logical step will be figuring out what we should do."
Green said a few options are so realistic, the effort's first programs could debut by second quarter 2009.
But, who is the CU Housing Round Table, and do they have the firepower to pull it off?
The white paper lists some heavyweight co-authors in addition to Green, including Callahan's Chip Filson and Jay Johnson; Joe Barron, who heads Western Corporate's investment product development; Nizar Hashlamon of Prime Alliance; Sam Inman, chief financial officer of $1.8 billion Community First Credit Union of Florida; Bill Walker of CMG Mortgage Insurance Co.; and Denise Oullette of Oakmont Advisors LLC.
CUNA Mutual is listed on the Round Table's Web site as a corporate sponsor, and Prime Alliance's 1,600 clients represent 40% of credit union mortgages.
The mammoth $8.5 billion BECU isn't the only heavyweight credit union sponsor, either. The group's natural person sponsor list is an A-to-Z roll call of high-profile, large credit unions, from Alaska USA, Alliant CU and American Airlines FCU to Suncoast Schools FCU, Wescom CU and Xceed Financial FCU.
"If you look at the folks involved, absolutely, we've got people who are very active and passionate about credit union mortgage lending who want to see these things happen," Green said. "It's going to take a cooperative, collaborative effort, and thankfully, it's something credit unions are good at already. It makes us stand apart, and it will boost our success in this effort."
The credit union industry can also proceed with the new endeavor thanks to staying the underwriting course and not getting into subprime lending, Green said. Difficulties in the market and a distrust of banks and Wall Street among consumers also provides a once-in-a-lifetime opportunity, he added.
The American Credit Union Mortgage Association is a corporate sponsor of the Round Table, and president Bob Dorsa said he's anxiously awaiting the paper's presentation. Dorsa will jet to Seattle for the event only days after wrapping up his own organization's annual meeting in Las Vegas.
"We've actually been talking about [a credit union secondary market] amongst ourselves for many years," Dorsa said, "and really, the forerunner to all of this is loan participations, which have been baby steps toward getting some kind of formal secondary market."
The idea of keeping liquidity in the family isn't a new one, he said. In fact, Dorsa recalled a business plan he wrote 25 years ago when he headed the industry's first broker-dealer CUSO for now $1.4 billion Premiere America CU, which was known as Litton Employees FCU back then.
"My plan at the time was to originate mortgage loans through the credit union, securitize them through the CUSO and sell those securities to the Litton pension fund," Dorsa said, "so if you're asking me what I think of the idea, 25 years later, I'm glad to know it's finally getting some serious attention."
Dorsa said he agreed with those in the industry who speculate that credit union mortgage-backed securities would have more value, thanks to stronger underwriting and credit quality.
"However, my concern was if our volume wasn't sufficient enough, our stuff would get diluted with the others and reduce or eliminate our control abilities," he said. "So as long as it stays under the control of credit union system, and that's what the housing round table is discussing, I'm for it."
Dorsa thinks the credit union industry is capable of building up enough market share to be a force to be reckoned with on Wall Street. He predicted that the industry has the potential to increase market share to as much as 6% within the next 18 months.
"There will probably be a lot of good, talented people from the financial industry looking for work, and credit unions could probably pick up some good human resources," Dorsa said. "It's going to take guts and determination, and we can't be discouraged by people saying it will never work."
ACUMA will exhibit at the National Association of Realtor's annual convention in November, where Dorsa said he will appeal to the nation's realtors, who are hungry for partners.
"I hope the credit union system is ready to respond when realtors come knocking on their doors," he said. "Any credit union with an ounce of strategic timing has to realize this could be the last great opportunity to become a major player in the consumer financial services marketplace."