The reform of the secondary mortgage market in the U.S. is like a very slow moving train. As of now, it appears that neither political party will take up the issue until after the 2012 elections, which are still more than a year away. But even a very slow moving train eventually gets where it’s going. Before that happens, I believe credit unions need to be organized to meet it.
Recently, I had the opportunity to join a panel with two of my fellow CEOs, Rudy Hanley from SchoolsFirst Federal Credit Union and Nader Moghaddam from Financial Partners Credit Union, along with John McKechnie from Total Spectrum, a Washington government relations firm, at the American Credit Union Mortgage Association Conference to discuss the future of secondary markets and credit union implications.
We were impressed to see almost 300 industry professionals take so much interest in the subject. This is a testimony to the importance of real estate lending to credit unions. As we read trade literature and listen to business news, we hear much about the legislative jockeying to shape the future of the secondary mortgage market, particularly of its long-time institutions Fannie Mae and Freddie Mac.
Although there is sure to be much debate about the ultimate structure and mission of the potential replacements, we, as credit unions, need to develop contingency plans in case the future developments fail to produce a favorable outcome for our industry.
To appreciate the issue's gravity, certain fundamentals need to be acknowledged. Mortgage securitization is a scale business and Wall Street requires a constant flow of large dollar volumes to set up and advance a securitization business. They don’t do one- offs. Credit unions originate a relatively small portion of the total volume as evidenced by our 6% market share.
It is further interesting to note that the originated volume is the split between a somewhat small number of credit unions. With these facts in mind, the only way to have a meaningful impact is through collaboration among the credit union community. If we prove successful in taking a united step, we can achieve better pricing and options for all credit union participants and their members.
By organizing now, we can accumulate our collective volumes, understand our performance and, most importantly, be prepared for any of the outcomes at whatever speed they develop. If we do not, then we will be required to quickly put something together or end up being picked off by a few, large players, dividing the business. If the business is divided, it will never be put back together and the pricing advantage will be lost to us.
The great strength of the current government-sponsored enterprise model for credit unions is that it forces equal behavior and provides unparalleled asset/liability management options. If those options disappear, our business model will be crushed. If we don’t have equal access then the largest and smallest of the movement will not be able to compete on price and potentially service with the largest banks.
The mortgage business is a key driver of interest and noninterest income. It is one of the key areas where credit unions can differentiate themselves in how they serve members. It is core to our current business model and a cornerstone for developing deep member relationships. To lose access or to lose equal pricing could dramatically change our business.
The ALM issues are large. GSEs mitigate credit and interest rate risk, provide liquidly, standardization and allow us to retain mortgage servicing rights. Any or all of this could change without a GSE model or government entity that regulates these issues. If the current model gives way to privatization, then large banks would dominate the market and set the rules to play the game. They are not likely to care about our interests or treat us fairly.
Without the GSEs, during difficult times, we may not have a conduit to the secondary market. To see an example, look at the jumbo secondary market today. It is open to all players and yet no one is playing. Where would we be if the same model was prevailing over the conforming loans? Without some sort of government support, will there be affordable 30-year fixed loans?
The fate and interest of current and future members rests on the answers to these questions.
They say need is the mother of all inventions. I think we can safely prove a need to concerted action by credit unions. By working as we have done many times before through shared branches, credit cards, insurance and more, we can move these issues forward. This is time to bring all industry organizations, including the trades, groups, CUSOs, researchers and opinion leaders to collaborate in developing a common solution for the long term benefit to our industry. It is in our best interest that this is a good starting point.
Kirk Kordeleski is CEO of Bethpage Federal Credit Union.
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