Mortgages Shifting From Refinance to Purchase
Credit unions and other housing finance lenders face an economic pinch as rising interest rates squash demand for refinanced mortgage loans while demand for purchase money loans still struggles to grow.
Borrowers use so-called purchase money loans to buy property rather to merely refinance a previously existing loan.
In late August, analysts with SNL Financial reported in a data dispatch that rising rates have strongly reduced demand for housing refinance loans, but said demand for new housing finance loans has not yet grown enough to provide business for every existing mortgage firm.
Executives quoted in the report forecasted a shake out, particularly among mortgage firms which only began business in the last few years. They also forecasted that demand for purchase money loans will continue to rise as long as the economy continues to expand and unemployment continues to drop. Purchase money demand is much more correlated to economic growth than with interest rates, the report said.
Tracy Ashfield, founded of Ashfield and Associates, a housing finance consultancy in business, agreed with the SNL analysts, noting that the Mortgage Bankers Association predicted housing finance lenders will make more purchase money loans than refinance existing loans by the fourth quarter of 2013.
Further, the MBA forecasted that purchases and refinances will almost achieve parity by the end of the third quarter, with 51% of the home finance loans in that quarter being refinanced loans and 49% purchase loans.
“But the big news is that overall loan volume is forecast to shrink,” she said, noting that the MBA reported 2012’s overall mortgage volume was $1.75 trillion, but said that number will fall to $1.59 trillion this year and to drop further to $1.09 trillion in 2014. That shrinking volume means that the whole mortgage pie is likely going to get smaller, and credit unions are going to have to struggle to make sure they get a piece of that business, she said.
Ashfield, who has consulted on housing finance issues with leading credit unions and mortgage CUSOs, urged credit unions to pay attention to three different aspects of readying their housing finance operations to compete with in the changing market: people, process and products.
She said credit unions don’t necessarily need to hire new staffers or managers to try to capture a bigger slice of the purchase money market, but said they should focus on helping existing employees re-tool for the changed market dynamic.
She pointed out that a refinanced loan is a relatively simple transaction, with one borrower, no sellers and no real estate professionals having an interest in the transaction. By comparison, a credit union loan officer processing a purchase money loan has to be aware that not only a borrower has an interest in the outcome, but so might a seller who is seeking to purchase another home, as well as a real estate professional who could have their own alternate lender ready in the wings if the credit union should stumble in the way it handles the loan.
There are similar concerns with process, she said.
“If I am refinancing a loan,” she said, “of course I want it done correctly and for it not to take too long, but I am not really concerned about the time it takes in the same way as I would be if I am applying for a purchase money loan. The stakes are just higher.”
Efficiency, timeliness and a good deal of contact between the borrower and the credit union are all hallmarks of the purchase money loan process and credit unions which want to win more purchase money business need to try to include them, Ashfield explained.
Finally, credit unions who want to build purchase money loan volume should make sure they have loan products that members would find attractive. She recounted how one credit union had achieved great housing finance success with a 10-year loan that baby boomers were using to refinance smaller existing balances on loans they expected to pay off before they retired.
“As well as that loan has performed,” Ashfield said, “It’s not the sort of loan likely to attract a borrower seeking to finance their first home purchase.”
Credit unions need to know their markets well enough to design the sort of loan products that are going to appeal to purchase money borrowers, she said. In some markets, it might be something close to a jumbo loan, she added.
One credit union that has made progress in setting up a housing finance program aimed at purchase money lending has done through a partnership with a leading CUSO that specializes in the loans.
The 42,000-member, $777 million Los Angeles Police Federal Credit Union has begun moving its housing finance program away from mostly refinancing existing loans and towards funding new loans with a parntership with CU Realty Services.
Two LAPFCU executives, Manny Padilla, vice president for marketing, and Ron Guzman, vice president for loan services, explained that a combination of rising interest rates nationally and rising home values in the Los Angeles area helped LAPFCU conclude that the long-standing refinance wave in housing finance had finally begun to recede and it was time to focus on new home loans again.
Like many credit unions with a strong track record in refinances, it was not an easy switch to make. Of the $153 million in real estate loans the credit union made last year, the executives reported between 95% and 97% had been refinance loans, and in many ways LAPFCU was already set up for this type of lending.
“But the rising interest rates for mortgage loans helped damp down some of the refinance demand and rising prices both helped bring some underwater home owners back up again and helped make some more homes available,” Guzman said.
LAPFCU turned to the Phoenix-based CU Realty for help. CU Realty is a real estate CUSO that helps credit unions get in with members very early into their home purchase and works with real estate professionals to help make sure the credit union captures the business.
“We know the entity homebuyers connect with first during their online search is the one most likely to steer them through the buying process—including financing,” said Mike Corn, CU Realty’s CEO. “By making an early connection, credit unions can actively help members find their homes and finance them.”
LAPFCU worked with CU Realty to craft a new program that both will help credit union members find a new home and also help them find a real estate professional and get pre-qualified for a housing finace loan. The program introduces members to real estate tools, such as the multiple listing services, which can help them more efficiently look for real estate, the executives explained.
They also noted that many members have been enthusiastic about the 20% rebate that CU Realty Realtors provide when a home is bought or sold.
“Everybody likes to make some extra money,” Padilla said.
Reaction to the program has been very strong.
LAPFCU launched the program June 24 after a series of real estate seminars. After less than two months, the executives reported that 136 members had signed on, meaning they have logged in to the system to look at home listings, chosen a real estate professional to work with and, in many cases, gained pre-approved for a LAPFCU mortgage loan. So far, four members are working through loan application process, they said.