Credit unions and other housing finance lenders facean economic pinch as rising interest rates squash demand forrefinanced mortgage loans while demand for purchase money loansstill struggles to grow.

Borrowers use so-called purchase money loans to buy propertyrather to merely refinance a previously existing loan.

In late August, analysts with SNL Financialreported in a data dispatch that rising rates have strongly reduceddemand for housing refinance loans, but said demand for new housingfinance loans has not yet grown enough to provide business forevery existing mortgage firm.

Executives quoted in the report forecasted a shake out,particularly among mortgage firms which only began business in thelast few years. They also forecasted that demand for purchase moneyloans will continue to rise as long as the economy continues toexpand and unemployment continues to drop. Purchase money demand ismuch more correlated to economic growth than with interest rates,the report said.

Tracy Ashfield, founded of Ashfield and Associates, a housingfinance consultancy in business, agreed with the SNL analysts,noting that the Mortgage Bankers Association predicted housingfinance lenders will make more purchase money loans than refinanceexisting loans by the fourth quarter of 2013.

Further, the MBA forecasted that purchases and refinances willalmost achieve parity by the end of the third quarter, with 51% ofthe home finance loans in that quarter being refinanced loans and49% purchase loans.

“But the big news is that overall loan volume is forecast toshrink,” she said, noting that the MBA reported 2012's overallmortgage volume was $1.75 trillion, but said that number will fallto $1.59 trillion this year and to drop further to $1.09 trillionin 2014. That shrinking volume means that the whole mortgage pie islikely going to get smaller, and credit unions are going to have tostruggle to make sure they get a piece of that business, shesaid.

Ashfield, who has consulted on housing finance issues withleading credit unions and mortgage CUSOs, urged credit unions topay attention to three different aspects of readying their housingfinance operations to compete with in the changing market: people,process and products.

She said credit unions don't necessarily need to hire newstaffers or managers to try to capture a bigger slice of thepurchase money market, but said they should focus on helpingexisting employees re-tool for the changed market dynamic.

She pointed out that a refinanced loan is a relatively simpletransaction, with one borrower, no sellers and no real estateprofessionals having an interest in the transaction. By comparison,a credit union loan officer processing a purchase money loan has tobe aware that not only a borrower has an interest in the outcome,but so might a seller who is seeking to purchase another home, aswell as a real estate professional who could have their ownalternate lender ready in the wings if the credit union shouldstumble 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 itdone correctly and for it not to take too long, but I am not reallyconcerned about the time it takes in the same way as I would be ifI am applying for a purchase money loan. The stakes are justhigher.”

Efficiency, timeliness and a good deal of contact between theborrower and the credit union are all hallmarks of the purchasemoney loan process and credit unions which want to win morepurchase money business need to try to include them, Ashfieldexplained.

Finally, credit unions who want to build purchase money loanvolume should make sure they have loan products that members wouldfind attractive. She recounted how one credit union had achievedgreat housing finance success with a 10-year loan that baby boomerswere using to refinance smaller existing balances on loans theyexpected to pay off before they retired.

“As well as that loan has performed,” Ashfield said, “It's notthe sort of loan likely to attract a borrower seeking to financetheir first home purchase.”

Credit unions need to know their markets well enough to designthe sort of loan products that are going to appeal to purchasemoney borrowers, she said. In some markets, it might be somethingclose to a jumbo loan, she added.

One credit union that has made progress in setting up a housingfinance program aimed at purchase money lending has done through apartnership with a leading CUSO that specializes in the loans.

The 42,000-member, $777 million Los Angeles Police Federal Credit Union has begun moving itshousing finance program away from mostly refinancing existing loansand towards funding new loans with a parntership with CU RealtyServices.

Two LAPFCU executives, Manny Padilla, vice president formarketing, and Ron Guzman, vice president for loan services,explained that a combination of rising interest rates nationallyand rising home values in the Los Angeles area helped LAPFCUconclude that the long-standing refinance wave in housing financehad finally begun to recede and it was time to focus on new homeloans again.

Like many credit unions with a strong track record inrefinances, it was not an easy switch to make. Of the $153 millionin real estate loans the credit union made last year, theexecutives reported between 95% and 97% had been refinance loans,and in many ways LAPFCU was already set up for this type oflending.

“But the rising interest rates for mortgage loans helped dampdown some of the refinance demand and rising prices both helpedbring some underwater home owners back up again and helped makesome more homes available,” Guzman said.

LAPFCU turned to the Phoenix-based CU Realty for help. CU Realtyis a real estate CUSO that helps credit unions get in with membersvery early into their home purchase and works with real estateprofessionals to help make sure the credit union captures thebusiness.

“We know the entity homebuyers connect with first during theironline search is the one most likely to steer them through thebuying process—including financing,” said Mike Corn, CU Realty'sCEO. “By making an early connection, credit unions can activelyhelp members find their homes and finance them.”

LAPFCU worked with CU Realty to craft a new program that bothwill help credit union members find a new home and also help themfind a real estate professional and get pre-qualified for a housingfinace loan. The program introduces members to real estate tools,such as the multiple listing services, which can help them moreefficiently look for real estate, the executives explained.

They also noted that many members have been enthusiastic aboutthe 20% rebate that CU Realty Realtors provide when a home isbought 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 realestate seminars. After less than two months, the executivesreported that 136 members had signed on, meaning they have loggedin to the system to look at home listings, chosen a real estateprofessional to work with and, in many cases, gained pre-approvedfor a LAPFCU mortgage loan. So far, four members are workingthrough loan application process, they said.