Credit unions and other mortgage lenders faced an economic pinchin 2013 as rising interest rates began to squash demand forrefinanced mortgage loans while demand for purchase money loansstill struggled to grow.

Borrowers shifted from refinancing to buying.

In late August, analysts with SNL Financial reported in a datadispatch that rising rates had strongly reduced demand for housingrefinance loans, but said demand for new mortgages had not yetgrown enough to provide business for every existing mortgagefirm.

Executives quoted in the report forecast a shakeout,particularly among mortgage firms which only began business in thepast few years. They also forecast that demand for purchase moneyloans will continue to rise as long as the economy continues toexpand and employment figures improve. Purchase money demand has astronger correlation to economic growth than interest rates, thereport said.

Tracy Ashfield, founder of housing finance consultancy Ashfield&Associates in Madison, Wis., agreed with the SNL analysts,noting that the Mortgage Bankers Association predicted mortgagelenders will make more purchase money loans than refinance existingloans by the fourth quarter of 2013.

Further, the MBA forecast 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,” Ashfield 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, Ashfieldsaid.

As the year drew to a close, it was unclear whether enoughcredit unions had gotten the message, she said.

Ashfield pointed out that a refinanced loan is a relativelysimple transaction, with one borrower, no sellers and no realestate professionals having an interest in the transaction. Bycomparison, a credit union loan officer processing a purchase moneyloan has to be aware that not only a borrower has an interest inthe outcome, but so might a seller who is seeking to purchaseanother home, as well as real estate professionals who could havetheir own alternate lender ready in the wings if the credit unionshould stumble in the way it handles the loan.

There are similar concerns with process, Ashfield said.

“If I'm refinancing a loan,” she said, “of course I want it donecorrectly and for it not to take too long, but I'm 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 that want to build purchase money loanvolume should make sure they have loan products that members wouldfind attractive. Ashfield recounted how one credit union hadachieved great mortgage success with a 10-year loan that babyboomers were using to refinance smaller existing balances on loansthey expected 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.”