Professional sports thinking has it that the best defense is a good offense. Brian Daskalovitz feels much the same way about mortgage lending and its related fee income.
Daskalovitz, accounting services manager for FedChoice Federal Credit Union in Lanham, Md., is planning for flat financial growth in 2014. He also believes that rising interest rates will dampen any further mortgage refinancing, slicing into the $350 million credit union's noninterest income. To combat the anticipated income decline, Daskalovitz said FedChoice is ramping up its mortgage loan efforts in the new year.
“We’ve tried to stay out of this area because rates were at rock bottom,” Daskalovitz said of the credit union's $10 million mortgage loan portfolio. “We anticipate rates moving up, so we’re planning to expand our mortgage lending program.”
Mortgage lending comprises about 10% of the credit union's loan portfolio, the accounting manager said. Through more aggressive marketing and sales, the Maryland credit union hopes to double its mortgage portfolio in 2014.
FedChoice is not alone in its thinking. Fearing the decline in fees, credit unions across the country are looking for ways to replace what may be significant lost income from mortgage origination and sales fees, as well as other sources of noninterest income.
In the case of FedChoice, the mortgage fee income has not been as significant as income from other noninterest sources. Such is not the case with all credit unions.
“Noninterest income makes up roughly 30% of revenues for all credit unions, but the distribution varies greatly from credit union to credit union,” said Dwight Johnston, chief economist for the California and Nevada Credit Unions Leagues in Ontario, Calif. “The 30% figure is historically on the high side.”
NCUA statistics bear this out. Total noninterest income peaked at $14.6 billion for fourth-quarter 2012, or about 30% of total income for federally insured credit unions, according to NCUA spokesperson John Fairbanks. Of that figure, fee income, including mortgage fees, totaled $7 billion for the same period, also a record. By comparison, average noninterest income since 2009 has been about $7 billion for all types, or about 15% of credit unions’ total income, Fairbanks said.
Rising rates definitely mean that mortgage refinancing will decline, Johnston stressed, resulting in lower levels of related fee income. Larger credit unions with significant mortgage portfolios will feel the hit but may have the resources to compensate in other areas. And many credit unions with less than $100 million in assets and not as deeply involved in mortgages may slide by with only minimal damage, the economist said.
At West Community Credit Union, located in the St. Louis bedroom community of O’Fallon, Mo., mortgage fee income makes up a significant percentage of noninterest income. Declines in that income will be dearly felt by the $155 million institution, according to Jason Peach, its chief financial officer.
“With gross annual revenues close to $11 million, our mortgage fee income of $400,000 is not a small part of that,” said Peach. “It's an important revenue stream and if it's gone we would miss it.”
Mortgage refinancing declined during 2013, falling about $8 million behind the credit union's “stretch budget,” which translates to a net income loss of $110,000, said Peach. “That's not a small number for a credit union our size,” he added.
Mortgage fees are West Community's second-largest source of noninterest income after overdraft fees and more than double credit/debit card interchange fees. The decline in mortgage refinancing activity has sent definite signals to management that steps should be taken to offset continued decline, said Peach. As with FedChoice, those steps will be pro-active.
“There is still a huge opportunity to get mortgage purchase business, but doesn’t just walk in the door,” Peach said. ”We’re going hire mortgage loan officers that are outside sales people who will go out and find that business.”
Despite the challenges, West Community has set an optimistic goal in light of its new strategy. The credit union hopes that increased lending and fee income from other sources will make up for any shortfall from mortgage fee decline.
“In 2013 we grew 3%, which is slow compared to our historical average of 9% annually,” Peach said. “We’re budgeting 5% growth in 2014, which is close to what CUNA says the industry average will be.”
Mortgage lending and other growth activities in 2014 will require a shift in emphasis and, in some cases, a delicate balancing act for credit unions to stay on the right side of the ledger, according to William Kennedy, chief financial officer at the $147 million Interior Federal Credit Union in Washington, D.C. Whatever steps the Federal Reserve takes could have a significant impact on credit union stability and growth, he said.
“Most credit unions have a lot of activity within the mortgage arena, selling their loans to Fannie (Mae) and Freddie (Mac) and collecting fee income,” said Kennedy. “The quantitative easing going on by Fed has created an artificial environment, and once that easing stops the situation will have to be delicately managed.”
Interior Federal has 58% of its loan portfolio tied up in mortgages, which account for 40% of the $150 million credit union's assets. A bump of 80 to 90 bps can have a significant impact on a portfolio that size, Kennedy said.
“Overall portfolio declines past summer saw boatloads of credit unions moving from positive to negative market values,” Kennedy said. “The lucky ones went from really nice positive values to barely nice positive values.”
A credit union with a portfolio worth $100 million hit by an 8- to 90-bps decline can lose as much as $20 million over the life of the loans, Kennedy stressed. Many credit unions long ago cut whatever corners they could to cushion financial shortfalls, but fortunately the rising interest rates and new mortgage money could be good news for a lot of institutions ready and willing to take advantage of it, he added.
“New purchase mortgages have flipped places with mortgage refis, but the total pie is smaller,” Kennedy said. “Success will depend on how long and how well credit unions have built out their liability structures.”
Regulator fears to the contrary, an increase in interest rates is critical for continued economic growth, said the CFO. Credit unions need to be ready to embrace those increases and adjust their expectations and activities accordingly despite historic regulator concerns.
“Credit unions are like buffalo – one will go over the cliff and rest will follow,” said Kennedy. “There has to be a credit union pioneer, face down in the mud with an arrow in his back, who can point the way.”