WEST PALM BEACH, Fla. – By all accounts, 2002 was a banner year for the mortgage industry, and credit unions' mortgage portfolios reflect that. But for all their mortgage originations processed last year, credit unions are still having difficulty increasing their share of the overall mortgage market beyond the 2-3% range its been at for the past several years. CU economic experts say changes may be in the offing. Consider the following stats from Callahan & Associates: early estimates show CUs' share of first-mortgage originations in 2002 was roughly 2.2% of total U.S. mortgage originations; 48% of member households have a mortgage loan, but only 7% of that group has a mortgage through their CU. This at a time when CUs processed 31% more first mortgages in the first six months of 2002 compared to the same period in 2001, and the National Association of Realtors shows 2002 set a record for existing home sales. NAFCU Economist Jeff Taylor says several factors are to blame for CUs' relatively small share of the mortgage market compared to other mortgage lenders. For one thing, he says, credit unions are just beginning to get in to first mortgage real estate. "There are a lot of asset liability management issues and capital that has to be set aside to do first mortgages, as well as technology and the infrastructure to handle and process originations. That puts first mortgages out of reach for most small credit unions," he said. Taylor opined that, "Credit unions' share of the mortgage market is being carried by large credit unions." CUNA Economist Steve Rick agreed. "Overall if you look at the credit union industry and the number of credit unions involved with mortgage lending, there are still more credit unions that don't offer first mortgages than do." But that number is growing, and year end 2002 data show that while large credit unions still dominate the mortgage market, an increasing number of small and mid-size CUs are getting involved in the product (see chart). As of mid-year 2002, NCUA call report data showed 48.5% of all CUs offer mortgages. That's up from 47.4% in mid-year 2001, and 46.4% in mid-year 2000. Ten years ago, said Rick, NCUA call reports showed only a little more than a third – 39.8% – of all CUs offered first mortgages. CUNA year-end 2002 data also show dollar volume for fixed-rate mortgages held was up 15.3% from December 2001-$76.7 billion compared to $66.5 billion. Dollar volume for adjustable mortgages held was up 13.7%, year-end 2002 to 2001 – $28.9 billion compared to $25.5 billion.. "Just imagine how much higher those number would be if all credit unions offered mortgages," said Rick. Even so, Rick said credit unions that offer first mortgages are up against aggressive direct mail and telemarketing efforts by mortgage brokers. "A lot of members are taken in by phone solicitation offers from mortgage brokers that don't tell them about hidden fees or the fine points of their offers. Members get psyched on brokers' low interest rate offers," he said. Jim McCourt, SVP, home ownership solutions for CUNA Mutual Mortgage cited another contributing factor – capacity. "Credit unions haven't built up their capacity to keep pace with other competitors and member demand. "Capacity holds credit unions back from gaining a larger share of the first mortgage market," McCourt continued. "Mortgages are a cyclical business, and credit unions don't like to add staff when demand is high and then have to lay them off later." CUs' increased use of outsourcing is allowing them to channel their first mortgage overflow and handle excess capacity. McCourt also offered that the increase in the number of small and mid-size credit unions that are offering first mortgages is a symptom of the low interest rate environment, "struggling" auto loans, "less robust" consumer loans, and high member deposits in share accounts. "First mortgages and refinancings are a natural option for them as a way to offload some of the money accumulating in deposits," he said. The challenge, said McCourt, will be when mortgage rates begin to go up and member demand drops off. "These CUs will have to be convinced that they've already gotten their feet wet in mortgage lending and have done it, what they need to do now is shift their focus to the purchase mortgage market," he said. That might be easier said than done, McCourt concedes. "Small and mid-size credit unions' bread and butter loans have always been consumer loans. Those are easy and they don't have the guidelines and compliance issues like mortgages. Some credit unions have also gotten burned on mortgage operations," he said. Five years from now, Taylor expects credit unions' share of the mortgage market will increase, albeit he said "it won't be huge." "As credit unions continue to add select employee groups and convert to community charters, their pool of potential borrowers will increase," he said. In addition, as the number of mortgage CUSOs increase, small and mid-size credit unions that have wanted to get involved with mortgage lending but felt they couldn't support the infrastructure, will use the services of mortgage CUSOs as a way to avoid having to bring all of the lending operations in-house. In addition, credit unions' relationship with Freddie Mac and Fannie Mae is expanding, and that alleviates credit unions' concerns about retaining first mortgages in their portfolios. CUNA's Rick agreed that credit unions' increased access to the secondary mortgage lenders and their lending tools has opened up mortgage lending doors for many credit unions that otherwise couldn't entertain offering the services. McCourt is more optimistic predicts credit unions will hold a 5-8% share of the first mortgage market in five years. To get there, credit unions will have to do a lot of educating and marketing to members and make them aware that they offer first mortgages, he said. "Credit unions aren't beating their chest enough to let members know they offer first mortgages," said McCourt. The perception among members is that "credit unions aren't in the first mortgage game." Last year, CUNA Mutual Mortgage began offering its Homeownership Solutions comprised of six mortgage lending solutions that CUs can select from that lets them offer first mortgages and determine their level of involvement. "The objective is to enable credit unions of all sizes to capture a larger share of the home mortgage market. Even very small credit unions should offer first mortgages, and there should be a way for them to do that," said McCourt. Taylor put it this way: "Credit unions' growth in market share won't happen overnight, but the movement is towards that happening. With as much demand as there is among members for mortgage services, all credit unions will need to think about offering them." -

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