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Over the past several years, mortgage lending has not been a major focus at many credit unions, which have opted instead to concentrate on traditional core lending products such as auto finance and credit cards. This assertion is supported by credit unions’ 2-3% total market share of the residential mortgage market despite record low mortgage rates over the past few years. To put this number in perspective, each of the top 10 mortgage originators in the country will put more mortgage assets on their books this year than will the entire credit union industry. Where’s the growth? But mortgages may soon become more alluring, particularly as competition increases for members’ auto loans and credit cards. Captive auto finance companies are offering 0% financing and gaining a greater share of business at point-of-sale. And the credit card market, especially the prime segment, is increasingly dominated by a few large, aggressive, monoline issuers. This increased competition for the traditional credit union lending market is a primary reason why the industry experienced minimal loan growth of only 0.14% in the first quarter of `03. Meanwhile, deposits rose 5.48% compared to the same period in 2002. Clearly, credit unions could benefit by exploring new strategies to better balance loan growth with deposit growth. What other product lines can credit unions tap into for asset growth? Business/commercial lending presents an interesting opportunity for large credit unions. But the current 12.5% cap on assets in that particular category limits the potential of business/commercial lending as a long-term growth strategy. Moreover, commercial lending doesn’t play to credit unions’ traditional consumer marketing strengths and member loyalty. Today, mortgages present a great opportunity for credit union growth. Although a lower margin business, they are a key relationship-building product – and relationships are where credit unions excel. The challenge has been combining credit unions’ desire to deliver a superior member experience with the necessary operational capacity to grow the business. With the right focus and commitment, there should be no reason why credit unions cannot capture 10-15% of residential mortgage originations, or approximately the same share they hold for overall consumer lending. This ambitious goal will not be reached overnight, and the projected $3.7 trillion in originations this year is clearly an aberration. According to the Mortgage Bankers Association of America, originations are expected to normalize in a range of $1.5 trillion to $2.0 trillion over the next two years. So, a 10% share of this market translates into a $150 billion to $200 billion opportunity for credit unions. Considering that CUNA puts the industry’s total assets at $600 billion at the end of the first quarter, such dramatic growth won’t come easily. And most likely it won’t happen by pursuing traditional origination strategies. We know that conventional wisdom says that credit unions don’t have the infrastructure to handle current levels of demand; they don’t have the technology in place to deliver the quick underwriting decisions and closings that today’s borrowers expect; and they can’t compete with major national lenders on price or secondary market execution. True, infrastructure and technology hurdles will have to be overcome, but our optimism that they can be is grounded in three important beliefs: *Credit unions enjoy a member loyalty level that is the envy of other financial services providers although many CUs have yet to fully exploit this loyalty in terms of cross-selling; *Credit unions possess a service orientation that is second-to-none and can help differentiate them in mortgage lending; *New partnership models enable credit unions to provide an exceptional member experience, through the use of multi-channel service delivery, without significant infrastructure and technology investment. And this can be accomplished while promoting the credit union’s brand and member relationships. Once a credit union decides that mortgage lending is, in fact, a promising path to growth and enhanced member service, the decision then turns to “buy or build.” Building the infrastructure to compete in today’s mortgage market is an expensive and high-risk proposition. To fulfill the service promise, credit unions must not only deliver fast decisions and reduced time to closing, they must also be prepared to transact business any way their members desire – in-branch, by phone, or online. This adds another layer of cost and complexity. Co-sourcing is an increasingly attractive option for credit unions that want to expand their mortgage operations by adding state-of-the-art lending technology without incurring the cost of building it themselves. Granted, CUs are more familiar with outsourcing. Though it’s a relatively new concept, co-sourcing allows for better partnerships between the service provider and their clients than do some other traditional outsourcing arrangements. It provides the credit union with the ability to retain more control over the process while delivering an unparalleled member experience. T&C FCU, Pontiac, Mich. and Coastal FCU, Raleigh, N.C. are among the credit unions that have already embraced the co-sourcing concept with much success. They use CUMACT Powered by NexstarT, a mortgage co-sourcing program formed last year by Bear Stearns Credit Union Financial Services and Nexstar Financial Corp, but there are other co-sourcing programs available for credit unions to choose from. When searching for a mortgage partner – whether they be co-sourcing or outsourcing – credit unions should look for a mortgage provider that offers the following: * Proven mortgage industry expertise; * “Ahead-of-the-art” technology; * Ability to originate through multiple channels – online, by phone, or in-branch; * Private-label and client-branded options that protect and enhance the credit union’s brand; * A set of clearly delineated service standards; * Flexible structures that provide options in products, pricing, underwriting, servicing, and investment/secondary marketing strategies; * A business-to-business model so that the outsourcer does not compete with the credit union for its members; * Quick time to market; * Marketing support; * And a clear understanding of, and commitment to, the credit union community. Clearly, mortgages are one of the brighter growth opportunities for credit unions. The key is putting a proven operational model behind the existing focus on member service. With the right partner, a commitment to service, and strong member demand, there is no reason why credit unions can’t capture a significant share of the mortgage business and ignite asset growth. In considering this challenge, keep in mind the advice of Tom Peters: “You can’t think your way out of a box, you’ve got to act.”

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