WASHINGTON – Rising interest rates coupled with appreciating home prices nationwide are forcing credit unions involved with mortgage lending to offer members more non-traditional mortgage products. No where is this more evident than in the growing popularity of adjustable rate mortgages (ARMs). In a May 17th Webinar hosted by Callahan & Associates on "ARMing Your CU with Non-Traditional Mortgage Offerings," industry analyst Tom Geggel said while the number of credit unions offering ARMs has stayed fairly constant over the last 10 years except for a decline in 2001, the amount of ARMs originated by credit unions in 2004 has increased almost 400% in the last five years. As of the fourth quarter 2004, ARMs account for 40.9% of credit unions' first mortgage origination. While fixed rate mortgages still make up more than half of credit unions' first mortgage activity, Geggel said the ARMs level is at its highest point since 1999, "due to the reaction of the Federal Reserve's movement on rates." CUs' growth in ARM activity mirrors what the mortgage industry is seeing nationwide among all lenders. ARMs have become a larger percentage of the mortgage industry's origination volume – they accounted for 27% of mortgage originations at the end of 2003 and 38% by the end of third quarter 2004 – and are projected to maintain that volume through 2007 due to higher house values. Callahan estimates ARMs will comprise 37% of mortgage originations by 2007. The growing popularity of ARMs is only one mortgage product credit unions are seeing more interest in among their members in the emerging mortgage environment. Other non-traditional mortgage types such as hybrids, balloon mortgages, interest-only, and jumbo mortgages are also turning up on credit unions' mortgage menu list. Another newer non-traditional mortgage product that Geggel predicts will grow in prominence in CUs' mortgage portfolio is the 40-year mortgage. Fannie Mae has just completed an 18-month pilot program with 21 CUs and in June plans to begin purchasing the product on a nationwide basis (see related story page 24). With the growing number of mortgage products available to members to select from, Geggel stresses that member education strategies are key, whether they're one-on-one with members or more general member-wide through articles in monthly newsletters or statement stuffers. Geggel's assessments on credit unions' ARMs strategies were underscored by three credit union mortgage professionals who participated in the Webinar – Bill Fulk, VP of Lending, Three Rivers FCU; David VanDusseldorp, VP Mortgage Loans, University of Iowa Community CU; and Phil Greer, SVP of Lending, State Employees' CU of N.C. All three explained that offering ARMs has given their credit union greater ability to manage rate risk and the ability to remain competitive with other mortgage lenders. "We don't want to send members to our competitors," said Fulk. Greer agreed, adding that, "Today's economic climate means risk management is more important than ever. Deregulation, industry consolidation and industry overcapacity all have combined to make competition more fierce in the mortgage lending market." As the purchase mortgage market continues to evolve and interest rates and home prices continue to go up, the three credit union mortgage professionals agreed that CUs must find a way to expand and hype the uniqueness of their mortgage products through member education. Three Rivers FCU, for example, offers members the ability to make bimonthly payment options. The objective is to not only make members aware of what the credit union can offer them, but as Greer said, to keep the member even after they refinance their mortgage. That means cross-selling members on other products and services and to continuously educate members on the mortgage and home buying process. -

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