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CHICAGO – Mortgage lending consultant Tracy Ashfield didn’t mince words when she spoke to attendees of the NASCUS Credit Union Advisory Council’s Mortgage Lending Roundtable during the association’s annual conference here. “The mortgage landscape is changing, all the assumptions are falling apart. For the past four to five years, credit unions have been fortunate to been able to build a strategy to stay on track. But going into 2006, credit unions are going to have to rethink their strategies, processes and procedures because the old ones aren’t working anymore,” said Ashfield, president of Strategic Mortgage Solutions, LLC, Madison, Wis. And a lot of those new strategies will be affected by demographic market conditions such as in California where rising home prices have consumers and lenders focused on loan-to-value ratios. One of the areas, said Ashfield, where a change in credit unions’ lending strategies is becoming evident is in how they view members’ credit ratings. “Credit unions have had a tendency to say they only want the crme de la crme of borrowers or high-yielding non-conforming paper. Now in the evolving rate and purchase market environment, we’re seeing the emergence of the A-minus rating. Credit unions are saying they don’t necessarily want the A or A-plus paper because maybe they won’t be able to get a yield on their portfolio, but they don’t want the non-conforming paper either. They want the middle group to help keep the yield up in their portfolio without taking undue risk. They no longer want the crisp clean loan.” Ashfield stressed that, “no two financial institutions will look at a credit rating the same way. What’s A to one could be A-minus to another. A lot will be driven by demographic and regional issues.” “Consumers are getting so focused on what they’re monthly payments are that they’re missing the fine print. Products like interest only loans mean more affordability and smaller monthly payments even though the principal might increase, the consumers want those products,” said Ashfield. Products like these, she opined, will present unique challenges to credit unions because of their relations with their members. “How will you feel about offering a product like an interest only loan that’s not necessarily in your members’ best interest? How will credit unions react when the universe is offering loans a credit union mortgage person wouldn’t offer to their son or daughter?” she asked attendees. “The fact is credit unions will have to wrestle hard with whether to write what members want and is profitable, and what they know is in members’ best interest,” she added. If you look at credit unions’ mortgage numbers since 2003, she offered that “credit unions are not setting the world on fire” with mortgage lending, “and that can’t be blamed entirely on the end of the refi market and emergence of the purchase market.” Citing statistics from Callahan & Associates, in 2003 CUs granted $88.2 billion inmortgages and sold $37.5 billion that year; in 2004 that number dropped to $57.2 billion and $20.1 billion, respectively; and for the first half 2005 CUs have granted $27.7 billion mortgages and sold $9 billion. “And not all of that $9 billion is new products, some are old products that credit unions have been holding on to in their portfolios that they’ve now decided to take off their books and sell as they see interest rates go up,” she explained. But what we are seeing, Ashfield pointed out, is selling mortgages on the secondary market “is becoming more of a natural part of the business model” for credit unions. Years ago only the very large credit unions sold on the secondary market, she said, but the Government-Sponsored Enterprises have made it easier for all credit unions to do so. With the mortgage market continuing to evolve, Ashfield stressed “softer markets are the time to build efficiency. There is room for growth in a purchase market.” For credit unions to compete effectively in a purchase market, “they can no longer just take applications anymore. They have to be creative. What worked from 2001-2004 and into 2005, isn’t going to carry you into 2006 and 2007. Credit unions have to plan for the long-term and react to the short term,” said Ashfield. Dealing with what she said are the key mortgage lending issues for 2006 – managing cyclicality, increasing delivery channels, managing fixed costs – Ashfield said “credit unions will be asking themselves the same questions they did with risk-based lending. Is this product and practice friend or foe?” Among the various best practices she advised CUs to implement is to make an organizational commitment to mortgage lending. “Mortgage lending will be most effective and your share will grow when the entire credit union is focused on it. Don’t segregate the mortgage department. You’ll never have the success you want with mortgage lending if you make your mortgage department autonomous and stick it in a corner,” she emphasized. -

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