MIAMI – Any credit union involved in mortgage lending – and even those that aren't – knows rates are going up and refinance activity is slowing. But what they made not be aware of is the importance of assessing their mortgage portfolio in the changing rate environment. Freddie Mac's Dave McCraw, director of sales, community lending gave attendees at CUNA's Lending Council Conference an update on the mortgage market and suggested ways they can leverage the changes taking place to maximize services and improve their bottom line. According to McCraw, there are four areas credit unions need to refocus on as the mortgage market changes: * brisk home sales are keeping purchase money originations high. They're expected to reach $1.6 trillion in 2006. * home price appreciation will slow from a forecasted 10.8% in 2005 to 7.7% in 2006. * mortgage originations are declining – they totaled $3.9 trillion in 2003, and Freddie Mac expects them to total only $2.6 trillion in 2005. * the refinance share of applications is declining from 65% in 2003, to 43% in 2005, and to only and expected 33% in 2006. Freddie Mac economists, he said, are expecting a "gentle" upward trend in the 30-year fixed rate and expect it to average 6.4% by the end of 2005. That means, said McCraw, that "while there's been an interest in adjustable rate mortgages, we think fixed-rate products will be more attractive than they've been the last few months." According to Freddie Mac, 5/1 hybrids dominate the ARM market – approximately 42% of ARMs – but fixed-rate mortgages dominate the overall market and account for about 82% of the primary mortgages outstanding. ARMs only comprised about 16% of the prime MDO in July. McCraw said consumers' interest in the so-called exotic mortgages "is not as big as we believe. A lot of time with new types of mortgages, there's more interest than actual usage." He explained that most of the usage has been on the east and west coasts because of rising home prices. In markets where home prices are going up, being able to get an initial interest-only mortgage has been very helpful, he said. But these types of products haven't been as popular in the U.S. heartland. "A lot of credit unions may be sitting on 30-year mortgages with rates in the 5% range," said McCraw. "If you're sitting on a portfolio yielding less interest than rates, then a credit union needs to be cognizant of that." He added that Freddie Mac can help credit unions assess the value of their mortgage portfolio and discern its financial condition. Credit unions involved in mortgage lending during the now-ebbing refinance boom are quickly realizing that attracting members' mortgage dollars during the now-emerging purchase market is a lot different and harder. "During the refi boom, a lot of members just walked in the door and wanted to refinance their home. That's a lot different from a purchase market where you have to be more assertive and be able to work with various industry groups like realtors. You have to have a full range of products and promote those products," said McCraw. Citing NCUA statistics, McCraw said mortgage loans are a growing share of credit union loan assets – as of Dec. 31, 1994 first mortgages accounted for 21% of CUs' $179 billion in loans outstanding; as of March 31, 2005 they made up 32%. Fixed-rate first mortgages are currently 56% of CUs' mortgage loan assets. Despite these gains, credit unions only accounted for about 2% of the volume of originations in 2004. The problem, said McCraw, is "credit unions aren't aware of the opportunities that come from offering mortgages. They're a wonderful anchor product. The cross-sell opportunities from mortgages are on average five different products. For many credit unions it's a lack of experience in the market, for others they need to start promoting in their own membership that they offer an array of mortgage products." Of course fewer refis will mean less mortgage originations in 2005 and 2006 – Freddie Mac predicts there will be a 5% drop in originations – and that means credit unions will have to reevaluate their mortgage strategies and assess where the emerging market opportunities are. One key area will be designing strategies to appeal to minorities. Citing figures from the Harvard Joint Center for Housing Studies, Freddie Mac says minorities will represent nearly two-thirds of household growth by 2010. "Credit unions have to remember that each segment has different needs and habits. Being able to reach these markets will be key," said McCraw adding that CUs will need to offer a wider variety of products than they have in the past because of the way the market is changing. They'll also need to work with local community-based organizations in outreach efforts. "Even in this changing mortgage lending environment, the opportunity is enormous for credit unions to meet their memberships' needs," said McCraw. -

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