WASHINGTON – Tightening liquidity fueled by decreasing member deposit growth and increasing loan demand has heightened credit unions' vulnerability to balance sheet risk. The secondary market, offered Callahan & Associates in a recent Webinar, is positioned to help CUs mitigate that risk while giving them the opportunity to increase liquidity.
According to Callahan & Associates industry analyst Tom Geggel who hosted the May 17th Webinar on "Optimizing Performance Using the Secondary Market," credit union share growth fell to a 10-year low as of December of 2005, to 3.8%. He stressed though that this trend is not unique to credit unions. The U.S. as a whole, he noted, experienced a negative savings rate of negative 0.5% resulting from consumers spending more money than saving.
But for the CU industry that trend is coupled with other factors such as declining membership growth.
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At the same time, borrowing is at an all-time high among credit unions, in fact it broke the $20 billion mark by the end of 2005 for the first time ever.
Ironically, at the same time the origination market is projected to decline into the rest of 2006 and into 2007, credit unions are placing greater emphasis on real estate lending. Although credit unions continue to hold a small share of the first mortgage origination market, working with the secondary market can provide them with new products they can use to boost their market share, said Geggel.
In 2005, for example, First CU, Tempe, Ariz., sold $91 million of its loans on the secondary market – a 13.8% increase over 2004 – ranking the $465 million in assets-CU the 39th CU in the country for dollar volume of loans sold on the secondary market. According to Chief Financial Officer Jay Curtis, 15%-20% of its mortgage loan production are low-risk loans, and lot and construction loans, all of which are strong relationship type of products that "require a lot of additional attention."
It sells more nontraditional types of loans on the secondary market such as interest-only and stated income loans.
Selling on the secondary market has also created new mortgage opportunities for AEA FCU, Yuma, Ariz. The $302 million CU provides up to 100% financing on manufactured housing. It also participates in the Southwest Border Alliance program that allows members of modest means to put down as little as $400 of their own money for the sweat equity program. In addition, it partners with nonprofits and the Housing Authority of the City of Yuma, which builds new condo projects where 20% of the units are slated for low-income families.
Riverside, Calif.'s Altura Credit Union's first mortgage secondary market sales are 75% above its 2003 levels during the refinance boom. As part of its strategies for managing balance sheet risks, the $737 million CU sells all its fixed-rate first mortgages servicing retained whenever possible. It also limits its held-to-maturity portfolio of first mortgages to 20% of its assets. Altura CU also portfolios hybrids, adjustable-rate mortgages and cherry-picks some 15- and 30-year fixed-rate loans.
About a year-and-a-half ago, Altura expanded its field of membership and added San Bernardino and Orange counties. With the median house price in Orange County being high enough to qualify as a jumbo mortgage, Altura CU now makes those types of loans as well and has the right of first refusal with secondary market investors on these loans.
In 2004, Altura CU started a wholly-owned CUSO – Patrion Mortgage – and is currently developing a wholesale broker operation program to increase the CU's market share by expanding Altura's hybrid portfolio. The CU plans to sell those to the secondary market as well.
Also featured in the Webinar was Toyota FCU, Torrance Calif., the single-sponsor CU for Toyota Motor Corp. According to Vice President of Mortgage Lending Ed Casanova, the $233 million CU's secondary market sales increased 33.9% to over $50 million in 2005. He explained that the CU "uses the secondary market to keep the loan-to-share ratio in an appropriate range to manage liquidity," that is to maintain the ratio below 90%. But it keeps a mix of 30-year fixed and adjustable rate mortgages in its portfolio. While Toyota FCU doesn't have a formal cap for these loans, Casanova said the CU tries to keep those loans at or near a third of its portfolio.
Toyota FCU also offers nonprime and nonconforming loans, which it sells to Charlie Mac rather than to Fannie Mae or Freddie Mac because of the loan amount. It is also beginning to offer stated-income loans to its members.
"The key to building and maintaining a member for life is to constantly reinforce the message `we're here whenever or whatever your financial need is,' " said Casanova. -
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