While the supposed "housing bubble" may not have burst as many expected, there's no question that the tide has recently shifted in the mortgage lending marketplace. Rising interest rates have left credit union mortgage lenders with less wind in their sails, and as the housing market has cooled, competition for real estate loans has heated up.
Unfortunately, this slowdown all but guarantees that credit unions are at the end of a three-year "golden period" where the industry made huge strides with its mortgage lending efforts. Riding on the crest of the housing market wave, credit union real estate portfolios grew from $173 billion in 2003 to $238 billion at the end of June 2006. Real estate loans now comprise 48% of total loans and 33% of total assets, both record highs for credit unions. Yet despite this tremendous growth, credit unions only boosted their share of the total real estate loan market to 2.5%.
Without question, challenges lie ahead for credit union mortgage lenders. Obviously, the real estate market is extremely competitive, and the changing economic conditions will make mortgage lending even more difficult. NAFCU expects the pace of economic activity to slow from 5.6% during the first quarter to a "soft landing" pace of about 3% over the second half of this year.
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While labor market conditions, income growth and demographics are expected to be positives for the housing market over the near-term, the decline in affordability coupled with the pull-back in speculative purchasing will dampen sales in 2006 and 2007. NAFCU is forecasting that total mortgage originations will decline to $2.35 trillion this year from $2.91 trillion in 2005.
Although a sharp increase in either short-term or long-term interest rates is not expected this year or next, the average adjustable-rate mortgage (ARM) and fixed-rate mortgage (FRM) rates will be at their highest levels since 2001. To make matters even more challenging, the flat yield curve is expected to keep ARM-FRM spreads relatively tight over the next 18 months.
Despite this, the ARM share of loans is expected to remain elevated due to the high cost of housing in many parts of the country. The continued robust demand for secondary mortgage loans will partially offset the slowdown in purchase and refinancing applications.
Ultimately though, credit unions will have to work twice as hard to avoid losing their footing in the mortgage lending marketplace and even harder than that if they want to improve on it. I believe that credit unions can succeed in the latter by taking an "outside-the-box" approach to mortgage lending. For example, Air Academy FCU in Colorado Springs, Colo., has made a name for itself in the state's mortgage lending market by introducing an intriguing value-added proposition: the credit union will refund $500 from the borrower's closing costs if it does not deliver the closing figures three days prior to closing to the title company. The guarantee has helped the credit union turn heads among local realtors and greatly improved its mortgage loan portfolio.
Another NAFCU member, Shiloh of Alexandria Federal Credit Union in Alexandria, Va., has been able to offer its members a unique mortgage program by partnering with Fannie Mae, Prime Alliance and others. Through its first-time homebuyer's program, Shiloh provides up to $5,000 in closing cost and down payment assistance to qualified individuals to finance their first home purchase. Shiloh also offers homeownership counseling so members can learn how to be responsible first-time homeowners.
In addition to developing innovative mortgage lending programs, credit unions would also benefit by preparing themselves for the impending demographic shift that is expected to take place. Over the next 10 years, the U.S. is expected to add 27 million new people, creating 13 million new households. Minority families will represent 80% of this population growth. By 2015, minorities will account for two-thirds of growth in the number of households and one-third of our country's population, according to the Census Bureau and the Harvard University Joint Center for Housing Studies.
The good news is that credit unions are uniquely positioned to meet the financial needs of the growing number of multicultural consumers. These individuals, which include African-Americans, Hispanics and Asians, will make up a significant portion of the country's population in the years to come, and the growing housing market will be driven by families from these communities, which are largely low-income. This expected population increase presents a unique opportunity for credit unions to expand their reach and help these individuals build wealth through homeownership.
By serving these communities, credit unions can also meet a long-sought-after goal that has often eluded them: participation from younger members. The average age of a credit union member today is nearing 50. By contrast, the median age of the Hispanic consumer is just 27, while it is 31 for African Americans and 35 for Asians. The mortgage market is an ideal way for these communities to be introduced to the concept of credit union membership.
Credit unions can also offer an important alternative to predatory lenders that target minority communities. In fact, according to the 2004 Home Mortgage Disclosure Act data, credit unions have a mortgage approval rate for low-income minority families of 66%, surpassing the 59% approval rate of banks and thrifts.
Clearly, credit unions have a responsibility to become more involved in the mortgage industry. But it's about more than just carving out a larger slice of the mortgage lending marketplace pie. It's about helping people realize their dreams of homeownership and giving them the tools to build wealth. Credit unions can compete with the bigger mortgage brokers by coming up with smart ideas and adapting to our communities' needs and environmental surroundings.
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