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“The sky is falling, the sky is falling!” cried Chicken Little. Chicken Little jumps to a conclusion. Her friends are gullible. Panic ensues. Bad things happen. Then, as with all fables, we’re presented with the moral of the story. It would be easy to adopt a “sky is falling” mentality about mortgage lending. The mortgage crisis melted into this global economic Slurpee from which were all sipping. While credit unions were largely immune, for the first time many of us are experiencing foreclosures as a result of first-mortgage defaults. Delinquencies are up, too. Wouldn’t now be a good time to stop making mortgage loans and wait this thing out? No. At least, that’s my answer. If I were told I could do only two things to earn my way out of this mess, the first thing I would do is concentrate on collections. Not so much for earnings but as conservation. This is critical. We are seeing things we’ve never seen before, and enough time has passed that patterns are starting to emerge; some of which are temporary, and some of which may be harbingers. Collections not only conserve capital, they conserve members, too. Charge off a member, lose a member. It’s cheaper to keep one than acquire a new one, at least most of the time. All kidding aside, this is the worst economic disaster most of us have ever experienced, and for that matter, the worst any of us will ever see. It’s different from previous recessions, though, in that it brought with it opportunity for lenders like us, which leads me to my second choice. Mortgage lending is the other place I’d spend all my time. The opportunity for earnings as well as helping members is enormous. Rates are at their lowest point in more than four decades. Housing affordability is remarkably high. Government incentives for first-time homebuyers are generous. Members and nonmembers alike are beating a path to our door for all their home financing needs. This menu of opportunity is just what we need to rebuild our capital. Mortgage loans are the most profitable lending program we have. In the simplest analysis, it takes between eight and 12 auto loans to equal the interest income generated by one mortgage loan placed in portfolio, though I am not advocating that today’s long-term, low-rate mortgages belong on our books. Yet, that is what is so interesting about mortgage loans, and what makes them such an opportunity: they needn’t live on our balance sheets in order to generate revenue. Mortgage loans and their servicing rights are nothing more than two valuable series of cash flows that we can take apart and realize as current revenue or as longer term annuities. So if we’re not placing them in portfolio, we can sell the loan and retain the servicing. Some revenue now and additional revenue over the life of the loan. Or, we can sell both the loan and the servicing as we close them, recognizing all revenue right now. There are other variations as well. My point is, like the opportunity we have to make a large number of home loans this year, we also have an opportunity to generate significant revenue as a result. Let’s make every mortgage loan we can while the opportunity is nigh. Our industry has gained 300 basis points in market share since 2006. From a measly 2% at the end of 2006 to almost 5% at last year’s end, we’re making progress on our audacious goal of 10% market share by 2016. The more members whose homes we finance now, the more the word will spread that we’re affordable lenders worthy of the public trust. If there’s any good to come from this crisis, it’s the reputation we’re gaining as sustainable housing finance providers. The moral of our story: the sky isn’t falling. And, viewed through the lens of housing finance opportunity, it isn’t even a little lower. The moral of the Chicken Little fable isn’t a happy one. Henny Penny, Cocky Lockey and Goosey Loosey, three of CL’s friends, get invited to dinner by Foxy Loxy. Need I remind you of the rest?

Peter Westerman

Credit Union Times

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