Keeping On An Even Keel Upheaval in Financial Markets Could Be Opportunity for Credit Unions

WASHINGTON — Credit unions should not be concerned by the ongoing turbulence in the markets for securities, particularly those involved with subprime mortgage loans or backed by so called jumbo mortgages, according to a leading credit union economist.

CUNA Chief Economist Bill Hampel argued that instead of being worried, credit unions with room on their financial statements and an existing mortgage operation in place should instead gear up to help members who might find other doors in the mortgage market closed to them.

Speaking to reporters about the ongoing situation in financial markets, Hampel drew a distinction between the situation with higher risk securities, often backed by mortgages, and the secondary market for mortgages themselves.

The former, Hampel explained, are really not a concern for most credit unions because they are forbidden from holding high risk securities while the problems in the latter leave credit unions open to possibly growing their mortgage market share.

First, Hampel pointed out that the secondary market for so-called conforming mortgage loans, those which meet the criteria for the secondary mortgage market as defined by Freddie Mac and Fannie Mae, is still quite healthy since those organizations are still buying conforming mortgages and still successfully selling securities based on them in the secondary market.

“I think having the guarantee from the government makes all the difference,” Hampel said, adding that this has helped insulate the market for conforming mortgages from the temporary contraction going on the market for securities based on non-conforming mortgages.

Credit unions which have room on their books to write mortgages which are non-conforming and which they will not look to quickly sell are also in a position to keep on lending, Hampel said. In fact, these CUs might be in a good position to expand their marketshare in mortgages by helping members who might have found the market for mortgage money suddenly drying up.

Since credit unions who write these sorts of mortgages intend to hold them for a time they are less affected by the ups and downs in the secondary mortgage market and are less vulnerable to what goes on there, Hampel explained.

Credit unions with solid mortgage programs and familiar underwriting standards should keep lending, Hampel said. “There is nothing which says that mortgages issued under a credit union's underwriting guidelines today are inherently more risky than those issued by under the same guidelines last quarter,” he added.

And non-conforming does not mean subprime or necessarily reflecting an additional risk. So called “jumbo mortgages” are considered non-conforming primarily because they are larger than the $417,000 cut-off for conforming mortgages established by Freddie Mac and Fannie Mae.

But in some markets, as Hampel pointed out, particularly those along the coasts, the market for homes is so high that $417,000 essentially buys a starter home. Credit unions in those markets which wish to issue mortgages might have to consider having them on their books for some time until the market for mortgage based securities calms itself, Hampel said.

“There is no way to tell if it will be days or weeks or months or even a year or two,” Hampel said. It's as long as it takes for the market to properly reintroduce risk into the pricing of these securities.”

The spirit of Hampel's comments was echoed by Clifford Rosenthal, executive director of the National Federation of Community Development Credit Unions.

Since 2005 the Federation has been working to set up a secondary market for non-conforming mortgages which are written by its member CDCUs. Since they are non-conforming and many times might be considered subprime, they are the sorts of paper for which CUs or the Federation might find it difficult to find a buyer. But Rosenthal made it clear that the mortgages were soundly underwritten, even if non-conforming and were further well seasoned to prove their worth.

“We only buy loans that have been performing well for over a year and then hold them to season them further,” Rosenthal explained. “In addition we anticipate selling the loans directly to socially conscious investors and not on the public market.”

Rosenthal added that the Federation had not planned on having any loans ready for sale before the end of the year anyway, which should provide enough time for the market to settle down. “If I know anything, I know that that the mortgage market is going to come back,” Rosenthal said confidently.

–dmorrison@cutimes.com