A study of factors outside of CUs’ full control—and how to best respond to them.
Managing the forces that impact your mortgage business is complex. Internal factors, like talent, policy and partnerships, you can directly control. But external factors outside credit unions’ full control—like lawmaker intent, evolving federal programs, pricing and housing inventories, and consumer sentiment also can have significant impact on success. Let’s take a look at the lay of this external mortgage marketplace as 2019 nears.
Navigating S. 2155
Lenders have been busy dissecting the implications of the recently enacted S. 2155, says CUES member Tim Mislansky, CCE, SVP of $4.2 billion Wright-Patt Credit Union Beavercreek, Ohio, and president of the CU’s mortgage CUSO, myCUmortgage.
“The bill was a win for credit unions, and perhaps one of the biggest advantages is the HMDA (Home Mortgage Disclosure Act), exemption for lenders that do less than 500 loans” a year. It’s beneficial, Mislansky explains, because of the onerous HMDA requirements, such as the significant increase in the required data fields for reporting.
Additionally, S. 2155 helps credit unions under $10 billion in assets and other small lenders with an exemption from the qualified-mortgage/ability-to-repay rules.
“These lenders can now place loans that do not meet the QM/ATR requirements on their balance sheets and no longer need to consider them a non-qualified mortgage,” Mislansky explains. “When the QM/ATR rules came out, some lenders chose to stop originating non-qualified mortgages to avoid the potential regulatory and legal risk. This change in the law enables lenders to stay in the mortgage lending space and help more members.”
Mislansky adds, “As credit unions, we tend to be relationship lenders because we’ve known our members for years. As a result, we can use the QM exemption to help creditworthy members who, for example, may have slightly elevated debt ratios, obtain a non-qualified mortgage.”
S. 2155 will also help lessen the expense for small lenders and assist with resource allocation while expanding their lending options, says Deborah Ames-Naylor, interviewed shortly before retiring in October from her role as president/mortgage banking and corporate EVP for $23.6 billion Penfed Credit Union, Alexandria, Virginia. “Specifically, the bill provides important changes in loans classified as business loans by removing loans secured by non-owner occupied one-to-four residential dwellings from NCUA’s business lending cap.”
The provision is excellent for credit unions, as many offer business loans to members, adds Ames-Naylor. Plus, it should facilitate increased credit options for America’s businesses.
Also an aid to credit unions, clarity has been provided on the TRID (TILA/RESPA Integrated Disclosure Rule) waiting period, which, as part of the bill, will now be waived if mortgage rates fall.
“TRID previously required lenders to re-disclose to borrowers whenever there was a change in their interest rate and re-start the three-day waiting period,” explains Mislansky. “But, if the change was to a borrower’s benefit, (i.e., lower rate or costs), it penalized the borrower by forcing them to wait even if they were getting a better deal.”
Credit unions may still see some TRID requests despite a rising rate environment. For temporary shifts in the market, the clarity afforded by S. 2155 will be helpful for the consumer and allow them to close their mortgage sooner, Mislansky says.
An other positive outcome (which took effect in November) from S. 2155 concerns mortgage loan officer licensing. The new law eliminates the need for financial institution loan officers to reapply for licensing if they go to work for a non-bank. “This is a win for mortgage loan originators who switch jobs and want to help homebuyers immediately in their new roles,” explains Ames-Naylor. “Eliminating the unnecessary red tape of getting new NMLS numbers is a win for everyone.”
The bill also contained new stipulations for restoring the Protecting Tenants at Foreclosure Act. “You should become familiar with this part of S. 2155, which allows tenants to stay under certain conditions, even if their landlord defaults when foreclosing on a property,” advises Ames-Naylor. “You may need to determine if there is a tenant before moving forward with eviction.”
Small lenders that were previously required to maintain escrow accounts for high-cost mortgages (mortgages secured by a principal dwelling with an APR that exceeds the average prime offer rate by a given amount) are getting another break from S. 2155. “While it will have minimal impact on PenFed because we do not offer high-cost mortgage loans, credit unions under $10 billion in assets that do so will most likely find this a welcome component of the bill,” says Ames-Naylor, “and it should reduce the regulatory burden in setting up escrow accounts.”
Jeremy Smith, compliance manager for PolicyWorks, a regulatory compliance firm based in West Des Moines, Iowa, cautions credit unions that it is still early days with S. 2155.
“As of now, it is hard to tell how the changes under S. 2155 will really impact credit unions. On the surface, the changes to HMDA seem likely to have the largest impact, but until we know how these changes will be implemented, it is hard to tell,” he explains.
Bureau of Consumer Financial Protection Acting Director, Mick Mulvaney, has mentioned that the BCFP (formerly CFPB) is currently evaluating the HMDA rule for other possible changes. “That means we could see more fluctuations regarding HMDA,” says Smith.
CUs also need to consider other factors from Washington, D.C., including the federal budget. As an example, Ames-Naylor cites the proposal to increase guarantee fees charged by Fannie Mae and Freddie Mac, adding, “All mortgage lenders, including credit unions, should be watching these efforts as they would ultimately decrease revenue and affect loan sales to GSEs (government-sponsored entities).”
Economic Trends & Consumer Sentiment
Lower mortgage activity and reduced volume is a trend that all successful lenders must adapt to. “Interest rates have moved up from their low levels of the past few years, and most business is now purchase money rather than refis,” explains Mislansky. “Those mortgage lenders that don’t have a defined purchase money strategy are seeing challenges in production numbers, while those that have strong strategies in place are generally seeing positive results.”
The new cap on state taxes, including the revamped real estate tax, may impact mortgage activity as well, adds Ames-Naylor. “The deductible amount, now capped at $10,000, may hurt credit union members in states with high real estate taxes like New Jersey or New York, and credit unions could subsequently see decreased mortgage volume or lower loan amounts.”
Lower mortgage activity also means lower profit margins.
Mortgage banking has become more expensive due to increased compliance costs as well as investments in technology. And with fewer loans available, adds Mislansky, lenders become more price competitive, thus reducing their income per loan.
The overall affordability of buying a home is decreasing, too. Ames-Naylor says that consumers see rates rising and the normal progression of moving up to better homes is slowing, creating a domino effect. “With rates approaching 5 percent, consumers don’t want to lose their current (3 to 4 percent) rate, so they’re staying put.”
She notes that in May, the real estate company Redfin asked 4,000 buyers what they would do if rates increased to 5 percent for a 30-year fixed rate mortgage.
Almost a third—“32 percent of respondents said they would slow their search and wait to see if rates would come back down, which is up from 27 percent in November and 29 percent in May 2017. Additionally, 21 percent said a 5 percent mortgage rate would cause them to look in other areas or buy a smaller home, but up from 18 percent a year ago.”
There are also not enough homes on the market to meet demand. “With a shortage of quality housing in many parts of the country, consumers subsequently see an increase in home prices,” submits Mislansky. “The NAR (National Association of Realtors) attributes this to not only rising home demand but also increased construction costs and fewer construction purchases.” To monitor housing costs, Mislansky recommends looking at resources on the NAR website.
With a shrinking supply, it hasn’t helped that new home construction hasn’t kept pace in part due to constraints of labor, land and lumber costs. “In some markets, we see multiple bids again and homes selling over asking price,” adds Ames-Naylor. “Home prices also increased nationally 7.1 percent from May 2017 to May 2018 (CoreLogic, July 2018). And some locations, like Washington and Nevada, have seen double-digit growth.”
Ames-Naylor says it’s a must to consider these statistics from your member’s perspective. “If home prices are increasing 7.1 percent, but wages are only increasing 2 to 3 percent, mortgage payments will take a bigger chunk of their paycheck and decrease overall affordability.”
Fewer homes for sale also means stiffer competition among lenders.
Brad Bach, VP/sales for LenderClose (lenderclose.com), a mortgage technology CUSO, West Des Moines, Iowa, observes that most consumers have locked in their 4 percent loans, putting competition for new-purchase transactions at an all-time high. “As a result, we’ll see bigger banks and fintechs shift their focus to subordinate lien-type loans, and the advent of 125 percent loan-to-value lending, along with looser guidelines.”
It will also lead to more comparison shopping among consumers, Bach notes. This makes it essential for credit unions to scrutinize their lending processes to meet evolving expectations. “Thanks to Amazon and other digital brands, consumers are no longer willing to wait six weeks for anything, including their mortgage,” he says.
“If a credit union sets the expectation for a three-week turnaround on a mortgage closing, and it takes six,” Bach adds, “that’s a negative (and costly) member experience, a circumstance that leads to fewer referrals and less repeat business—a credit union’s traditional bread and butter.”
Another consumer shift is the preference to do business locally.
There’s a growing sentiment pushing consumers away from the megabanks, proffers Bach. “This spells a fantastic opportunity for credit union lenders, especially those that can communicate the credit union difference while delivering the same high-tech, high-speed experience of the megabanks.”
Factors also point to more home equity financing opportunities on the horizon.
“Home values across the U.S. are finally getting back to their pre-2009 values,” states Bach. “Combine this with historically low unemployment, and it’s not surprising to see a growing appetite for both home improvements and debt consolidation loans.”
He adds that during periods of high consumer confidence, home equity demand naturally increases.
“With home values on the rise, people are borrowing money,” Bach says. “It’s just a matter of you getting in front of them with the right promises and then overdelivering. Credit unions should mobilize their teams, streamline operations and integrate new technology. These factors will help you to give applicants a faster ‘yes’ and better manage what’s expected to be a huge increase in home equity demand.”
The new tax law will have some influence on home equity borrowing as well.
“Members can still deduct interest on second-mortgage and HELOC loans if they meet certain thresholds,” offers Bach. “While most borrowers will be happy with the increased personal deductible limit and no longer itemize, they will still pay fewer taxes. However, if borrowers itemize, they can deduct the interest if the loan is used for home improvements.”
Fintech and CUSO Opportunities
Fintech is continuing to have an important impact on mortgage lending. Lenders have a handful of solid technology options for gathering applications up front but often neglect to consider the rest of the process, explains Mislansky.
“Be careful not to fall in love with the slickest tech solution. Instead, focus on building a cohesive digital strategy from the initial application through loan closing.”
Also evaluate why you’re doing things the way you do, says Bach. “If you can accomplish better results using streamlined technology, why not integrate it? Participate in demos with fintechs and CUSOs and pose hard questions to your internal team and outside partners.”
The beauty of a CUSO is that it offers credit unions the ability to build volume together and create flexibility in their lending, adds Mislansky. And as a credit union, you don’t have to be an expert at everything, including the ever-changing world of compliance.
Partnering with a CUSO or a fintech can be advantageous, but properly evaluate these relationships, stresses Smith.
“Vendor management continues to be an area of focus for state and federal regulators with thorough review and due diligence key to mitigating the risks associated with any third-party partnership.”
Regardless of whether a fintech or a CUSO is used, successful credit unions should question how they do mortgage lending, says Mislansky.
“Focus on building a purchase-money mortgage strategy that will include mortgage loan originators and by developing Realtor relationships,” he advises. “Balance the need to provide outstanding member service with the need to invest in fintech.”
The digital transformation in the lending space is not just something to talk about at conferences, adds Bach. “It’s real and saving credit unions money, drawing in more business and improving the overall sustainability of the movement.”
Borrowers are facing an extremely challenging market. “Serving your members quickly with the right technology and products will improve their experience and help distinguish you from your competitors—for increased market share,” Ames-Naylor says.
Prep Steps for Mortgage Lending 2019
In a nutshell, what should credit unions do to prepare for success in the ever-changing mortgage landscape? CUES member Tim Mislansky, CCE, SVP of $4.2 billion Wright-Patt Credit Union Beavercreek, Ohio, and president of the CU’s mortgage CUSO, myCUmortgage offers the following suggestions:
- Focus on building out a purchase-money mortgage strategy, which most likely includes mortgage loan originators and developing Realtor relationships;
- Balance out the need to provide outstanding member service with the need to invest in fintech;
- Seek the use of technology to become more efficient;
- Have a solid product suite to help members with members’ home ownership needs; and
- Be willing to question how your credit union has always done mortgage lending.cues icon
Stephanie Schwenn Sebring established and managed the marketing departments for three CUs before launching her business. As owner of Fab Prose & Professional Writing, she assists CUs, industry suppliers and any company wanting great content and a clear brand voice. Follow her on Twitter@fabprose.