Introduction to Mortgage Lending

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1 Many experts think that credit unions have a high potential for greater growth in the mortgage lending area. In this chapter we explain the development of mortgage lending at credit unions, how mortgage loans differ from consumer loans, and the benefits of mortgage loans to both members and credit unions. We go on to discuss the mortgage loan process, selling mortgage loans in the secondary mortgage market, and how you can help promote the use of mortgage loans at your credit union, whether or not you work directly with them. Development of Mortgage Lending at Credit Unions Originally, credit unions evolved as a source of consumer loans for members. Other types of financial institutions, such as savings institutions and mortgage banks, specialized in mortgage loans. However, as the credit union movement expanded into a greater variety of services, mortgage loans were seen as a logical and desirable extension of the services offered by credit unions. Many state legislators authorized statecharted credit unions to offer mortgage loans. Federal credit unions now have the authority to grant up to 40-year home mortgage loans to their members. As of 2013, the amount of mortgage loans held at credit unions achieved a new high, with greater growth in originations possible especially with the continued ability to sell loans into the secondary market. At U.S. credit unions, real estate loans accounted for 53 percent of all Objectives Upon completion of this chapter, you should be able to: 1. Explain why credit unions have great potential for increasing their share of the mortgage loan market; 2. Describe the differences between mortgage loans and consumer loans; 3. List the benefits of mortgage loans to members and credit unions; 4. Outline the stages in the life of a mortgage loan; 5. Describe the sale of loans in the secondary mortgage market; and 6. Cross-sell mortgage loans to your credit union s members. loans. However, credit union mortgage loans on the books are only about four percent of all the nation s outstanding mortgage loans.therefore, many experts think that credit unions have high potential for greater growth. The factors that contribute to this judgment include: Growth in fields of membership that are community-based. Community-based credit unions have particularly good potential for building loan referral relationships with local real estate agents and other sources of borrowers. MORTGAGE LENDING 5

2 Case Study: Mortgage Moment: Cross-Selling Mortgage Loans Greater use of electronic technology in mortgage lending. Credit unions are using more sophisticated programs to capture and manipulate borrower data so that loans can be processed efficiently. The Internet is also proving to be a valuable means for members to apply for a loan and for data to be John, a member of the credit union approaches Sarah, a member services representative. John: What are your mortgage loan rates? Sara: Let me get you a rate sheet. Are you purchasing a home or refinancing? John: Buying a house. We ve just started looking and want to see what rates are like. Sara: Is this your first house? John: Yes. We think we ve finally saved enough that we can do it now. Sarah: That s great. By the way, have you looked into our home buyer seminars? Several members told me that were really helpful when they bought their first house. John: What seminars? I didn t know you had that. Sarah: Here s the flyer about the next one. And here s a rate sheet. As you can see, we have a lot of different programs. I m sure one of the loan officers would be happy to help you with them. John: This looks good. Thanks a lot. You ve been really helpful. I ll make sure I talk to a loan officer soon. John walks away looking at the flyer as Sarah s friend Caren approaches. Caren: Sarah, I was eavesdropping. I didn t know you knew about mortgage loans. When members ask me about rates, I don t know what to say. I just freeze up and give them a rate sheet. I m terrified they ll ask me questions I can t answer. Sarah: (laughs) Actually, I m no expert on mortgages. I try to ask a few questions to get a conversation going and help me figure out what they need. Sometimes I can tell they ve had a mortgage loan before and know more than I do, so I don t embarrass myself by pretending I know a lot. Sometimes they re just getting started and looking for any information they can get. When brand-new home buyers ask about rates, I do know there s a lot more they need to think about. The home buyer seminars give them the whole picture. By asking them a couple of questions, they get what they need and I don t get in over my head. Caren: I ll remember that next time somebody asks me about mortgage loans! communicated among all the parties involved in a mortgage loan transaction. More sales of mortgage loans to investors. As discussed later in this module, credit unions can sell loans to investors and use the funds received to make more loans. Differences Between Mortgage Loans and Consumer Loans Mortgage lending is so different from consumer lending that many credit unions separate these functions by department or staff specialty. These types of lending differ in three ways: 1. Mortgage loan processing is a longer and more complex process. 2. Mortgage loans generally have longer terms and thereby have greater interest-rate risk. 3. Real property is the collateral for mortgage loans. Longer and More Complex Process Quite often, a member receives a fast answer on whether a consumer loan, such as a car loan, will be approved by the credit union. The credit union can approve a consumer loan after checking information such as the member s credit report, value of the car, and the credit union s loan experience with the member. The credit union gives the member a few required disclosures and is able to release the loan funds quickly. In contrast, mortgage loan processing is longer and more complex. A credit union usually requires more 6 MORTGAGE LENDING

3 information and verification to approve a mortgage loan. Regulations require the credit union to disclose more information to the member. The property includes more variables that the credit union must evaluate. The appraisal process takes time, and the results must be underwritten. Credit unions provide needed education to members about the stages in the process so that members understand the current status of their applications. Greater Interest-Rate Risk Credit unions base loan interest rates on broader market interest rates, such as interest rates established by investors in mortgage loans and other types of investments. These rates also affect the dividends that a credit union can pay on share accounts. A credit union needs to charge more for loans than it pays out in dividends so that it can pay staff salaries, maintain the credit union offices, and meet other expenses. Since market rates can rise or fall at any time, credit unions must carefully manage the difference between loan and dividend rates. This is called the interest-rate spread. When credit unions make consumer loans, the loan terms are usually no more than a few years so the credit union takes on a small amount of risk that market rates will rise during the term of the loan. However, mortgage loans are longer-term loans (often up to 40 years) so the credit union takes on a greater risk that market interest rates will rise and make the loan produce less income than the credit union needs to pay market-rate dividends on share accounts. To overcome interest-rate risk, credit unions may make mortgage loans with adjustable rates that rise and fall with market rates. Credit unions may also sell loans so that they gain immediate income based on today s rates. Special Risks of Real Property Lending Real property, which is defined as land and its improvements, such as a house, is the collateral, or security, for a mortgage loan. If the member doesn t repay the loan, the credit union has the right to foreclose, or take the property to satisfy the debt. However, foreclosure on real property is a more complicated and time-consuming process than taking possession of other types of collateral, such as cars or share accounts. In addition, if the property has not been well maintained, the credit union may end up with a loss. Credit unions try to ensure that the property continues to be well maintained by requiring borrowers to maintain home insurance. Another special risk of real property as loan collateral is the fact that borrowers must pay real estate taxes MORTGAGE LENDING 7

4 Activity 1.1 How Do Consumer and Mortgage Loans Differ? For each statement, circle the word in parentheses that accurately completes the statement. 1. Mortgage loans have (greater/lesser) interest-rate risk than consumer loans. 2. Taking possession of collateral on a defaulted loan is more difficult and timeconsuming with a (consumer/mortgage) loan. 3. Credit unions usually make loan decisions (more quickly/more slowly) on consumer loans. 4. More information must be verified and evaluated for a (mortgage/consumer) loan. Answers appear in appendix B. Without a mortgage loan, few members would ever have enough money to purchase a home. to local taxing bodies, such as county governments. If the borrowers don t pay the taxes, the county can sell the property to satisfy the tax debt. The unpaid taxes take precedence over the credit union s loan. All of these risks mean that a credit union takes extra care to protect the collateral when managing mortgage loans. Complete activity 1.1 to review the differences between consumer and mortgage loans. Benefits of Credit Union Mortgage Loans Although mortgage loans are more time-consuming and complex to make, they are beneficial to both members and credit unions. Member Benefits Members enjoy many benefits from obtaining a mortgage loan. The pri mary benefit is fulfilling the dream of homeownership. Without a mortgage loan, few members would ever have enough money to purchase a home. Members also gain specific benefits because the loan is obtained from a credit union. In general, credit unions are focused on delivering financial products to members at competitive rates and with low fees. Member service is the mission rather than high profit. Mortgage loans from credit unions frequently have attractive interest rates and lower fees compared to other lenders. In addition, members have the convenience of obtaining their mortgage loan at the financial institution where their other accounts are maintained. Members can have monthly mortgage loan payments automatically transferred from their credit union accounts to the loan so that payments are never late. Credit unions also offer home buyer seminars and member counseling to help members make good decisions in the home buying and loan decision process. Many members state that their credit union s long commitment to personal service is a valuable part of obtaining a mortgage loan. Members feel confident that their credit union will answer their questions promptly and courteously. They also know that their past credit history with the credit union is an important factor in the loan decision. 8 MORTGAGE LENDING

5 Member retention becomes more and more important as the market becomes increasingly competitive. Credit Union Benefits Credit unions also value the benefits of mortgage loans. They are a major component in providing full service to their members. The three primary reasons credit unions offer mortgage loans are: 1. Service to members; 2. Member retention; and 3. Loan interest income. Service to Members Service to members is most important. A mortgage program must be designed with members needs in mind to be successful. Three-fourths of your members own their own homes, and many of them will refinance their existing loan or take out a new loan this year. For the most part, the millions of credit union members would rather take out a mortgage loan from their credit union than from a big, impersonal bank, or mortgage company. Member Retention Providing mortgage loans at your credit union can ensure one-stop, long-term relationships with members. A mortgage loan can strengthen the bond between a credit union and a member. The member s full disclosure of financial information adds strength to the relationship. It can increase share deposits members usually keep their largest savings deposits at the institution that provides their home mortgage loan. In fact, studies have shown that members with credit union mortgage loans use twice as many services as those who obtain their mortgage loans elsewhere. This relationship also opens the door to cross-selling opportunities the ability to cross-sell other products such as share draft accounts, credit life insurance, debt consolidation loans, and credit cards. A credit union can determine a member s needs from the member s loan application and can direct that member to the credit union s services that will meet those needs. Member retention becomes more and more important as the market becomes increasingly competitive. Many national companies are making mortgage loans as the popularity of these loans grows. These national companies also realize that a mortgage loan can be a starting point rather than the end result of a relationship. This starting point allows the outside company to sell additional products. Most mortgage lenders today not only send notices to borrowers about their existing loans but also about life and disability insurance, credit cards, home equity loans, and, in some cases, auto loans. In addition, even with current consumer privacy requirements, selling the names of their borrowers to direct-mail marketing companies is an added bonus and a good money-maker for outside companies. Loan Interest Income Mortgage loans are good earning assets for credit unions. Many credit unions have the available funds to invest in mortgage loans, and they offer an attractive return. When properly structured, a mortgage loan program provides fee income, interest income, and an acceptable level of risk. MORTGAGE LENDING 9

6 The Life of a Mortgage Loan One intention of this module is to help you understand the characteristics of mortgage loans and the lending process. The process of making a mortgage loan follows a general pattern common to most credit unions (figure 1.1). However, remember that credit unions use outside companies in different ways in the process and no one model applies to all credit unions. In fact, the range of involvement in the process can be as minimal as having a referral relationship with an outside source of mortgage loans or as substantial as retaining almost every element of the process in-house. Credit unions also use technology in different ways to make the process faster, more efficient, and easier for both the credit union and member. Counseling the Member The first stage of the process has a variety of starting points. Members may review information on your credit union s Web site about loan program choices and then call with questions. Members may come into the credit union or make an appointment to find out how large a mortgage loan they can afford or what payment amounts might be. Your credit union may offer a home buyer seminar that educates members about the process and how to qualify. Chapter 2 covers more information about loan program options and chapter 4 addresses member counseling. Taking the Application Credit unions take member applications in a variety of ways. Many credit unions prefer that the member provide Figure 1.1 The Life of a Mortgage Loan Counseling the member Taking the application Processing and underwriting Loan closing and funding Servicing, including accepting payments, paying taxes and insurance, collections and payoff 10 MORTGAGE LENDING

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