Balancing Mortgage Risk/ Return

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1 Balancing Mortgage Risk/ Return while Navigating Choppy Waters September 13, 2012 Sponsored by:

2 Michigan Credit Union League & Executive Summit: Affiliates Kathy Carlson, President/ CEO, Member First Mortgage Thomas Teeple, President/ CEO, Mortgage Center

3 Home Finance The Good Financing the American Dream.. One of the Most Important Financial Transaction(s) any Consumer (Member) will undertake during their lifetime.

4 Home Finance The Bad Mortgage Implosion Recognized as One of the Primary Causes of Global Financial Crisis in the late 2000 s. Balance Sheet Impact to ALL investors in Mortgages. Millions of Borrowers Displaced from Homes.

5 Home Finance The Ugly Vast Majority of Mortgage originators from mid 2000 s have been forced to fold and/ or exit the Business. Justice Department/ AG Settlements up to $25 Billion. Recent Surveys Indicate that Mortgage Bankers are the least admired of all professions.

6 Current Mortgage Market Residential Mortgage Market (First Lien): 75% Refinance/ 25% Purchase GSE Market exceeds 95%: Fannie Mae (Conventional) Freddie Mac (Conventional) Ginnie Mae (FHA) Lack of Private Investors Financial Institution Balance Sheet Private label Securities Mortgage Servicing Model Under Siege 57% Concentration from 5 Large Banks AG Settlement/ CFPB Regulations etc.

7 Opportunity/ Return Big Market Nationally Credit Union Mortgage Origination rose from $60.4 Billion in 2005 to $82.5 Billion in 2011 Increase of 37% while market as a whole declined by 57% Credit Union Market Share rose from 3.3% in 2005 to 7.8% in 2011 (number of loans) 2012: Credit Union Mortgage Growth Continues: Estimated Credit Union Market Share for Mortgage Origination exceeds 8% Mortgage Servicing on Similar Trajectory in terms of market share and volume

8 Opportunity/ Return Credit Union Growth Contributors: Withdrawal of big banks and mortgage brokers from Mortgage market due to: Regulatory Mandates Compliance Concerns Capital Requirements Brand Impact Liquidity Constraints Scarcity of Skills Lack of Consumer Trust Investment in Mortgage Market by Credit Unions CU/ CUSO Marketing/ Awareness Efforts Trusted Relationship and Source for Major Financial Products and Services Balance Sheet/ ALM

9 Risks Reputation Risk Credit Risk Distressed Assets Put backs Interest Rate Risk Hedging of Locked Pipeline Regulatory/ Compliance Risks

10 Risks Regulatory/ Compliance Requirements (current/ partial list): Equal Credit Opportunity Home Mortgage Disclosure Act Privacy of Consumer Information Fair Credit Reporting Act Real Estate Settlement Procedures Act Truth in Lending SAFE Act/ NMLS (licensing) Incentive based Compensation Unfair and Deceptive Practices Act Appraisal Independence Bank Secrecy/ Anti Money Laundering/ SAR USA Patriot Act Identity Theft/ Red Flag Requirements OFAC Fair Debt Collection Practices Act Information Security/ GLBA Business Continuity Vendor Management/ Compliance Certification State Laws

11 Risks Regulatory/ Compliance (CFPB Proposed Origination) TILA/ RESPA Integration HOEPA/ High Cost Loan Officer Compensation Appraisal Independence Escrow Disclosures Initial Disclosures/ Closing Package Timeframes Ability to Repay Regulatory/ Compliance (CFPB Proposed Servicing) Billing Statements ARM Rate Adjustment Disclosures Payment and Payoff Prompt Crediting Force Placed Insurance Error Resolution and Information Request Procedures Information Management Policies and Procedures Delinquency Early Borrower Intervention Procedures Borrower Continuity of Contact Procedures Loss Mitigation Procedures prior to foreclosure proceedings

12 Credit Union Dilemma: BALANCING Mortgage Risk/ Return Credit Union Members Increasingly want to Obtain Mortgage through their Credit Union relationship. One of the most important financial decisions of members lifetime. Yet. How to Mitigate All of the Risks Associated with Mortgage Origination and Mortgage Servicing??

13 Credit Union Service Organizations (CUSO Model) Providing Excellent Member Service for Mortgage Originations and Mortgage Servicing Requires Scale: Skills/ Resources Technology Platforms Costs Mitigating Risks Inherent to Mortgage Origination and Servicing Requires Skills and Management Expertise, including: Regulatory/ Compliance Expertise Interest Rate Hedging and Liquidity Expertise Underwriting and Credit Risk Expertise

14 CUSO Model Keys to Success: Credit Union/ CUSO Planning and Communications Seamless Business Process for Members Marketing/ Awareness Campaigns Setting Proper Member Expectations Measurements/ Quantification of Service Levels Credit Union/ CUSO Industry wide Advocacy

15 What s Next? Interest Rates very likely to rise over the near term Current wave of traditional refinances will wind down in the near term Government supported refinance programs such as HARP 2.0 will wind down in the intermediate term Purchase finance opportunities will increase with housing market rebound over the long term Regulatory Compliance will continue to elevate professionalism required to remain in Mortgage industry Costs to originate and service loans will continue to escalate on a per file basis economies of scale will be required to remain viable Credit Union members will increasingly rely on Credit Unions for Mortgages

16 Summary Exceptional Opportunity awaits Credit Union Industry in the Mortgage origination and Mortgage servicing spaces We should embrace the opportunity as an industry CUSO model gives individual Credit Unions and Credit Union industry as a whole a unique opportunity to continue to grab market share Coordinated industry advocacy required to influence Regulatory/ Compliance implementation

17 Summary We ll Be Ready!!!!!

18 Thank You

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