A Strategic Approach to
Residential Mortgage
Lending
Presented by
Tracy Jean Ashfield
Strategic Mortgage Solutions
The Consulting and Training Division of
Prime Alliance Solutions, Inc.
June 14, 2010
Learning Objectives
•
•
•
•
Overview of mortgage lending
Develop your loan policies
Create a business plan
Learn about the secondary mortgage market
Credit Union
Market Share
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Thru March
3.66%
4.52%
4.66%
2.61%
2.00%
2.00%
2.06%
2.32%
2.18%
2.08%
1.81%
2.03%
1.93%
0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%
It’s not a Challenge,
it’s an Opportunity!
Nationally 7% of members choose their
credit union for their first mortgage needs.
• The time is now
• “Consumers” are flying to safety
• Our balance sheet capacity is gold
Real Estate Borrowers Designate
Credit Unions Their Primary
Financial Institution
80%
73%
58%
60%
43%
40%
20%
0%
Mortgage at CU
Mortgage Elsewhere
No Mortgage
Real Estate Borrowers Use
More Services
4.08
4.5
3.99
3.95
4.12
Var Rate Mtg
Equity Loan
Equity Line
4
3.5
3
2.5
2.07
2
1.5
1
0.5
0
Total
Fixed Rate Mtg
Why Are Mortgages So
Important?
• Builds relationships
• Increases the products per household
• Exemplifies the trusted advisor role
• Income
Credit Union
Mortgage Volume
100.0
80.0
60.0
40.0
Thru March
20.0
0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Granted 20.6
Sold
5.9
46.6
16.4
62.3
25.0
88.2
37.5
57.2
20.1
60.4
20.6
54.4
16.5
60.3
16.2
70.3
19.5
95.0
51.4
14.4
7.9
Offering Mortgages to Your
Membership
• Refer members to another entity
– CUSO
– Mortgage company
– Bank
• Do some of the mortgage functions and
outsource the rest
• Do everything in-house
Mini Needs Analysis
•
•
•
•
Why do we want to offer mortgages – the motivation?
What’s our vision of the member experience?
Which delivery channels are important to us?
Should we have mortgage lending in branches?
– Mortgage loan officers?
– All sales staff trained to take mortgages?
•
•
•
•
What products do we want to provide our members?
What states do we want to do business in?
How will we measure success?
How is technology going to help achieve our goals?
Building a Strategy
Numerous
options
Basic
Referral
Wholesale Mortgage
Correspondent Delivery
Direct Seller and Servicer
The Creation of a Mortgage
Origination
Creating New Loans
Processing
Gathering Loan
Documents and
Verifications
Appraisal
Determining
the Value of
the Real Estate
Underwriting
Approving or
Denying the
Loan
The Creation of a Mortgage
Closing
Culminating the
Mortgage
Transaction
Delivery
Transferring
Loan Files to
the Investor
Secondary
Marketing
Selling Existing
Loan Product
Loan
Administration
Collecting & Remitting
Loan Payments
Basic Referral - Key Features
• Toll-free mortgage number assigned to CU
• Web site
– Direct to partner’s site or
– Fully customized Credit Union site
• Product selection
• Portfolio growth: CU retains the right to fund any
loan originated
Wholesale - Key Features
• CU responsible for member contact
– Taking application, quoting rates, disclosures
– Submitting application to lender partner
– Collecting the necessary documents (pay stubs, appraisal,
etc.)
• Wholesale partner responsible for closing loan
–
–
–
–
Final processing
Underwriting, document preparation, loan closing
Technology
Training
• Product selection: broad range of products
• Portfolio growth
– CU funds loan and either keeps in Portfolio or assigns to
partner for sale into the secondary market
Correspondent - Key Features
• CU responsible for originating, processing,
underwriting, closing and funding loan
• CU on its own for technology
• Mortgage conduit responsible for
– Underwriting loans that will be sold to ensure they are
secondary market eligible
– Servicing loans for those sold; sub servicing for loans
credit union retains in its portfolio
• Product selection
– Substantial effort required to add products
• Portfolio growth
– CU funds loan and either keeps in Portfolio or assigns to
partner for sale into the secondary market
Finding the fit that’s right for you
AND your member
•
•
•
•
•
You don’t have to do it all
Focus on what you’re good at
Compliance needs to be considered
Meet your members’ needs
Most of all do your due diligence
Business Partners
• Determine your specific needs
• Focus on your members and your
credit union
• Look for a match to YOUR needs
• Keep focus on your priorities
• Keep your longer-term goals in mind
• Get good counsel!
Giving Up Control
• Technology helps
• Learn the process
• Develop relationships with your partner
How do you get started?
Consider your resources
Look at business partners
Consider ALM needs
Develop a business plan
Develop your real estate loan policy
Consider your resources
• Staff expertise
• Technology support
• Marketing support
ALM Considerations
• What’s your appetite for loans
– Loan to share
– Real estate concentration
• Risk tolerance
– Interest rate risk
– Credit risk
Matching the Policy to the
Business Plan
The more you do in-house
the more you will need to document
internal policies and procedures.
Loan Policies
•
•
•
•
•
•
•
•
Types of loans offered
Trade area
ALM allocations
Loan underwriting highlights
Loan approval guidelines
Appraisal requirements
Pricing guidelines
Quality control and audit
The Secondary Market
Is it for you?
Residential Lending Markets
$
Home Buyer
Primary Market
The entire residential
lending market revolves
around home buyers.
Borrowers wanting to buy
a home come to a lender
to obtain a mortgage.
Secondary Market
Lenders then sell the
mortgages to the
secondary market for
cash, thus replenishing
their supply of funds for
additional lending.
$
Credit Union
$
$
$
Capital Market
The secondary market
uses some of the
mortgages purchased
from lenders to create
securities. It then sells
those securities to
capital market investors,
thus replenishing its
funds to buy more
mortgages from lenders.
$
Investor
Who are the players?
•
•
•
•
•
Fannie Mae
Freddie Mac
HUD
FHA
VA
Which are investors?
Advantages
1.
2.
3.
4.
5.
Provides liquidity
Expands volume
Increases variety
Improves earnings
Reduces risk
More Options for the Member!
Accessing the Secondary
Market
How close to “direct” do you want to get?
•
•
•
•
Broker
Correspondent
Seller
Seller-Servicer
Recourse
• Full Recourse
• Standard Recourse
• No Recourse
Let’s Consider Underwriting
• Portfolio-proprietary guidelines
• Desktop Underwriter (DU)
• Loan Prospector (LP)
• Total Scorecard (FHA)
Let’s Consider Servicing
Service In-House
Outsource Servicing
Issues that will
Influence Decision
• Number of Loans Serviced
• Types of Loans Serviced
• Regulatory Environment
• Technology or Lack Thereof
• Business Strategies
• Professional Preferences of Management
Let’s Look at Pricing
10 Day 30 Day 60 Day 90 Day
30 Year
Fixed Rate
6.67%
6.75%
6.875% 7.00%
15 Year
Fixed Rate
6.59%
6.67%
6.75%
6.875%
Loan Level Price Adjustments
• Rates and/or fees are higher for:
– High LTVs
– Low credit scores
– Cash-out refinances
– Non-owner occupied
• Quoting an accurate rate means having
all the variables established:
– Credit
– Property value
– Debt and income
Types of Commitments
• Mandatory – Better rate/more risk
• Best Efforts – Higher rate/lower risk
Private Mortgage Insurance
PMI helps your credit union against the
costs and potential losses associated
with foreclosure.
PMI Rates are based on:
LTV / Loan Quality
State
Product Type
Payment Options
Payment Options
Annual
Monthly
Single Premium
Financed Premium
What Happens if an Insured
Loan Defaults?
Sales Price
LTV
Rate
Term
Default Costs
Mortgage Balance
Total Outstanding
Insurance
Claim Payment
Net Potential Loss
$75,000
95%
6.75%
30 Year
$8,000
$71,250
$79,250
30%
$23,775
$55,475
$75,000
80%
6.75%
30 Year
$7,200
$60,000
$67,200
0%
-0$67,200
Mortgage Lending
Offering first
mortgage loans is
a key to helping
your members
realize their
homeownership
dreams…
The Best Never Rest
• Constantly evaluate where you are
• Communicate regularly with your
business partners
• Survey your members
• Stay current on developments
Resources and Training
www.cuna.coop
www.freddiemac.com
www.fanniemae.com
www.consultsms.com
Questions?
Tracy Ashfield
tashfield@consultsms.com
608-231-9767
www.consultsms.com