Credit Union Times - Centennial Edition - (Page I8) CeLeBrAtiNg 100 YeArS , SPeCiAL CeNteNNiAL editioN Veterans Say CU Mortgage Lending Has Come Full Circle By HeatHer anDersOn CU Times Correspondent-at-Large MADISON, Wis. — According to CUNA Mutual archives, credit unions were funding mortgage loans to members as early as 1926. However, state laws severely limited or prohibited credit unions from making firstmortgage loans at the time. Credit union pioneer Roy Bergengren wrote in 1931 that in Illinois, credit unions were allowed to make second mortgages less than $1,000 but were required to refuse first mortgages, despite the superior position of the first. “This seeming inconsistency in the law may be traced to opposition in the legislature to credit union first mortgages by banks or other agencies fearful of first mortgage competition,” Bergengren wrote. And so began the credit union’s long-fought battle to make a name for itself in mortgage lending. More than 80 years later, credit unions are still battling bankers and regulatory limitations, but in contrast to the earliest days of mortgage lending, the industry is positioned to double, or even triple, market share within just a few years. Mortgage lending was slow going until federal credit unions gained the authority to make long-term mortgage loans of up to 30 years. Before the 1977 amendment was made to the Federal Credit Union Act, only state-chartered credit unions in certain states could do so. While the number of credit unions funding mortgages was hit or miss under state authorities, the CUNA Mutual Board of Directors began insuring mortgage loans in the early 1940s. At the beginning of 1978, credit unions held $2.55 billion in first mortgages, which accounted for 6.2% of all credit union loans. However, after the Credit Union Membership Access Act and common bond lending became less necessary, mortgage lending grew to 32% of all CU loans by 2005, according to CUNA figures. Bob Dorsa, president of the American Credit Union Mortgage Association, said the growth of mortgage lending in all institutions boomed in the 1970s due to two very important factors: the shift of baby boomers into adulthood and rising home prices that required financing. “My parents’ generation saved up for things, but I think because of inflation and rising prices in the 1970s and 1980s, you couldn’t save for homes or autos anymore and debt became common for boomers,” Dorsa said. However, he added, initial response to mortgage loans was cold on the part of many credit union board members, who were still part of the World War II generation, and hadn’t yet warmed to the idea of credit. Second mortgages, or home equity lending, was more widely accepted, Dorsa said, and received a big boost from the 1986 Tax Reform Act, which phased out tax deductions for interest paid on consumer loans. By the late 1980s, many credit unions wanted to provide mortgages to members, but they didn’t have the expertise to provide the product in-house. As a result, mortgage CUSOs and vendors sprang up throughout the industry, especially during the 1990s. By the late 1980s, Dorsa filled one of those roles, working for Fallbrook Mortgage, an originator and underwriter in the Los Angeles area. “It’s similar to how credit unions got into offering investment services,” Dorsa said. “They stuck to their knitting with consumer lending and outsourced the more exotic items, like investments, mortgages and trust services. That was probably the biggest solution in the 1990s, the acknowledgement that members wanted this stuff, and credit unions could provide it while choosing to outsource the expertise.” Linda Clampitt, senior vice president at Dallas-based CU Members Mortgage, recalled a similar timeline. Clampitt said Colonial Savings, which owns CU Members, entered the credit union market in 1982 but didn’t dedicate an entire division to the nonprofits until 1993. “We knew when we started CU Members, that we wanted to take it nationally, so we grew a lot, signing up The size of the homes and the fashions may have changed, but even in the early days of credit union mortgage lending, the cooperatives have used families to tell the story. In these early photos from CUNA Mutual, a small family in Indiana and a large one in Tennessee are shown in front of their homes, which were purchased using credit union mortgages. 130 credit unions in our first year,” Clampitt said. “We focused on medium-sized credit unions, because we felt they needed our help more than the big ones who could afford the expertise.” From the 1990s until recently, particularly in California, Countrywide was a major player in credit union mortgages, Dorsa said. “I’ll bet Countrywide was funding more mortgages to credit unions members than the rest of credit union mortgages combined,” he said. “I remember consulting with a credit union in early nineties, and they would originate the loan for their members and immediately dish it off to Countrywide. That was their secondary market. There were a number of credit unions doing business with Fannie and Freddie, too, but Countrywide was the odds-on choice in the 1990s.” Given that the country’s largest mortgage lending company loosened up its lending standards and started pushing exotic products, which contributed greatly to the mortgage meltdown, does Dorsa regret advising credit unions to give their referrals to Countrywide? “I guess we were torn between saying ‘no, we can’t help you’ or refer them to someone that we think can do it fairly well, and Countrywide did their thing well,” Dorsa said, “I mean, how can you go wrong with doing business with the No. 1 lender?” In addition to Countrywide’s reputation at the time, the company paid a 1% service release premium, which provided a great cash flow for some institutions, Dorsa said. When the housing market boomed this decade, credit union outstanding mortgage balances grew with it; however, for the most part, credit unions avoided the subprime, interest-only and other exotic products that drove a large percentage of the boom. “Typically, credit unions have stayed pretty vanilla,” Clampitt said. “You’ll see big sophisticated credit unions still offering only plain, conventional Fannie and Freddie quality, fixed-rate mortgages.” Clampitt said that while CU Members offered and regularly used about 200 different mortgage products, the company has since dropped many of them because they no longer have a secondary market. “We’ve seen almost all stated income go away, and in large part the jumbo market has gone away. It’s very difficult to find jumbo loan investors right now and credit unions would have to portfolio those,” Clampitt said. “Nodoc products are gone; we never got into subprime, but the market for that is obviously gone, and Alt-A, that’s gone too. We’ve really come full circle, back to the early 1980s, when it was pretty much just your Fannie, Freddie, FHA, VA and a couple of variations from there.” Dorsa agreed, adding that he thinks the industry will see more consolidation and outsourcing. “I think mortgage CUSOs have tremendous potential, if credit unions can get over the ego of doing biz with another credit union,” the ACUMA president said. “I’m amazed there are 8,000 credit unions and at least 6,000 collection departments. Can’t we also hire out back-office functions, too? I suspect this recession will force us to find different ways to look at some of these things.” The future of credit union mortgages received a boost this year when the CU Housing Roundtable, a group led by executives from Seattle-based Prime Alliance and majority-owner BECU, wrote a white paper and subsequently proposed an initiative to the NCUA to create an industry-controlled secondary mortgage market. The group is proposing a variety of ways to tackle the project, from formalizing a specific loan-participation program within the existing corporate participationloan network to pooling whole credit union mortgage loans together and securitizing them. The Roundtable said it could have the first secondary market program up and running by early 2009. —handerson@cutimes.com Massachusetts group Holds its First Statewide Meeting in Boston BOSTON, April 27, 1915 — The Massachusetts Credit Union, an association of 22 of the state’s 50 individual credit unions, held its first statewide meeting at the Boston Club. MCU was formed last year to encourage the formation of credit unions, to aid the credit union movement, and to loan money to its members. At last night’s dinner meeting, Gov. David I. Walsh lavished praise on the credit union movement. “The greatest thing about the movement: it reaches a class the banks cannot reach. It will help all,” he said. Boston Mayor James Curley also spoke. He attacked loan sharks and said many city employees were in the clutches of the money lenders. He said that he had ordered all city employees to get out of debt by the first of May or visit a credit union. Arthur Ham of the Russell Sage Foundation told the crowd that they were “witnessing the beginnings of a movement of tremendous importance, which is destined within a brief period to sweep over this country.” www.cutimes.com Credit Union Times, December 2008 http://www.cutimes.com
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