Sell the mortgage if you must, but retain the servicing

Does your credit union’s strategic plan include objectives such as increasing the number of member relationships and becoming your members’ primary financial institution? If it does, “Should your credit union originate mortgage loans and retain servicing on members’ mortgages?” Sometimes the obvious answer is not correct. Credit union managers typically focus on the financial characteristics of the mortgage – yield, yield spread, term, etc. However, a mortgage represents much more than a financial instrument. It represents an often overlooked and undervalued asset – the member relationship. Studies show that members with a mortgage loan at a credit union have more and larger financial relationships with the credit union, and are more likely to consider the credit union their primary financial institution. A win-win for the credit union and its members. In short a credit union can increase relationships with its members by offering mortgage loans. The member relationship benefits that develop are far more important than the financial return from the mortgage because they help the credit union develop its overall balance sheet and financial services portfolio as well as move the credit union closer to the primary financial institution status. As the member’s primary financial institution, the credit union has a prime opportunity to provide other financial services to the member. The mortgage is a natural entry to a homeowner’s insurance, mortgage credit insurance and life insurance and home equity loans. The mortgage relationship is the longest-lived financial relationship other than a checking account that a member will have. The mortgage relationship results in multiple contacts with the member over the term of the loan – at least 12 annually. A credit union has the following options for managing a mortgage loan: portfolio the loan and keep the relationship; sell the loan, retain the servicing and keep the relationship; or sell the loan, sell the servicing and retain the relationship. The best of these is the ability to sell the loan and servicing and retain the relationship because the credit union receives all the relationship benefits of ownership without the financial investment and related interest rate risk. A credit union can make a mortgage loan to every borrowing member thereby deepening the member relationships. The credit union is able to protect the member from marketing advances from other financial institutions. The largest non-bank owned servicer in the country, itself owns a bank. It will cross sell competing financial services to your member. There is no need to let this happen. I often hear credit unions say, “I’m too small.” Believe me, credit unions of any size can realize this opportunity. Service providers offer various levels of services that enable any credit union to take advantage of mortgage relationships without investing in the origination or servicing processes or in the mortgage loan itself. Credit unions can make mortgage loans to members and control the relationship without any financial investment through a mortgage service provider. Is it affordable? Unequivocally – Yes! A credit union can offer mortgages and develop member relationships at no out-of-pocket cost to the credit union. Credit unions often find this hard to believe. After all, in this world, you don’t get something for nothing. Credit unions often say they don’t have the resources to create and administer a mortgage program. That’s because they believe servicing is expensive and low volume servicing is very expensive. But that doesn’t necessarily have to be the case. It would be true if they had to develop the mortgage origination and administration program themselves. But they don’t have to. The truth is that every credit union regardless of its size can offer mortgages to its members at no cost to the credit union. The solution is to partner with a company that will do the administration and service the loan in the credit union’s name. This is imperative for the credit union to retain the member mortgage relationship. When a loan is originated in a credit union’s name and sold on the secondary market, the credit union is essentially selling off that financial relationship with that member. But if the credit union uses a company that will service the mortgage loan in their name, they retain the relationship with the member. The relationship accrues to whomever the member makes the loan payment. When researching mortgage service providers to partner with, it’s critical that they be able to service members in your name. The key interface with the member should be done either by the credit union or in the credit union’s name. The following is a check list of critical member interfaces that should be in your name. They serve as constant reminders to members that you are their primary financial institution. They serve as on-going platforms to sell additional services. * Written correspondence * Web site and e-mail * Telephone/voice response * Real-time access to loan system * Customized member relationship management * Consolidated member statements include all mortgage activity * Service provider would provide no cross-selling except at the request of the credit union. The bottom line is simple: Sell the financial asset of the mortgage loan contract if you must, but keep the relationship. Relationships lead to greater capital, greater return on assets and reserves. Reserves can be used to provide additional member services. Credit unions have a unique relationship with their members. They should nurture the relationship, not sell it to the highest bidder.