NAFCU: CUs' mortgage portfolios, lending practices holding up in soft economy

ARLINGTON, Va. – Despite economic uncertainties and domestic and world events, an attractive interest rate environment is continuing to spur strong demand for credit union real estate loan products. Not only that, says NAFCU’s October 2001 Flash Report, credit unions as a result of board limitations on real estate loan exposure and internal strategies intended to offset the current rate risk environment, are well prepared for risks associated with real estate lending To assess trends in credit unions’ real estate lending, NAFCU posed a series of questions to credit unions concerning their real estate lending activity including first mortgages and home equity loans, for the third quarter of 2001 to the first half of the year. Among the responses garnered by NAFCU: * When asked to compare their first mortgage originations during the third quarter this year to the first half of 2001, over 43% of FCUs indicated their first mortgage originations had increased, while 35% said originations had remained almost the same, and 22% noted a decrease. * Next, FCUs were asked to compare home equity loan demand for the same two periods. Approximately 41% of the responding FCUs indicated increased home equity loan activity during the third quarter. Only 26% reported a decrease in demand, and approximately one third of the respondents indicated they’d experiences about the same level of home equity loan activity. * The third question asked FCUs to compare the demand for fixed rate real estate loans for the third quarter vs. the first half of 2001. Almost 68% of FCUs responding indicated that demand for real estate loans increased during the third quarter; only 32% said they’d experienced less demand for fixed rate real estate loans. * FCUs were next asked about the quantity of mortgage refinancings. Last year, 9.5% of FCUs surveyed indicated refinancings accounted for less than 10% of originations; 55% said they made up between 11 and 49%; and the remaining respondents indicated refinancings were at least half of their total originations. In this year’s Flash Report, only 2.4% of responding credit unions said refinancings were less than 10% of total originations, while a quarter said they accounted for 11-49% of total originations. Moreover, close to three out of four credit unions indicated that refinancings accounted for at least half of total originations. * Next, FCUs were probed concerning their board policies on real estate lending. Among respondents, 18% said their board restricts real estate lending to 20% or less of total loans, and 70% said their board restricts real estate lending to between 25 and 50%. * Credit unions were queried on how they plan to maintain their real estate loan margins in the present. The most common method cited (45%) was by selling their mortgage loans “sometime in the future.” Other methods frequently mentioned were: not selling in the future; reducing origination levels, and increasing real estate loan approval standards. * Lastly, CUs were asked how they process their first mortgage loan applications. The majority of respondents indicated they processed the applications internally; 10% said they processed them through a CUSO; about 6% outsource. Despite the good news, the softening economy and effects of September 11′s terrorist attacks are already beginning to emerge, and NAFCU said they will be felt over the next several quarters. NAFCU Economist Jeff Taylor said credit unions might begin to see some deterioration in their mortgage portfolios going in to the fourth quarter 2001. The Mortgage Bankers Association’s report for the week of October 19 showed a slight drop in first mortgages and refinances for the fourth quarter compared to September and the first three weeks of October. “There are only so many houses that can be bought and so many first mortgages that can be refinanced,” said Taylor. “Some consumers have actually refinanced more than once over the past three years. There are only so many times this is practical.” NAFCU predicts interest rates will continue to fall during the fourth quarter of 2001, especially on the short end and that this rate environment should continue to support loan growth for CUs, despite the economic slowdown. Taylor said credit unions are in “good shape.” After all, he said, the housing market is in better shape now than it has been in the past, the country has a strong monetary policy, and inflation is low. – [email protected]