Making a Difference: Innovative Mortgage Products Allow CUs to Make Homeownership a Reality for More Members

A widespread effort’s afoot within credit unions to change the way members are served. Like many of you, I spend a fair amount of time attempting to understand our members, and designing unique ways to meet their needs. Through my research I found it is common to hear from young adults, the “twenty-somethings”, that if they knew then what they know now they would have selected different college majors. This quest to change the way we do business and hindsight being “twenty-twenty” is as applicable to mortgage lending as it is to this generation. Credit unions have been mortgage lenders for over 25 years. Reflecting back, I’ll wager most of us would have approached the subject of helping members achieve the American Dream in different ways, `changing our major’ so to speak. What would I do with hindsight as my vantage point? Two things came to mind. Why Follow the `Leaders’ Otto von Bismarck, Germany’s chancellor during the mid-1800′s, is known for the remark, “I have come to the conclusion that the making of laws is like the making of sausages. The less you know about the process, the more you respect the result.” If he’d included traditional mortgage lending, I could wholeheartedly agree. We learned from the industry’s pioneers, an often ideal way to launch new services. Imitation is, after all, the sincerest form of flattery. And learn we did, from mortgage lenders, mortgage brokers, and mortgage investors. The problem was we didn’t question their methods. Until recently, that is. Credit unions are the relative newcomers to mortgage lending. In the last five years we have challenged the norm with incredible results. According to Fannie Mae’s 2004 Mortgage Focus Study, some credit unions are the industry’s most efficient lenders. On the three metrics that count – cost-to-originate, closed loans per full time employee (FTE), and pull through – these credit unions come out on top. The study tells us that the average lender’s cost-to-originate approaches $1,700 per loan. The most efficient of these credit union lenders whittle it down to slightly more than $350, an almost 80% reduction. The same holds true with closed loans per FTE. Consider this: on average, one employee can close about six loans per month. Those at the head of the class, these credit unions, close more than 17 loans per month per FTE. In other words, their productivity per employee is almost three times higher. And guess what: the same credit unions close 10% more of their pipelines. Look who’s leading now! Numbers like these add up to a cost reduction of at least 65 basis points per loan. What credit union wouldn’t want to use at least a portion of these savings to lower the cost of borrowing for members? Significance Members want their dream home, not a nightmare mortgage. People exhaustively shop for homes, doing so gladly. On the other hand, shopping for a mortgage is exhausting, and actually getting the mortgage to closing can be the dream-slayer. It doesn’t have to be that way. Credit unions have an advantage over other lenders: we have a relationship with our members, one that often spans generations. Members of the early 20th century – the first members – joined credit unions because we were the only institutions that offered affordable credit for people of modest means. Members and potential members of the 21st century are similar to the first members in some respects, yet differ in others. Like the founding members, people new to the United States are looking for a trustworthy organization willing to lend for their first home. They differ, though, in meaningful ways. Within the next five years, low-to moderate income members and members from emerging markets will be the majority of our borrowers. Many of the cultures from which they come distrust financial institutions or have unique cultural differences that make traditional lending impossible. Consequently, helping finance their homes requires credit unions to use both old and new methods. One approach is actually a return to tradition: rather than being “from” our communities, we must once again be “of” our communities. Members from emerging market segments choose lenders carefully, often from among those close at hand. Becoming the lender they choose means we will have to work closely with community groups whose objectives match our own. Organizations like the Urban League and United Way exist to build community. Credit unions exist to help members establish financial security. Our goals intersect in housing. Communities don’t become stable until their residents have a stake in them. Residents can’t establish a stake unless they can afford to live and own property in their communities. Community groups and credit unions, consequently, are made for each other. One of the new ways has to do with loan products. Housing finance has never been more member-creative than it is now. Homeownership has become an attainable goal for low- to moderate-income borrowers thanks to numerous low down payment and community lending programs. There’s also the new 40-year mortgage offered by Fannie Mae. Many times lowering a monthly payment by $50 to $100 a month means the difference between buying and renting. Creativity on the other end of the market is important, too. Middle class members face escalating housing costs as well. Meeting their needs also requires a bit of creativity. Consider today’s interest-first fixed rate and ARM mortgages. For the first 10 or 15 years, the member makes interest payments only. Beginning in the 10th or 15th year, the loan becomes fully amortizing. At any point, though, members are free to make principal payments, which, in turn, automatically adjust the member’s monthly payment. Members are pleased with just how much more affordable their new home becomes. Interest-first loans do more than make housing affordable. Because they improve cash-flow, members have additional money to invest for retirement or for college educations. Life insurance is another possible use of the additional cash. Or members may choose to use it to cover living expenses. Loan products like these transform the `mortgage as commodity’ into `mortgage as tax-, estate- and/or financial planning tool.’ Commodities have little utility. They’re also not that much fun to sell, since price tends to be all-important. Loan products that offer more, on the other hand, add significant value to members, and to their relationship with us. There’s a difference between simply making a loan and making a significant difference in the life of a member, as the above examples illustrate. And here’s the other parallel between credit unions and the twenty-somethings: as we both approach our fourth decade we’re wondering just what our societal contribution will be. I can’t speak for those in their twenties, but as for credit unions, it’s time we commit to helping our members achieve the American Dream.