Credit unions and other mortgage lenders faced an economic pinch in 2013 as rising interest rates began to squash demand for refinanced mortgage loans while demand for purchase money loans still struggled to grow.
Borrowers shifted from refinancing to buying.
In late August, analysts with SNL Financial reported in a data dispatch that rising rates had strongly reduced demand for housing refinance loans, but said demand for new mortgages had not yet grown enough to provide business for every existing mortgage firm.
Executives quoted in the report forecast a shakeout, particularly among mortgage firms which only began business in the past few years. They also forecast that demand for purchase money loans will continue to rise as long as the economy continues to expand and employment figures improve. Purchase money demand has a stronger correlation to economic growth than interest rates, the report said.
Tracy Ashfield, founder of housing finance consultancy Ashfield &Associates in Madison, Wis., agreed with the SNL analysts, noting that the Mortgage Bankers Association predicted mortgage lenders will make more purchase money loans than refinance existing loans by the fourth quarter of 2013.
Further, the MBA forecast that purchases and refinances will almost achieve parity by the end of the third quarter, with 51% of the home finance loans in that quarter being refinanced loans and 49% purchase loans.
"But the big news is that overall loan volume is forecast to shrink," Ashfield said, noting that the MBA reported 2012's overall mortgage volume was $1.75 trillion but said that number will fall to $1.59 trillion this year and to drop further to $1.09 trillion in 2014. That shrinking volume means that the whole mortgage pie is likely going to get smaller, and credit unions are going to have to struggle to make sure they get a piece of that business, Ashfield said.
As the year drew to a close, it was unclear whether enough credit unions had gotten the message, she said.
Ashfield pointed out that a refinanced loan is a relatively simple transaction, with one borrower, no sellers and no real estate professionals having an interest in the transaction. By comparison, a credit union loan officer processing a purchase money loan has to be aware that not only a borrower has an interest in the outcome, but so might a seller who is seeking to purchase another home, as well as real estate professionals who could have their own alternate lender ready in the wings if the credit union should stumble in the way it handles the loan.
There are similar concerns with process, Ashfield said.
"If I'm refinancing a loan," she said, "of course I want it done correctly and for it not to take too long, but I'm not really concerned about the time it takes in the same way as I would be if I am applying for a purchase money loan. The stakes are just higher."
Efficiency, timeliness and a good deal of contact between the borrower and the credit union are all hallmarks of the purchase money loan process and credit unions which want to win more purchase money business need to try to include them, Ashfield explained.
Finally, credit unions that want to build purchase money loan volume should make sure they have loan products that members would find attractive. Ashfield recounted how one credit union had achieved great mortgage success with a 10-year loan that baby boomers were using to refinance smaller existing balances on loans they expected to pay off before they retired.
"As well as that loan has performed," Ashfield said, "it's not the sort of loan likely to attract a borrower seeking to finance their first home purchase."
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