The credit union movement is hitting new highs in first mortgage market share and originations, and it's increasingly sharing the wealth in a most credit union-y way.
That's because loan participations are clearly on the rise while sales into the secondary market remain dominant but relatively flat among America's member-owned financial cooperatives.
As we reported in our second quarter Trendwatch, first mortgage market share rose 90 basis points year over year to 8.2%. Just more than a third – 33.8% – of that $67.5 billion in originations year-to-date have been sold into the secondary market. Five years ago, that was 50.4% of $56.3 billion in first mortgage originations sold off in the first six months.
Meanwhile, on June 30, 2012, U.S. credit unions had $2.7 billion in outstanding sold participation loans and $11.1 billion in purchased participation loans outstanding. Five years later, those numbers have risen sharply to $6 billion and $26.4 billion, respectively.
We see a few drivers here. One is rising interest rates of late boosting the popularity of ARMs and hybrid/balloon notes, which credit unions may prefer to hold or sell into participations rather than meet the requirements for selling those to Fannie Mae or Freddie Mac.
Based on liquidity, it may not make sense that we see any participations sold for credit unions under $250 million. However, consider that success in selling first mortgages is outstripping the capacity for some credit unions to handle all that servicing. They're big enough to aggressively market and manage the mortgage sales process but may not have the scale to service it, or the appetite and capacity for the accompanying interest rate risk.
And then, there's diversification of the loan portfolio, another way to help dampen interest and delinquency risk.
Of course, that's true in different degrees in all asset classes and no two credit unions are exactly like. There's also this: Many credit unions have always liked to work with other credit unions when they can, in this case helping to raise liquidity for themselves while providing much-needed earning assets for the participation buyers.
No matter the motivation, or combination of them, while originations were hitting an all-time high in the second quarter, fixed-rate mortgages were accounting for 58.1% of the $375.7 billion in total mortgages outstanding, compared with 61.2% for the $244 billion on the books as of the same quarter of 2012. Balloons and hybrids accounted for 26.9% of 2017 year-to-date originations, up from 24.1% five years ago, and ARMs got 15%, compared with 14.6% as of June 2012.
Taken in one five-year chunk, we can see that credit unions now have $375.7 billion on the balance sheet as of June 2017, up 54% from $244 billion in the same time frame five years ago. The growth leader again is balloons/hybrids, which jumped 71.9%, followed by ARMs at 57.6% and fixed rates at 46.1%.
Meanwhile, second quarter 2017 data from Callahan & Associates shows a stair step correlation between asset size peer groups and loan-to-share ratios. The highest was 83.69% among the 284 financial cooperatives of more than $1 billion in assets while the lowest was 54.82% for the 759 that were between $10 million and $20 million in assets at mid-year.
So, we'll just have to see how else the smaller credit unions will try to ramp up loan growth with all that liquidity. And even among all asset classes, there's room to grow, and loans to share.
Liz Furman is Senior Industry Analyst for Callahan & Associates. She can be reached at 202-223-3920 or [email protected].
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