Credit Union Lending Allies Bring Balance

Credit unions have deep relations with members, but typically they are far smaller than banks and unable to match their depth of loan offerings.

One way credit unions are cultivating ties with members is by enlisting CUSOs, banks and others for support ranging from back-office processing to correspondent lending.

Two trends that are making such arrangements more popular are the shift in first mortgages from refinances to purchases, and the increasing involvement of credit unions in business lending.

At the end of March, 1,945 credit unions held $71.7 billion in member business loans. The total amount increased 15.1% from a year earlier, making it one of the fastest-growing loan sectors.

However, an analysis of NCUA data by CU Times showed business lending is increasing as predicted by size. There were 114 fewer credit unions holding MBLs on their books in the 12 months ending March 31, with those exiting being significantly smaller than the others.

The 221 credit unions that shed MBLs by March 31 had average assets of $98.2 million, compared with $153.5 million for those adding MBLs to their books. Those with MBLs at both points had average assets of $671.4 million; those without MBLs either quarter had average assets of $46.2 million.

More than 500 of those credit unions in 46 states are clients of CU Business Group LLC, a Portland, Ore.-based CUSO owned by six corporate credit unions.

Credit unions often come to CUBG because they have members who want mortgages for commercial buildings or apartments, but the credit union does not have the capacity to offer those loans, Dina Kroshkin, CUBG’s vice president of loan originations, said.

“Correspondent lending offers another alternative for credit unions approaching their MBL cap. It also allows the credit union to say ‘yes’ to members and cultivate their relationship with them,” Kroshkin said. “Multi-family has really been performing well over the last two years, and is expected to continue performing well.”

Investors have seen that multi-family housing was more resilient than other real estate during the recession. Now, with prices for single-family homes nearing record highs in many markets, many young adults are delaying home purchases.

“A lot of the younger generation chooses to rent,” Kroshkin said.

Seeing the growth of credit union membership, Finance of America Mortgage created a sales team last year focusing on credit unions and community banks. Among the new hires was Linda Clampitt, a 25-year banking veteran, as EVP and head of the credit union and community bank division of the bank based near Philadelphia, Penn.

Clampitt said smaller credit unions are often at a disadvantage because they lack sophisticated online origination capabilities and robust marketing.

“Turning to a correspondent partner can help them reach current members and attract new members with the combination of existing products and others that credit unions may not already offer but can obtain via these correspondent relationships,” Clampitt said.

Meanwhile, the costs of originations have increased since the housing market shifted from refinances to purchase mortgages.

“In this kind of market, big banks, large independent banks and mortgage brokers benefit from an arsenal of originators cultivating referral relationships,” she said. “These dynamics make it very difficult for credit unions to compete, but correspondent relationships are now making this possible.”

The rising cost of mortgage lending is one of the factors that have led to a significant increase this year in inquiries by credit unions to myCUmortgage, a CUSO formed in 2001 by Wright-Patt Credit Union of Dayton, Ohio ($4.2 billion in assets, 360,506 members).

“As much as the mortgage market has changed, for a credit union to sit still and do nothing with their mortgage program or not evaluate it, the endgame is not going to be very positive for them,” Tim Mislansky, SVP and chief lending officer for Wright-Patt and president of myCUmortgage, said.

myCUmortgage can provide a little or a lot of help to enable credit unions to offer mortgages to members. Help can be limited to back-office support or extend to more of a turnkey solution with correspondent lending, Mislansky said.

“Credit unions want to remain engaged with their members, but they’re looking for help on the backside,” he said. “I call it the heavy lifting of mortgage lending: The processing, the underwriting, the closing, the sale of the loan to the secondary market.”

Credit unions often seek help with government lending, especially FHA loans. Some credit unions don’t have the volume to support the extra costs, such as having a direct-endorsed underwriter and conducting an annual audit.

Fannie Mae and Freddie Mac also have first-time homebuyer mortgages with low down payments, but FHA loans are more flexible, he said.

“FHA is a nice product to have in your product suite because it has lower down payment requirements and a little bit more flexible underwriting guidelines,” Mislansky said.

One strategy for credit unions is to find a partner to start an FHA line through referrals to a correspondent lender. When the volume increases, the credit union can reassess and decide whether it wants to originate the loans in house.

“We’ve had credit unions come to us and say that’s what they want to do, and we’re happy to help them get there,” Mislansky said.

Sometimes those credit unions will return to a correspondent lending arrangement after finding the costs of doing the loans themselves were higher than they expected. Some credit unions stay in the correspondent lending arrangement because they want to focus on the member relationship rather than invest in the back-office work.

“If you’re a small or mid-sized credit union with a couple people in your mortgage department and your volume starts to go up, the flexibility of having a partner is a positive,” Mislansky said.

The advantage of outside help is especially important if the real estate is being mortgaged for a business.

Investors see lower risks and higher gains through apartment investments, but those same factors make multi-family loans very competitive. Investors often seek loans of up to 75% to 80% of the property value with no personal guarantee.

All but the largest credit unions tend to lack personnel with the expertise to handle these loans. The big loans are often too risky for their portfolios, and even for smaller loans, rate competition from larger lenders makes it difficult to land the deal.

Larger banks can offer loans with no recourse and higher loan to value – terms credit unions usually can’t match. That’s where correspondent lenders can help a credit union, Kroshkin, of CUBG, said.

“They can still use this model and offer the buyer what they’re looking for through the program, and not lose the borrower to a Chase bank,” Kroshkin said.

When a credit union has nothing to offer a member, they risk not only losing the multi-family loan to the big bank – they risk losing other loans and accounts to the bank. Often a large bank will offer a better deal on the multi-family loan by structuring it with a loan on another property, say the main office, which might be at 60% loan-to-value.

CUBG works as a facilitator, getting credit union referrals placed with one of its wholesale lenders, which are not able to work with borrowers directly.