How to Navigate the Changing Mortgage Market

Coming out of the most unprecedented times most of us will ever experience, it can be challenging to look forward with confidence. With ever-evolving economic conditions through the pandemic, many credit unions are wondering how to anticipate the next trends and find opportunities to serve more members.

When it comes to mortgage lending through the pandemic, the market saw a surge in both purchase loans and refinances due to record low interest rates. Before COVID-19, mortgage interest rates averaged 3.65% in January 2020, Freddie Mac reported. They hit their lowest level ever during the first week of 2021 at 2.656% and have climbed only modestly to 2.90% as of July.

As economic conditions continue to evolve, what should credit unions see going forward?

The expectation is for purchase mortgage lending to remain strong as the millennial generation continues to purchase homes. While CUNA Mutual Group (CMG) expects purchase mortgage lending to grow more than 10% over the next year, the mortgage refinance boom is likely to wane over the next year with refinance originations expected to drop 50% over the next 12 months.

When looking for opportunities, here are the key areas to keep an eye on:

• Credit unions should pay attention to the stance of monetary policy and when the Federal Reserve will begin tapering its bond buying program known as Quantitative Easing. Currently the Federal Reserve is buying $80 billion in Treasury securities and $40 billion in mortgage backed securities each month. It will begin to reduce these numbers sometime over the next 12 months, which will push up market interest rates and slow the housing market.
• Expect 30-year mortgage interest rates to rise from 2.9% to 3.5% by the end of 2022, due to rising real interest rates and rising inflation expectations.
• With credit union yield on assets ratios hitting record low levels in 2021, credit unions are growing their fixed-rate mortgage portfolios by 12% during the past year in an attempt to lessen the drop in their loan-to-share ratios.
• CMG believes home prices will likely rise at rates in the 8-10% range over the next 12 months as strong demand from the millennial generation keeps demand strong in the face of limited supply.

One key for credit unions is to develop a more creative first mortgage strategy that unleashes the full power of your portfolio to help you meet members’ needs, as well as distinguish your credit union with homebuyers and real estate agents alike. It may also help your credit union beat expected industry averages in growing your loan and membership growth.

Consider two examples being implemented by credit unions today to stand out in their markets and offer current and potential members something beyond the same vanilla loans everyone else in the market is offering.

Michigan First Mortgage, a division of Michigan First Credit Union ($1.4 billion, Lathrup Village, Mich.), offers homebuyers a mortgage product called Turning Point, a unique alternative not found on most lenders’ websites. This portfolio product is designed to provide a path back to successful homeownership after a member has experienced a significant life-changing event, such as illness, a job loss or a divorce.

“Turning Point provides the financing opportunity for an otherwise helpless homeowner, and helps build generation dreams of homeownership, and because of that strong member relationship, the program preforms very well and has a lower than average run-off rate,” Daniel Sugg, CMB, chief mortgage lending officer at Michigan First, explained. “We believe that owning a home is a privilege, not a right, and Turning Point provides that privilege for members that want to do the work.”

A similar story of using the power of the institution’s portfolio can be found at American Eagle Financial Credit Union ($2.3 billion, East Hartford, Conn.).

As Patty Mason, vice president of real estate lending and servicing described it, “We use our portfolio offerings as a key part of our purchase money strategy. We offer the Community Pro program to meet the various needs of our first-time homebuyers up to 97% LTV. Plus, to help our members moving up to more expensive housing, we offer jumbo loans up to 95% LTV, which is unique in our area. These offerings also help us with our efforts in marketing to local real estate agents.”

These are a few examples of developing niche programs to attract new members and referral partners. There are of course many other purchase money strategies a credit union could deploy, including a first-time homebuyer education program, and using data to quickly identify which members are currently selling their homes or projected to prepay their loans. And the list goes on.

The pandemic we are all so eager to put behind us has changed us in many ways. What never went away – and never will go away – is the fact that credit unions are uniquely positioned to best solve their members’ needs. And those that engage in a first mortgage purchase strategy aimed at prudently using the power of their portfolio will be poised for growth the rest of this year and beyond.

Steve Rick Director and Chief Economist CUNA Mutual Group Madison, Wis.

Chris Perry Vice President – Sales, National Credit Union Manager MGIC Milwaukee, Wis.