BY ALEC HOLLIS
ALM First Financial Advisors,
Since the enactment of P.L. 95-22 in April 1977, expanding lending authority for credit unions, residential mortgage lending has become an important and growing facet of the credit union model. Today, granted mortgage loans are as high as they’ve ever been. Credit unions posted a record-high of $172 billion in 2016, and may again reach a new high this year, as 2017 year-to-date numbers have surpassed 2016’s year-to-date. In order for credit unions to maintain and grow their importance in this vital market, they should consider revisiting secondary marketing. Managing the financial risks inherent in secondary marketing operations remains critical for credit unions.
Secondary market risk management aims to profitably deliver loans to investors while minimizing risk to the institution. For credit unions originating with the intent to sell, this risk-management process is not only essential, but it is also receiving more regulatory scrutiny of late.
Origination Volume and Production Sold
In the face of increasing mortgage production, credit unions have actually reduced first- mortgage production sold over the past five years, as Figure 1 demonstrates. Since the 2013 steepening event, production sold dropped significantly and has remained near 40% since then, despite a significant rebound in origination volume. As of the third quarter this year, first mortgage loans sold represented 41% of first lien mortgage production.
Interestingly, mortgage production sold demonstrates a negative correlation with the 10-year treasury rate, possibly indicating that, as credit unions experience pipeline losses, mortgage loans are re-designated as “held for investment.” While this may prevent realizing losses on the income statement, these losses are realized over time as the credit union adds low-rate loans on the balance sheet; this can be thought of as a form of market timing. While this is not uncommon, there could still be other factors at play.