A Strategic Approach to Residential Mortgage

LendingPresented by

Tracy Jean AshfieldStrategic Mortgage Solutions

The Consulting and Training Division of

Prime Alliance Solutions, Inc.

June 14, 2010

Learning Objectives

• Overview of mortgage lending

• Develop your loan policies

• Create a business plan

• Learn about the secondary mortgage market

Credit Union Market Share

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%

1998199920002001200220032004200520062007200820092010

1.93%

2.03%1.81%

2.08%2.18%

2.32%2.06%

2.00%2.00%

2.61%4.66%

4.52%

3.66%Thru March

It’s not a Challenge, it’s an Opportunity!

• The time is now• “Consumers” are flying to safety• Our balance sheet capacity is gold

Nationally 7% of members choose their credit union for their first mortgage needs.

Real Estate Borrowers Designate Credit Unions Their Primary

Financial Institution73%

43%

58%

0%

20%

40%

60%

80%

Mortgage at CU Mortgage Elsewhere No Mortgage

Real Estate Borrowers Use More Services

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Total Fixed Rate Mtg Var Rate Mtg Equity Loan Equity Line

2.07

4.08 3.99 3.95 4.12

Why Are Mortgages So Important?

• Builds relationships

• Increases the products per household

• Exemplifies the trusted advisor role

• Income

Credit Union Mortgage Volume

0.0

20.0

40.0

60.0

80.0

100.0

Granted 20.6 46.6 62.3 88.2 57.2 60.4 54.4 60.3 70.3 95.0 14.4

Sold 5.9 16.4 25.0 37.5 20.1 20.6 16.5 16.2 19.5 51.4 7.9

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Thru March

Offering Mortgages to Your Membership

• Refer members to another entity– CUSO– Mortgage company– Bank

• Do some of the mortgage functions and outsource the rest

• Do everything in-house

Mini Needs Analysis

• Why do we want to offer mortgages – the motivation?• What’s our vision of the member experience?• Which delivery channels are important to us?• Should we have mortgage lending in branches?

– Mortgage loan officers?– All sales staff trained to take mortgages?

• What products do we want to provide our members?• What states do we want to do business in?• How will we measure success?• How is technology going to help achieve our goals?

Building a Strategy

Numerous

optionsBasic

Referral

Wholesale Mortgage

Correspondent Delivery

Direct Seller and Servicer

The Creation of a Mortgage

Origination

Creating New Loans

Appraisal

Determining the Value of

the Real Estate

ProcessingGathering Loan Documents and

Verifications

UnderwritingApproving or Denying the

Loan

The Creation of a Mortgage

Closing

Culminating the Mortgage

Transaction

DeliveryTransferring Loan Files to the Investor

Secondary Marketing

Selling Existing Loan Product

Loan AdministrationCollecting & Remitting

Loan Payments

Basic Referral - Key Features

• Toll-free mortgage number assigned to CU• Web site

– Direct to partner’s site or– Fully customized Credit Union site

• Product selection• Portfolio growth: CU retains the right to fund any

loan originated

Wholesale - Key Features• CU responsible for member contact

– Taking application, quoting rates, disclosures– Submitting application to lender partner– Collecting the necessary documents (pay stubs, appraisal,

etc.)

• Wholesale partner responsible for closing loan– Final processing– Underwriting, document preparation, loan closing– Technology– Training

• Product selection: broad range of products

• Portfolio growth – CU funds loan and either keeps in Portfolio or assigns to

partner for sale into the secondary market

Correspondent - Key Features• CU responsible for originating, processing, underwriting,

closing and funding loan• CU on its own for technology• Mortgage conduit responsible for

– Underwriting loans that will be sold to ensure they are secondary market eligible

– Servicing loans for those sold; sub servicing for loans credit union retains in its portfolio

• Product selection– Substantial effort required to add products

• Portfolio growth– CU funds loan and either keeps in Portfolio or assigns to partner for

sale into the secondary market

Finding the fit that’s right for you AND your member

• You don’t have to do it all

• Focus on what you’re good at

• Compliance needs to be considered

• Meet your members’ needs

• Most of all do your due diligence

Business Partners

• Determine your specific needs

• Focus on your members and your credit union

• Look for a match to YOUR needs

• Keep focus on your priorities

• Keep your longer-term goals in mind

• Get good counsel!

Giving Up Control

• Technology helps

• Learn the process

• Develop relationships with your partner

How do you get started?

Consider your resources

Look at business partners

Consider ALM needs

Develop your real estate loan policy

Develop a business plan

Consider your resources

• Staff expertise

• Technology support

• Marketing support

ALM Considerations

• What’s your appetite for loans– Loan to share– Real estate concentration

• Risk tolerance– Interest rate risk– Credit risk

Matching the Policy to the Business Plan

The more you do in-house

the more you will need to document

internal policies and procedures.

Loan Policies

• Types of loans offered

• Trade area

• ALM allocations

• Loan underwriting highlights

• Loan approval guidelines

• Appraisal requirements

• Pricing guidelines

• Quality control and audit

The Secondary Market

Is it for you?

Residential Lending Markets

Primary MarketThe entire residential lending market revolves around home buyers. Borrowers wanting to buy a home come to a lender to obtain a mortgage.

Secondary MarketLenders then sell the mortgages to the secondary market for cash, thus replenishing their supply of funds for additional lending.

Capital MarketThe secondary market uses some of the mortgages purchased from lenders to create securities. It then sells those securities to capital market investors, thus replenishing its funds to buy more mortgages from lenders.

Home Buyer

Credit Union

Investor

$

$$

$

$ $

Who are the players?

• Fannie Mae

• Freddie Mac

• HUD

• FHA

• VA

Which are investors?

Advantages

1. Provides liquidity

2. Expands volume

3. Increases variety

4. Improves earnings

5. Reduces risk

More Options for the Member!

Accessing the Secondary Market

How close to “direct” do you want to get?

• Broker

• Correspondent

• Seller

• Seller-Servicer

Recourse

• Full Recourse

• Standard Recourse

• No Recourse

Let’s Consider Underwriting

• Portfolio-proprietary guidelines

• Desktop Underwriter (DU)

• Loan Prospector (LP)

• Total Scorecard (FHA)

Let’s Consider Servicing

Service In-House

Outsource Servicing

Issues that will Influence Decision

• Number of Loans Serviced

• Types of Loans Serviced

• Regulatory Environment

• Technology or Lack Thereof

• Business Strategies

• Professional Preferences of Management

Let’s Look at Pricing

10 Day

30 Day

60 Day

90 Day

30 Year Fixed Rate

6.67%

6.75%

6.875%

7.00%

15 Year Fixed Rate

6.59%

6.67%

6.75%

6.875%

Loan Level Price Adjustments• Rates and/or fees are higher for:

– High LTVs– Low credit scores– Cash-out refinances– Non-owner occupied

• Quoting an accurate rate means having all the variables established:– Credit– Property value– Debt and income

Types of Commitments

• Mandatory – Better rate/more risk

• Best Efforts – Higher rate/lower risk

Private Mortgage Insurance

PMI helps your credit union against the costs and potential losses associated with foreclosure.

PMI Rates are based on:

LTV / Loan Quality

State

Product Type

Payment Options

Payment Options

Annual

Monthly

Single Premium

Financed Premium

What Happens if an Insured Loan Defaults?

Sales Price $75,000 $75,000 LTV 95% 80% Rate 6.75% 6.75% Term 30 Year 30 Year Default Costs $8,000 $7,200 Mortgage Balance $71,250 $60,000 Total Outstanding $79,250 $67,200 Insurance 30% 0% Claim Payment $23,775 -0- Net Potential Loss $55,475 $67,200

Mortgage Lending

Offering first mortgage loans is a key to helping your members realize their homeownership dreams…

The Best Never Rest

• Constantly evaluate where you are

• Communicate regularly with your business partners

• Survey your members

• Stay current on developments

Resources and Training

www.cuna.coop

www.freddiemac.com

www.fanniemae.com

www.consultsms.com

Questions?

Tracy Ashfield

tashfield@consultsms.com

608-231-9767

www.consultsms.com