By Ray Birch
MADISON, Wis.—The balances on adjustable-rate mortgages at credit unions are up 16.3% over the last 12 months, and analysts say the growth has as much to do with ALM concerns at CUs as it does with growing consumer interest in the lowest-priced option.
As CUNA Mutual Group’s chief economist, Steve Rick, observed, the trend is an interest rate risk play by CUs. “Credit unions want to book and hold more adjustable-rate mortgages because they mitigate risk.”
Rick said credit unions are originating more fixed-rate mortgages but are selling them off, “letting Fannie and Freddie worry about the risk.”
Bill McGuire, chairman emeritus at McGuire Performance Solutions, a Mountain View Company based in Scottsdale, Ariz., noted there is a lot of concern on the part of both credit union managers and NCUA about what is going to happen to funding costs when interest rates rise.
“If high interest expense sensitivity to rising interest rates is a worry, best to keep the asset side shorter in terms of ability to reprice—and increase interest income—when interest rates rise,” said McGuire. “NCUA, as well, does not like fixed-rate mortgages in basically any shape or form right now. So there may be some examiner pressure behind the strategy.”
Steve Rick, CMG
Lots Of ARMs
But McGuire reminded in the current market “ARM” now has a wide range of definitions.
“In the ‘old days’ 1/1 and 1/3 ARMs, which could reset their rate every year or three years, have extended to much longer initial lockout periods—especially the 7/1 and 10/1 products,” said McGuire.
When McGuire examines a credit union’s ARM holdings for interest rate risk, he makes sure that he first digs into what the CU actually holds.
“If it is mostly 1/1 and 3/1 ARMs, then I am confident that their near-term repricing will be an offset to rising funding costs,” explained McGuire. “But if the balances are mostly 5/1 or longer types, then I get concerned that management may not be as aware as they should be of just how long those mortgages are going to be fixed. So it would be interesting to see what is the actual mix of ARM loans in the recent surge.”
Curt Long, NAFCU’s chief economist and director of research, pointed out that the rise of ARMs as a share of total originations comes after a substantial drop in prior years.
“The current share of (credit union ARM) originations is pretty similar to where we were prior to the financial crisis,” said Long. “We see a similar trend among other lenders. There are a number of possible reasons for that, but the fact that long-term mortgage rates have been so low for the past few years would be at the top of the list.”
Curt Long, NAFCU
Rates To Rise Slowly
Consumers, too, are driving up CU ARM balances, due in part to their thinking that rates are not rising sharply anytime soon. Despite numerous predictions from housing market experts and economists that mortgage rates will rise in 2015, fewer consumers now think rates will increase in the next 12 months. Fannie Mae’s November 2014 National Housing Survey shows the share of Americans who expect mortgage rates to climb in the next 12 months decreased again to 45%, reflecting a gradual but uneven decline since the beginning of the year.
Rick pointed out that the Federal Reserve in its forward guidance has for some time projected that rates won’t rise for a while and when they do it will be slowly.
“A lot of Americans, I believe, are saying, ‘Let’s take out an ARM, I will only be in the house three to four years, and when the Fed really raises rates I won’t be in the home.’ ”
Bob Dorsa, president and CEO of Las Vegas-based American Credit Union Mortgage Association, thinks Millennials, as a result of what they have learned over the years and from being highly mobile, find ARMs particularly appealing.
Dorsa believes that all of the financial education delivered by credit unions over the last 10 years has produced more savvy young consumers. “Millennials understand the fees and the terms that accompany bank loans that often make the credit union loan a better deal. Credit union loans have fewer incidental fees.”
Dorsa also thinks that Millennials don’t hold to the same values as Boomers, who remained in the same home for many years. “The thinking that you stay in your home for 20 years, borne into Boomers, is not necessarily in the younger generation. The U.S. home ownership rate is at a 20-year low.”
Consumer Balance Sheets
McGuire thinks rising consumer interest in ARMs is being driven by personal balance sheets.
Bill McGuire, MPS
“ARMs have a notably lower rate right now and personal incomes are less than robust, so members take the lower rate ARM knowing they can quickly refinance into a fixed-rate mortgage when interest rates rise,” said McGuire. “Also, members are looking at longer ARMs—for example 5/1, 7/1, or even 10/1 products—as, essentially, a fixed rate, considering their length of time they expect to be the current house.”
But there is another factor at work, Dorsa believes, and that is more consumers thinking of credit unions as a place for more than just auto loans.
“The market share of credit unions in real estate mortgages has quadrupled in the last five to six years, so that alone accounts for some of the ARM volume,” explained Dorsa, who added the large CUs are creating very competitive products and accounting for a big chunk of the volume.
“You see Navy FCU advertising on prime time sporting events,” said Dorsa. “They are getting the term credit union into the mainstream and the rising tide is raising all ships.”
Dorsa also contends that CUs are increasing their promotion of ARMs. But Dorsa is not sure how long the ARM growth can continue. “Maybe not at this pace, especially not knowing what the demand will be.”
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