PLANO, Texas–Housing demand in the United States has fallen at least initially during the COVID-19 pandemic, but while it’s down, the housing market is not out, according to one analyst.
Millions of homes will still be sold this year and there may be reason to increase credit union engagement in the real estate market – or at least to refinance existing loans, according to Mark DeBree, managing principal at Catalyst Strategic Solutions.
Catalyst noted that while the downturn in sales is expected to lead to a slower pace for purchase mortgages, refinancing is expected to remain strong throughout the year, thanks to the low rate environment. Fannie Mae projects $1.41 trillion in refinance loans will be originated in 2020, up from $1.01 trillion last year, the company added.
‘Does it Make Sense?’
In a new Strategic Insights report, DeBree said one way credit unions are diligently serving members during the pandemic is by aggressively refinancing loans. But that leads to a question: “Does booking 30-year or 15-year mortgage loans make sense at current rates, or should credit unions be originating and selling them?” Debree asked.
In the Strategic Report, DeBree offers several reasons why it may be a good idea to increase refinancing efforts, including:
- Improving the affordability of loan obligations
- Creating goodwill and member value – especially when credit unions approach members with refinancing opportunities (versus waiting for members to contact the credit union…or a competitor)
- Ensuring loans remain on the credit union’s books, even if at a lower rate
- offering potential to improve loan performance
- Opening the door to recapture loans lost to other financial institutions
Learning from the Past
Debree reminded that many credit unions “incurred notable mortgage losses” during the Great Recession and were slow to reenter those markets.
“That decision weighed on credit union earnings and capital growth for years,” he said. “Trying to learn from the past and not leave potential earnings on the table, should we grow our portfolios or sell off originations?”
According to DeBree, part of the answer lies in looking back at the impact of the Great Recession and determining how net charge-offs increased into 2010-2012. That information “provides valuable insight when considering booking mortgages now,” he said.
“When evaluating the current attractiveness of mortgage spreads in the market, the decision between originating and selling, versus originating and booking, these loans will be driven by your credit union’s expectation of future loan losses,” Debree said in his analysis. “If you believe your future loan losses on new originations will be less than 50 bps (to be safe), booking mortgages may be an attractive option. If you feel your charge-offs are going to be closer to the top range of 75 bps, the ‘originate and sell’ option may be a better decision for your credit union.
For more info, go here.