Caution advised as credit unions consider mortgage spreads

on "May 13, 2020 9:48 am"

While it is down, the housing market is not out. Millions of homes will still be sold this year. And, in fact, there may be a reason to increase credit union engagement in the real estate market or at least to refinance existing loans, says Mark DeBree, managing principal at Catalyst Strategic Solutions.

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Housing demand in the United States has fallen during the COVID-19 pandemic with some, including Fannie Mae, suggesting 2020 sales falling 15 percent or more compared to last year. 

While the downturn in sales is expected to lead to a slower pace of mortgage lending for loans used to purchase homes, 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.

In a Strategic Insights report, released to credit unions today, DeBree notes that one way credit unions are diligently serving their members during the pandemic is by aggressively refinancing loans. But that fact prompts DeBree to ask: “Does booking 30-year or 15-year mortgage loans make sense at current rates or should credit unions be originating and selling them?”

DeBree offers several reasons why it may be a good idea to increase refinancing efforts:

  • Improves the affordability of loan obligations
  • Creates 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)
  • Ensures loans remain on the credit union’s books, even if at a lower rate
  • Offers potential to improve loan performance
  • Opens the door to recapture loans lost to other financial institutions

DeBree notes, however, 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?”

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. 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,” DeBree notes in the analysis.

To access a full copy of the report, titled Mortgage Spreads May Look Great…But Be Cautious, visit  

(Note: Catalyst Strategic Solutions is a CUSO that is wholly-owned by Catalyst Corporate Federal Credit Union.)