Lending Perspectives: Feasting on Mortgage Refinance Business?

The other day, I shared some thoughts with my mortgage group about how being in the business was akin to riding on a roller coaster. Sometimes it’s best enjoyed (or tolerated) by closing your eyes!

The mortgage market over the last 12 years has been a ride for sure. The financial crisis saw the benchmark 10-year Treasury bond yield drop to new lows and that started the roller coaster running at full speed. The fact I remember vividly the day that I sensed we were in for a ride (Dec. 17, 2008), along with the few slow periods for refinance volume, says a great deal about the operational challenges in keeping up with borrower demand.

COVID-19 has brought us record-low Treasury yields and mortgage rates again! During the span of a few weeks in February and March, our senior management group speculated that we certainly wouldn’t see the 10-year Treasury yield fall to 1% or less. Suddenly we were holding our breath that the yield wouldn’t fall below 0%.

When it comes to mortgage lending, there is no way we can fully prepare for all the possible volume and operational scenarios. What can your credit union do to be better prepared?

Staffing

Credit unions are typically loath to cycle through hiring and laying off people in response to the ebb and flow of loan volume, yet that’s how most mortgage operations outside our world tend to operate. “Last in, first out” is a concept I remember quite vividly from Accounting 101. It also applies to mortgage talent, which tends to make it a challenge to hire qualified talent from competitors at the height of the market.

Your consumer lending group can be a source of talent that can be trained in an accelerated fashion to fill the void. Over the years, my mortgage management team has realized that the mortgage process can be learned, but certain skills like organization can’t be readily developed. I shared some ideas on developing flexible lending talent in an earlier article.

This might also be a good time for your credit union to explore the value of hiring coachable talent right out of college. It’s a tough time for recent college graduates, just as it was after the Great Recession. Earlier this year I intervened for a family friend who had recently graduated in three and a half years with a business degree and nearly a 4.0 GPA. Trying to simply interview for a job in March was almost impossible for him.

Luckily one of my friends is the chief lending officer at a multi-billion-dollar credit union—and someone I suspected was in crisis mode over the flood of mortgage business. Would she consider hiring a smart recent college graduate with absolutely no mortgage experience? Nick was lucky enough to have a little taste of financial services, having interned for a stockbroker during college. He knew that he didn’t want a sales job and loved the idea of helping people. My friend took a chance on him and was rewarded by having an employee who learned quickly and loves the culture of credit unions!

Always Have Your Marketing Hat On!

The best time to have your marketing plan in order is when your volume is close to its peak; we all know that’s the time the volume bubble could be ready to burst. Even if you have just a slow leak, you’ll likely reach a point when you have greater mortgage processing capacity than your volume.

Many credit unions know that they can ride out the refinance wave a little longer with non-traditional products. One of the most successful products you can implement is a lower-cost, shorter-term loan designed for borrowers with lower balances who want to pay off their loans as quickly as possible. Whether it’s a 10-, 12- or 15-year term, if you combine limited costs with a still very attractive rate, there’s a strong opportunity to squeeze out a little more volume as rates start to climb.

Mining the opportunities in your FHA portfolio can also help drive some late-wave mortgage volume. In today’s real estate market, a borrower who obtained an FHA mortgage with just 3% down just a few years ago can often qualify for a conventional mortgage without the FHA insurance premium. Looking solely at the reduction in rate could leave some borrowers on the sidelines, as the rate savings alone is not worth refinancing. But eliminating the insurance makes it worthwhile.

A similar scenario applies for borrowers with a home equity loan. Depending on the amount borrowed, the rate savings by combining mortgages and getting away from a higher-cost home equity loan might be worth it to the borrower as mortgage rates start to rise.

When All Else Fails….

If your credit union is struggling with keeping up with volume at the peak, consider a streamlined process to handle internal refinances. If your credit union has a large mortgage portfolio that has not been sold to Fannie or Freddie, why go through the extensive refinance process when perhaps a much simpler mortgage rate modification is in order? Charge a minimal fee for the service and save your volume capacity for new relationships!

My Crystal Ball? It’s Cracked!

My friends who know I work for a financial institution will often ask me for my prediction on interest rates, the stock market, etc. My standard line is, “Well, I don’t have a crystal ball, and if I did, it would be cracked!” I joke that budgeting and planning based on a prediction of the shape of the yield curve is pointless—we haven’t had a reasonably accurate prediction in probably 14 years. Yet when it comes to the mortgage business, the stakes are high in ensuring we’re prepared for all possibilities.

Bill Vogeney is chief revenue officer and a self-professed lending geek for $7.3 billion Ent Credit Union, Colorado Springs.