Picture This
by: Joe Brancucci, Chairman and CEO, Prime Alliance Solutions, Inc.
Like you I see a great number of presentations: charts, graphs, bullet points, blah, blah, blah. And probably like you I find most of it dull, uninteresting, irrelevant. Yet one I viewed this week caught my attention. Expertly presented, artfully delivered, it capsulized all that’s transpired in the capital markets over the past two years on a single page, in one painfully simply, yet poignant graph.
The graph I refer to is titled ‘The Single Family Mortgage Related Securities Market’. It covers just 24 months and displays just four lines: market share positions of Fannie Mae, Freddie Mac, Ginnie Mae and Private Label mortgage backed securities. Beginning in June 2006, before the sub-prime cataclysm began, it shows what we all knew, and what was adversely impacting credit union share of the mortgage market: issuers of private label securities (Wall Street) held a better than 50% share. The mortgage loans backing these securities were largely what we know as Alternative A and Sub-Prime Loans. At that same point in time Fannie and Freddie held a share in the mid-20% range; Ginnie Mae, buyer of FHA loans, held a single digit share of the market, just as it had for some years.
Fast forward to June 2007. June 2006 was, if not the peak of housing market euphoria, it was pretty close. A year later marked the beginning of a new era, one that will in hindsight be remembered as a return to rationality in the housing and mortgage markets. Take another look at the graph. Private label security issuance began a precipitous decline. No more liar, NINJA or NINA loans. Another year later, in June 2008, private label share registered less than 1%. How things change.
We all know what happened and we all know why. Knowing about it and doing something about it are completely different in terms of importance. Obviously what we do with this information is crucial. Our strategic actions throughout this year and for the next few months will determine the role credit unions play in the housing finance market for the coming decade. Now, paraphrasing the old cliche, ‘a picture is worth a thousand words’, this graph hints at numerous strategies. One that is obvious for credit unions is clearly depicted by Ginnie Mae’s rapidly ascendant share. From single digits just a year ago to greater than 20% today, FHA lending is critical to the future success of credit union mortgage lending.
FHA loans, for us old-timers, were the backbone of many, early first-time homebuyer strategies. Low-cost, low down payment, insured, they made it easy for people, especially those with lower to moderate incomes, to purchase their first homes. Sure they were, and are, more complex to originate and they had a relatively low maximum loan amount, yet they were effective in so many ways. One attractive feature for borrowers and lenders alike was that they were and are sustainable. Where the creative financing vehicles of sub-prime hysteria days routinely put borrowers in payment-shock peril, FHA loans do no such thing.
There’s another reason FHA Lending is even more attractive than it was even 30 days ago: the Housing Bill signed into law last month perpetuates the higher loan limits established for FHA loans in legislation that was passed earlier this year. Congress, recognizing that housing prices, while declining in many markets, are higher now than they were when the formula that set FHA limits was originally established. For FHA financing to be attractive, loan amounts had to increase.
What’s a credit union to do? Offer FHA loans to your members as soon as you can, either directly or through a credit union and member friendly third party. Industry predictions call for FHA loans to become more than 30% of single family loan originations. Need further persuasion? Some originators who made nice livings making loans that were placed into private label securities (read: the subprime guys) are looking at FHA loans as their next lunch ticket. The more this happens, the more members will overpay. The more credit unions get involved, the more affordable housing remains. Don’t procrastinate. This is one of the opportunities credit unions cannot afford to let pass by. Members can’t afford for us to let that happen, either.
This graph does hint at many potential strategies for credit union housing finance. Interested in what else I’m thinking about? Visit the 18 Strategies Blog (www.18strategies.com) for more strategic insights into capital market dynamics as well as 17 other strategies (one of the 18 is FHA Lending) I think are essential to credit union mortgage lending growth.
18 Strategies in 18 Months: The Recap
I hoped you’ve enjoyed Prime Alliance’s 18 Strategies in18 Months, the daily e-mail we began sharing with you on June 2. We believe three things about the current market. First, the opportunity handed us as a result of the sub-prime crisis has an 18 month lifespan. Second, working together, our goal is positioning credit unions as our members’ first choice for housing finance. Third, we must focus on these strategies as a starting point to accomplish this goal. And the goal? It’s the Big Hairy Audacious Goal (BHAG) set by the CU Housing RoundTable in 2006. Ten percent market share by 2016, ‘Two to Ten’ as it’s commonly known.
The 18 Strategies you’ve had the opportunity to read this past month have many origins, yet they share a common purpose: to help credit unions put more members in homes more affordably. Eighteen is quite a few, I admit, yet I believe in every one of them. The role of strategy is to move us from our present market position, that of refinance lender for some of our members, to that of purchase-money adviser and lender for all of our homebuying members. Didn’t see all 18? Visit www.18strategies.com and spend thirty minutes. There you’ll find a brief summary of each strategy, with the full strategy just a click away. Or visit www.primealliancesolutions.com to download the 18 Strategies in 18 Months document. Where the site will give you a synopsis, this document provides more. In it you’ll see Prime Alliance has a follow-up plan for each strategy. Defining strategy is important. Executing on them is key.
Please use the 18 Strategies however you choose, but please, do use them. Download and distribute it, use it as a discussion item at an upcoming management team meeting, share it with your Board, choose those strategies that either fit your current model or the new housing finance model you’ve been contemplating. As I learned from Ross Shafer during the CUDL Conference this past week, the number is not important, the action you take is what matters.
Like you I am passionate about credit unions and I believe unabidingly that we must play a primary role in financing homes for our members. In many respects the opportunity we now have as mortgage lenders is the same opportunity we seized as automobile lenders more than fifty years ago. We were, and are, the affordable auto lender. We can and should be the affordable, sustainable mortgage lender. Car loans result in transportation, an initial linch-pin of financial security Home loans meet a more fundamental need, the need for shelter, the key to personal security and financial well-being. We must do both well for the well-being of our members .
And remember: while this may be the first you’ve seen our 18 Strategies, it won’t be the last. The ‘Want More?’ sidebars in the 18 Strategies document gives you a brief idea on what we have planned. There’s no need to wait, though. Additional information is already available for strategies one, two, four, five and fourteen, for instance. The CU Housing RoundTable, which will hold its Third Annual Meeting on October 16 – 17, 2008 in Seattle (you are invited, by the way, visit www.cuhousingroundtable.com for the details), is developing White Papers based on strategies three, four and seven. Prime Alliance is also offering webinars and classes on a number of them. SMS Univeristy is holding schools this Summer on FHA Lending. We’re as serious about this as we are about helping credit unions finance homes for members.
Finally, I’d like to use the 18 Strategies to start a dialogue about the role credit unions play in housing finance. So, share your thoughts with me and your peers on the 18 Strategies Blog, which debuts today at www.18strategies.com. I’ll bet we can refine and add to these strategies so that credit unions achieve their full potential as mortgage lenders.