NEW YORK–Credit unions looking to duplicate the success Pentagon Federal Credit Union has had in the mortgage space might want to follow its rigorous internal meeting strategy.
James Cotton, senior vice president, mortgage origination at Alexandria, VA-based PenFed, told a New York City meeting of the Mortgage Bankers Association that the credit union manages to get certainty on how to handle a big mortgage portfolio by having leadership of its mortgage operation frequently meet with top executives of the credit union. Very frequently, as in daily, weekly, monthly, quarterly and on an ad hoc basis if needed.
Cotton said financial and production personnel meet daily and make up a pricing committee. There is also a weekly meeting between treasury, financial, and production at a senior vice president level, a monthly meeting on a senior vice president/ executive vice president level, and a full recast of the plan for the rest of the year every quarter.
“That keeps us well integrated,” he told the meeting. And, if necessary, other meetings can be scheduled on the fly. Cotton said there were several of those in the days after the 2016 election.
Cotton said PenFed holds about 60% of its mortgage production on its own balance sheet while selling the other 40% in the secondary mortgage market. About 62% of the big credit union’s $22 billion in assets is real estate-related, he said.
Holding mortgages in portfolio is a strategy that gives PenFed “profitability on its asset/liability mix,” he said.
In addition to getting higher yields from the adjustable-rate mortgages it puts into its portfolio, the credit union uses the portfolio as a place to keep “common sense good loans” not eligible for sale to mortgage agencies (though some are kept in portfolio temporarily until they are eligible for sale).
“We’re a big customer of the Federal Home Loan Bank of Atlanta,” he said, noting that the district bank “helps us manage that asset/liability risk.”
'Eyeball to Eyeball'
Robert Dozier, executive vice president and chief business officer at the Federal Home Loan Bank of Atlanta, was on the same panel as Cotton, and he said many credit unions (1,389 nationwide as of Dec. 31, 2016) take advantage of the Federal Home Loan Bank System’s advances (loans) and other services to bolster asset growth, net interest margins, and customer retention.
“A lot of credit unions really believe in making sure their customers know where their mortgages are being held. There’s a lot of technology but looking at someone eyeball to eyeball still means something,” he said.
PenFed’s portfolio leans heavily toward adjustables, Cotton said, although some fixed-rate mortgages are included as well, especially “jumbo” mortgages where the loan amounts are larger than the mortgage agencies’ purchase limits.
The 5/5 adjustable is a popular portfolio product, he said. (This is a 30-year mortgage that adjusts up or down in rate after five years and for each five-year period after that.) PenFed is flexible on those terms, however. In a rising interest rate environment, PenFed will let members reset their mortgages ten months before the official reset if they think rates will be higher on the actual reset date.
“We’re seeing a lot of that this year,” he said.
The Psychological Hurdle
Credit union members sometimes need convincing on the benefits of an ARM, he said. “Psychologically, there’s a tremendous adverse view on ARMs,” he said.
The 5/5 ARMs are a better deal for members for at least 10 years, he said. And most members do not live in the same house for more than seven years.
“Even if they don’t think they will, they still want a fixed-rate product,” he said. “I think there is still a lot of latent fear about ARMs.”
Cotton said PenFed’s portfolio has performed “really well,” even in market downturns. Tight credit policies have helped, though Cotton said he feels there might be some cases where the credit union’s standards are too tight.
“We actually do quite a few loans just outside GSE (mortgage agency) guidelines. We have a limit in the portfolio on that but we’re probably going to ask the board to increase the limit because we have over 500 loans in that bucket and not a single one is delinquent. When you see that kind of performance you realize these really are loans we should be making.”
—Mark Fogarty