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Credit Unions in the Mortgage Market

Last December, the credit union trade group released a paper on credit unions’ role in the mortgage industry. While somewhat belated, it contains statistics worth mentioning and statements worth debating, not the least of which is their take on mortgage brokers.

Here, in no particular order, are some of its key points. The source is the Credit Union Central of Canada (now called “Canadian Credit Union Association” or CCUA):

CUs in the Mortgage Market

  • 58%: The percentage of credit union loans that are residential mortgages
    • In 1961 it was just 12.7%.
    • “…residential mortgage lending is now at the centre of credit union business,” notes Rob Martin, author of the report.
  • 8.9%: The average annual increase in mortgage balances at credit unions, from 2009 to 2014
    • Compared to 5.5% at banks over the same period.
  • Mortgage market share (outside of Quebec):
    • Highest penetration: 35.9% in Manitoba
    • Lowest penetration: 4.5% in Newfoundland
    • Ontario: 5%
  • 380: The number of communities in Canada in which a credit union is the only financial institution physically present.
    • It’s truly hard to overstate the importance of credit unions to small and rural communities.

Default Statistics

  • 0.29%: Mortgage arrears rate among federally regulated institutions (e.g., banks)
  • 0.13%: Mortgage arrears rate among provincially regulated institutions (e.g., credit unions)

“Credit union mortgages have very low arrears when compared to other institutions…below that of all other institutions with mortgages in [mortgage-backed securities] pools,” according to the report.

Sound Underwriting

Credit Unions FB

In the past, competitors have knocked certain credit unions for their higher loan-to-values, lower qualifying rates, stated income programs, cash-back mortgages and/or longer amortizations. But these criticisms don’t reflect the underwriting prowess of credit unions.

In actuality, the report notes that when compared to other lenders’ CMHC-insured mortgage performance, credit unions:

  • Make fewer default insurance claims 
  • Have lower early delinquency rates (EDRs)
  • Have a higher Misrepresentation Susceptibility Index (MSI) score, meaning they’re better able to detect mortgage fraud and other misrepresentation by borrowers, and
  • Arguably have better knowledge of their local markets, since they lend in their own communities.

Potential Effects of an Insurance Deductible

CMHC has publicly disclosed that it’s evaluating ways for lenders to share more default risk on insured mortgages. Speculation is that CMHC may impose a deductible on lenders when they make an insurance claim.

To that, CCUA says, “If a deductible is significant, the likely impact will be increases in mortgage credit costs for consumers and a reduction in mortgage credit availability for…home buyers. The impact of these changes will be most significant for lower income Canadians, Canadians living in rural/remote regions, or in areas with a fragile economic base.”

It adds: “These outcomes would…be at odds with CMHC’s role to serve underserved areas and fill gaps in the market.”

Effects of Low-Ratio Insurance Tightening

CMHC has cut back insurance for mortgages with a loan-to-value of 80% or less. It has also increased the costs to lenders for insuring and securitizing those low-ratio mortgages.

CCUA states: “…the elimination of low-ratio transactional mortgage insurance may have [a] similar negative impact on…homeowners in small urban centers and rural areas.”

Low-ratio insurance is vital to certain credit unions that operate in illiquid local housing markets. That’s because insurance mitigates property risk—important with rural properties that have less certain valuations than active urban properties. Low-ratio insurance is also key for securitizing mortgages on smaller market properties.

Credit Unions and Mortgage Brokers

Here’s where the paper gets a bit questionable.

CCUA commented on the rising use of mortgage brokers, which it says increased their share of mortgage originations from 22% in 2005 to 31% recently.

CCUA positions credit unions’ “limited reliance on mortgage brokers” as an advantage, stating:

“This development points to an increased commoditization of mortgage products and a general decline in consumer loyalty to a single financial institution when seeking a mortgage…Consumers are increasingly willing to look beyond their primary financial institution for a mortgage and they are making a choice of institution largely on price.”

That begs the question, what is the implication? Do they mean that if you’re a consumer who doesn’t prioritize loyalty and wants an outstanding rate, CUs aren’t for you?

The report says the big six chartered banks source 27% of total mortgage customers through mortgage brokers, whereas CUs obtain 18% of members through the mortgage broker channel.

“The lower reliance of credit unions on mortgage brokers should not be surprising given the stronger customer satisfaction and loyalty displayed by credit union customer/members,” Martin notes, citing “FIRM survey” data to back his argument.

That’s one heck of a claim, and a somewhat specious one at that.

Perhaps if more CUs acknowledged consumers’ growing broker preference, and perhaps if more CUs chose broker distribution, the credit union industry wouldn’t be stuck at just 8% market share, a number that hasn’t grown materially for years.

Credit unions offer exceptional service and support their communities admirably, but they don’t get enough exposure. That exposure is exactly what brokers deliver. This fact is evidenced by:

  • Established lenders like Scotiabank—the top lender in the broker channel, and one that relies more on brokers to bring in mortgages than its own retail channel
  • New lenders like Manulife—which strongly endorsed brokers with its recent entrance into the market
  • Credit unions themselves—witness the robust mortgage growth of broker-channel CUs like Meridian, DUCA Financial, Coast Capital Savings and many others.

CU executives who buy into the proprietary distribution argument better have a foolproof online marketing plan or an inspired local marketing strategy. Otherwise, they’re missing out on a tremendous funnel of new business through the broker channel. Brokers deliver highly qualified borrowers for a one-time fee. CUs then keep all the renewal and cross-sale revenue for their members—not too shabby a deal.