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.

  1. I worked for Credit Union’s in Ontario for over 12 years. CU executives have a hard time convincing their volunteer boards to do new stuff…that is the bottleneck…resistance to change of the existing business model for a lot of goes against the co-operative business model established by credit union founders. There are getting to be less and less of them in Canada, and Ontario…eventually they will catch up. They have to if they want to keep existing. They need to pay to retain experienced staff as well…always an issue…

    1. Thanks OTB, Tiny markets notwithstanding, mortgages are no longer a local business. You have mortgage brokers in BC serving customers in St. John’s, Newfoundland. You have banks and other national lenders marketing coast-to-coast. You have global financial markets setting the prices of mortgages.

      Even the farmer in Ruthilda, Saskatchewan (population: 5) is on the internet researching mortgages, and he’s seeing offers from 3,000 kilometers away. If CUs want to remain competitive, you’re right, adaptation and consolidation are no longer optional.

  2. “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?”

    That is statement is whack (no better way to say it). I don’t think they are saying that at all. I think they are saying that CUs already have more loyal customers than the banks AND they have rates as competitive or better as anywhere — still nobody has beat Meridian’s 1.5% last spring. Don’t forget all the BS from quoted Brokers in the media saying that the 18 month term was a “fox in sheep’s clothing” and that “when” interest rates go up the “1.5%” would be bad decision. Don’t forget too that Meridian would NOT allow any broker introduced clients the rate.

    1. Hello there Hadley,

      Let’s recap what the report actually says. It unmistakably links brokers with mortgage “commoditization,” a lower “quality of experience” for customers and less “consumer loyalty.” As a general statement, that my friend, is whack, to borrow your vernacular.

      Are broker customers less loyal? Sure they are, to a degree, but you can’t entirely blame the broker (apart from the minority of dreg brokers who do churn clients), nor can you blame the customer. There are far bigger changes driving declining loyalty and rate sensitivity, and believe me, credit unions will not be immune to them.

      On that note, no Canadian borrower should ever be loyal to a lender for loyalty sake. Borrowers must protect their pocketbooks first because lenders are not in the friendship business, they’re in the lending business. Educated consumers choose mortgages primarily on borrowing cost, service and features. To not target consumers who prioritize borrowing cost is short sighted because — I have news for you — Canadians have discovered remarkable new technology called “Google,” and guess who appears at the top of Google for “mortgage rates,” “mortgage calculators” and the like. It ain’t the credit unions.

      The point is, consumers are exposed to competitor’s offerings with the click of a mouse. Regardless of what channel those homeowners use, borrower loyalty is increasingly becoming a quaint pre-WWW notion. If you want a customer’s allegiance, you better earn it each and every month. And while you hang your hat on credit union rates, the data shows that only a tiny minority of credit unions have “rates as competitive or better as anywhere,” as you put it. Read on:

      The one thing I will agree with you on is how infantile it was for certain brokers to bash Meridian’s 1.49% offer. For someone suited to a shorter-term mortgage that was a tremendous rate, plain and simple. Brokers who badmouth good products that they can’t sell are a blight on our industry.

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