Spirits Unleashed by Mark Zandi N Page 30 Searchingsearching Forfor Solutions?Solutions? Findfind Themthem Atat Archarch MI

January • 2015 ACUMA

PIPELINEMAGAZINE

U.S. Macro Outlook 2015: Spirits Unleashed By Mark Zandi n Page 30 SearchingSearching forfor Solutions?Solutions? FindFind ThemThem atat ArchArch MI.

BroadenBroaden your your scope scope with with targeted targeted solutions solutions fromfrom Arch MI that support youryour diversediverse mortgage mortgage lendinglending needs. needs. Win Win more more business business and and reducereduce youryour riskrisk exposure byby originatingoriginating with with Arch Arch MI. MI. • •Specialty Specialty mortgage mortgage insurance insurance programs, programs, competitivelycompetitively priced • •Capabilities Capabilities to to provide provide mortgage mortgage credit credit enhancementenhancement outsideoutside of of the the traditional traditional GSE GSE MI MI business business modelmodel • •Integration Integration with with industry-leading industry-leading LOS LOS andand pricingpricing engines • •Contract Contract Underwriting Underwriting services services Expect MoreMore fromfrom thethe Right Right MI MI Partner. Partner. • Comprehensive Underwriting training • Comprehensive Underwriting training LearnLearn more more by by contacting contacting your your Arch Arch MI MI • •Financial Financial strength strength and and AccountAccount Executive Executive at at 800.909.4264 800.909.4264 readinessreadiness to to satisfy satisfy PMIERs PMIERs or or by by visiting visiting www.archmicu.com. www.archmicu.com.

SearchingSearching forfor Solutions?Solutions? FindFind ThemThem atat ArchArch MI. 2 CU Mortgage Lending, A real alternative for members BroadenBroaden your your scope scope with with targeted targeted solutions solutions fromfrom Arch MI that support youryour diversediverse mortgage mortgage By Bob Dorsa lendinglending needs. needs. Win Win more more business business and and reducereduce youryour riskrisk exposure byby originatingoriginating with with Arch Arch MI. MI. 4 In the Pipeline: Insights and Observations on CU Mortgage Lending • •Specialty Specialty mortgage mortgage insurance insurance programs, programs, competitivelycompetitively priced 4 Mortgage Insurers Start the New Year with New Master Policies • •Capabilities Capabilities to to provide provide mortgage mortgage credit credit enhancementenhancement By Arch Mortgage Insurance Company outsideoutside of of the the traditional traditional GSE GSE MI MI business business modelmodel 6 ACUMA 2015 Annual Conference • •Integration Integration with with industry-leading industry-leading LOS LOS andand pricingpricing engines September 14-16, Bellagio Las Vegas • •Contract Contract Underwriting Underwriting services services Expect MoreMore fromfrom thethe Right Right MI MI Partner. Partner. 7 Saving for a Downpayment Takes Time and Sacrifice, but the Payoff Remains • Comprehensive Underwriting training By Jessica Lautz • Comprehensive Underwriting training LearnLearn more more by by contacting contacting your your Arch Arch MI MI ACUMA’s Exhibit at the 2014 NAR • •Financial Financial strength strength and and AccountAccount Executive Executive at at 800.909.4264 800.909.4264 8 readinessreadiness to to satisfy satisfy PMIERs PMIERs or or by by visiting visiting www.archmicu.com. www.archmicu.com. By Bob Dorsa 10 Credit Union Uses eRegistry for eNotes to Bring 21st Century Efficiency to its Mortgage Process 13 ACUMA Sets new record for 2014 Annual Conference Attendance… By Bob Dorsa 18 ACUMA 2015 Real Estate Lending Workshops, Why Should You Attend? May 20-21, San Francisco – June 30-July1, Boston 20 Millennials: Challenge and Opportunity By Ann Clurman and Rob Callender 30 U.S. Macro Outlook 2015: Spirits Unleashed By Mark Zandi 40 The Intricate Art of Today’s Mortgage Underwriting By Jerry DeMuth 46 The Infrastructure Predicament By Terry Wakefield 55 Market Share–Credit Unions Are Holding On! By Tracy Ashfield

PIPELINEMAGAZINE

ACUMA Pipeline is a publication of the American Credit Union Mortgage As- sociation, PO Box 400955, Las Vegas, NV 89140. CU Mortgage Lending Bob McKay Baxter Credit Union A real alternative for members Chairman

As I watched the President’s State of the Union mes- Mark Wilburn Truity Credit Union sage this week he reminded us of the tough times our nation has endured the past few years. It is great news that Vice Chairman our economy is back on track and the future is once again bright for many. Pam Davis From our corner of the world, the recognition that Delta Community CU Credit Unions are perhaps the only real alternative for con- Treasurer sumers seeking competitive housing finance options. Since ACUMA began in 1996 this has been a resil- Barry Stricklin ient theme propelling us forward. More and more Credit Tower FCU Unions have discovered that home loans are the key driver Secretary for financial security and member satisfaction. We have witnessed in the past decade our market share rise from John Reed a mere 2% at the beginning on this century to above 8% Maine Savings FCU today and constantly rising to our 10 year goal to reach double digits by the end of next year. Director While achieving goals are most important to business leaders, in the case of Credit Unions assisting borrowers with home loans speaks to the fundamental fabric of our busi- Tim Mislansky ness, dating back to our origins. The updated version would be instead of pooling funds in a Wright-Patt Credit Union single sponsor or affinity group, Credit Unions have found a real niche originating and more Director importantly servicing those loans in the communities in which they serve. This comment was echoed by the President of the NAR at ACUMA’s Fall Conference. Brown also reflected on the parallel in what Credit Unions do best to what REALTORS® do best, serve the com- Michael Patterson, munity in which they live, work and share. Financial Partners We had many conversations this past year around the topic of working with Realtors. I Credit Union content we may be over thinking this issue. If we just get back to basics we have more in Director common with Realtors than we know. Now is the real opportunity. We have an entire new generation of younger borrowers entering the home-buying marketplace. Many of these individuals may not be that familiar with what Credit Unions offer. I see this as the perfect intro- Bob Dorsa duction. Working together with REALTORS® in your community you can provide valuable President information and trust sought by just about every borrower. In return securing the loan will give your organization an opportunity to grow based on leveraging the business relationship with the borrower for additional CU products and services. So the table is set. ACUMA works hard each every day to make this job a little easier. Whether exploring building relationships through the National Association of Realtors to The information and opinions pre- providing outstanding education to learn from professional and peers alike those all impor- sented here should not be construed as a recommendation for any course tant best practices to success. There are no shout cuts but we know our devoted professional of action regarding financial, legal or real lending professional have a resiliency second to none. I look forward to speaking with accounting matters by ACUMA, The many of you and seeing some you at our 2015 Educational events. It doesn’t get much better ACUMA Pipeline or its authors. than this! © Copyright 2014 by ACUMA. All rights reserved. Respectfully, Printed in the USA

Bob Dorsa, President/Founder

2 PIPELINE - January 2015 Join us Pictured above: ACUMA President Bob Dorsa and Tracy Ashfield.

should you join ACUMA? Because, just like you, we realize the importance of Why CU mortgage lending to the future of the credit union movement. ACUMA is: v an association whose only mission is CU mortgage lending with a membership made up exclusively of credit union professionals and their primary suppliers. v dedicated to serving the mortgage needs of both current and prospective credit union members and their families. v a committed advocate of CU mortgage lending constantly promoting the benefits of our programs and the value of membership. v actively working to build relationships with REALTORS®, Home Builders and other influential housing affiliated groups. v the single most powerful resource available when it comes to networking, relationship building and growing your market share. Join us today at www.acuma.org In the pipeline: Insights and observations on CU mortgage lending

Mortgage Insurers Start the New Year with New Master Policies By Arch Mortgage Insurance Company

The Great Recession launched an era related to when and for what reasons the of sweeping change for the mortgage mortgage insurers could rescind cover- lending industry – change that is still age on a loan. unfolding as we move into 2015. In late 2012, the GSEs, in conjunction The Great Mortgage lenders, including credit with the FHFA, provided a framework unions, naturally felt the greatest im- for MIs to develop new master policies Recession pact as new regulations and safeguards that would cover those loans purchased launched an era of were introduced to the home purchase by the GSEs, with an emphasis on: process and mortgage finance system. n Standardizing certain terms from sweeping change However, private mortgage insurers policy to policy for the mortgage (MIs) were also affected. n Introducing process transparency, The cornerstone of any mortgage particularly for claims lending industry – insurance business is the master policy, which specifies the responsibilities of n Enhancing clarity of coverage change that is still both the insurer and the insured. In the n Improving operational efficiencies wake of the housing meltdown, with its unfolding as we The MIs were required to draft and revelations that many insured loans had submit new master policies to the GSEs move into 2015. been underwritten incorrectly, Fannie and the FHFA in early 2014. After the Mae and Freddie Mac – the Government GSEs and FHFA approved the new mas- Sponsored Entities (GSEs) that purchase ter policies, the MIs submitted them to MI master policies varied among them- insured mortgages from lenders – and state regulators for approval. The GSEs selves as to the valid conditions for re- their regulator and conservator the Fed- targeted October 1, 2014, as the required scission, lenders found the language eral Housing Finance Agency (FHFA), effective date of the new master policies. confusing and the differing standards called for an overhaul of the private MIs’ The MIs met the challenge and de- relating to rescission frustrating. Rescis- master policies with the goal of stan- buted their new policies in October 2014. sions rapidly became a major concern dardizing certain terms, including terms As we move into 2015, lenders may find for mortgage originators, with broader that they benefit from the greater stan- implications for the industry as a whole. dardization. The responsibilities of all The new master policies were writ- The new master parties to the transaction – the mortgage ten to more clearly define the circum- originator, the servicer, and the MI – are stances under which mortgage insur- policies were now clarified to a greater extent than ance must be retained on individual written to more ever before in the industry. loans and when it may be rescinded. Following the GSE requirements, they clearly define the include relief from rescissions on loans New Options for Rescission Relief after 36 months, or after as little as 12 circumstances Receiving particular scrutiny in the months provided that the loan files were under which development of the GSE framework was fully reviewed by the MI company, and the issue of rescissions. so long as the borrower has made timely mortgage During the recession, mortgage in- loan payments. surers rescinded coverage on a number With clearer expectations laid out insurance must of loans they discovered to contain fraud for both parties in the updated policies, be retained or to have been incorrectly underwrit- lenders can feel greater confidence in ten by the lender when originated and choosing MI as their preferred means to submitted for mortgage insurance. As expand homeownership opportunities.

4 PIPELINE - January 2015 More options for your members More opportunities for your Credit Union FHA, VA, RD 1-2-3-4-5-6-7 Government Conventional 8-9-10-11-12 Wholesale

Lending

IS YOUR MORTGAGE PARTNER EXCEEDING YOUR EXPECTATIONS? DO THEY OFFER THE MORTGAGE PRODUCTS YOUR MEMBERS ARE LOOKING FOR? The right mortgage partner makes all the difference! Discover the benefits of working with a Credit Union owned CUSO that shares your core values and philosophies. Member First Mortgage (MFM) will provide your members with the mortgage options they’re asking about; like Conventional products, FHA, VA, RD and more. Partner with MFM and customize your Credit Unions experience with a variety of partnership levels; from a dedicated mortgage originator to a Wholesale model for the Credit Union experienced in mortgage lending. Compete with the larger lending institutions with MFM’s aggressive pricing, offer your members the mortgage products they want and create a mortgage lending niche for your Credit Union! MORE OPTIONS FOR YOUR MEMBERS. MORE OPPORTUNITIES FOR YOUR CREDIT UNION. MFM.

www.memberfirstmortgage.com ▪ 866.898.1818 Toll Free ▪ NMLS ID# 149532 ACUMA 2015 Annual Conference

Join us for an unforgettable learning experience in a truly inspiring environment

September 14-16, 2015, Bellagio, Las Vegas

Every year ACUMA strives to make our annual conference the best ever. We do it by bringing nationally known speakers, a program tailored precisely to your needs and state of the art conference technology together into a seamless educational experience. Throw in an outstanding venue, sumptuous dining and time to network with the best and brightest in the CU mortgage industry and you have a one of a kind, can’t miss experience.

You can count on ACUMA to deliver an informative program designed to meet the needs of todays CU mortgage lending professionals. Our program features expanded networking opportunities, special interest breakout sessions and general sessions featuring some of the brightest stars in the industry What will we do to make it better in 2015? Plan to join us again September 14-16, at The Bellagio, Las Vegas, and find out.

Visit acuma.org for details Downpayment Sources Among Home Buyers 1997-2014 Data from National Association of REALTORS® Profile of Home Buyers and Sellers 1997-2014 1997 2000 2003 Savings NA 57% 49% Proceeds from sale of primary residence NA 35 37 Gift from relative or friend NA 13 12 Sale of stocks or bonds NA NA 6 Equity from primary residence buyer continues to own NA NA NA 401k/pension fund including a loan NA 5 5 Loan from relative or friend NA 4 5 Proceeds from sale of real estate other than primary residence NA NA NA Inheritance NA 3 2 Individual Retirement Account (IRA) NA 3 3 Loan from financial institution NA 2 6 Loan from financial institution other than a mortgage NA NA NA Sale of personal property NA 2 NA Life insurance NA 1 NA Investment property sales (1031 exchange) NA 2 NA Equity from refinanced investment property NA 1 NA Credit from lease option to buy NA 1 NA In the pipeline: Insights and observations onLoan CU or mortgage financial assistance lend throughing employer NA NA NA Loan or financial assistance from source other than employer NA NA NA Other NA 8 6

NA=Not asked * Less than 1 percent

Length of Time Buyers Take to Save for a Downpayment Data from National Association of REALTORS® Profile of Home Buyers and Sellers 2014 Figure 1 Saving for a down payment Saving for a Length of Time Buyers Take to Save for a Downpayment More than 5 years 13% Downpayment Takes 24 months to 5 6 months or less years 37% 16%

18 to 24 months Time and Sacrifice, but 9% 12 to 18 months 6 to 12 months 10% the Payoff Remains 15% Jessica Lautz, Director, Survey Research and Communications, NAR Source: National Association of REALTORS® Profile of Home Buyers and Sellers

Many economists have predicted ers). Using savings as a downpayment of recent home buyers financed their this is the year of the return of the first- source has increased in prominence over home purchase. The typical downpay- time home buyer. Last year, data collect- the last 14 years as buyers are relying ment was 10 percent for all buyers, but ed from the 2014 Profile of Home Buyers less frequently on the proceeds from the six percent for first-time home buyers and Sellers reported the lowest level of sale of their primary residence. and 13 percent for repeat home buyers. first-time buyers since 1987—33 percent Saving for a home can take time for The payoff for home buyers is worth in 2014, vs. 30 percent in 1987. The his- home buyers, Figure 1, Among recent it. Seventy-nine percent of recent buyers torical norm of first-time home buyers home buyers, 37 percent saved for six believe their home is a good financial in- among primary residence purchases is months or less, 15 percent saved for six to vestment, and many believe it is a better 40 percent. Market conditions such as 12 months, and 10 percent saved for 12 to financial investment then stocks. Aside low inventory, difficulty accessing cred- 18 months. Home buyers often make sac- from the financial investment, buyers it, competition with investors, and diffi- rifices on their path to homeownership. were able to successfully complete their culty saving for a downpayment all are 72 percent cut spending on luxury or goal which was just to own a home of factors for first-time home buyers. non-essential items, 56 percent cut spend- their own. The majority of home buyers use ing on entertainment, and 45 percent cut The complete report is available at: savings as a downpayment source—65 spending on clothes. http://www.realtor.org/reports/high- percent of all buyers (81 percent of first- There is a light at the end of the tun- lights-from-the-2014-profile-of-home- time buyers, 57 percent of repeat buy- nel for those saving. Eighty-eight percent buyers-and-sellers. DDownpayment Sources Among Home Buyers 1997-2014 1997 2000 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Savings NA 57% 49% 50% 50% 52% 56% 54% 66% 67% 65% 64% 65% Proceeds from sale of primary residence NA 35 37 43 44 43 34 23 22 26 25 31 33 Gift from relative or friend NA 13 12 11 9 10 13 14 18 14 14 14 14 Sale of stocks or bonds NA NA 6 6 7 8 8 6 7 10 8 9 9 Equity from primary residence buyer continues to own NA NA NA NA 5 5 4 2 2 3 2 2 * 401k/pension fund including a loan NA 5 5 5 4 4 5 5 7 8 9 8 9 Loan from relative or friend NA 4 5 5 4 3 5 4 6 5 4 4 4 Proceeds from sale of real estate other than primary residence NA NA NA NA 3 2 2 1 2 2 1 2 2 Inheritance NA 3 2 3 2 3 4 3 4 5 4 4 4 Individual Retirement Account (IRA) NA 3 3 2 2 2 3 2 3 4 5 4 3 Loan from financial institution NA 2 6 NA NA NA NA NA NA NA NA NA NA Loan from financial institution other than a mortgage NA NA NA 6 2 2 1 1 1 1 1 1 1 Sale of personal property NA 2 NA NA 1 1 * * * * * * * Life insurance NA 1 NA NA 1 1 * * * * * * * Investment property sales (1031 exchange) NA 2 NA NA 1 1 * * * * * * * Loan or financial assistance through employer NA NA NA NA NA NA NA NA NA * 1 2 1 Loan or financial assistance from source other than employer NA NA NA NA NA NA NA NA NA 2 2 * * Other NA 8 6 7 4 * 5 4 4 4 4 3.5 4 NA=Not asked * Less than 1 percent Source: National Association of REALTORS® Profile of Home Buyers and Sellers 1997-2014

January 2015 - PIPELINE 7 ACInUMA the pMipelEMBine:ER Ins Beightsnefit and  observat Netwionsorki onn CUg mortgageat the NA lendR ing

ACUMA’s Exhibit at the 2014 NAR By Bob Dorsa 2014 marked the 12th anniversary for to the major money center banks. We ACUMA exhibiting at the NAR (National know credit unions have been the rock Association of Realtors®). This has following long established safe and become an annual event for us and our sound lending practices which date back dedicated Credit Union sponsors. Over decades. With little wavering the Credit Phil Reichers, PenFed, shares the CU Message the years in addition to our exhibit we Union system has quadrupled its market have participated in breakout sessions in share in first mortgage lending over the of the pillars of our society. Having per- 4 of those years. I am often asked what I past decade. sonal business experience working with gain from this experience and what can The Annual NAR event is the op- a Credit Union lender and seeing first we expect for the future. portunity to network with the best and hand the way his clients were treated The NAR is America’s largest trade brightest in Housing Finance as we resonated with Steve and his beliefs association with more than 1 million proudly display the America’s Credit about his community. He spoke of prior members. Their Annual Convention and Union’s official industry logo, as our in- relationships with lenders who had no Expo brings together the leading players dustry’s representative for all to see. This vested interest in the location of the in the housing industry, including the was a strategic decision made in the very property, it was another file and maybe lenders. Since 2009 interest rates have beginning. We determined a while ago little more. My reason for referring to dropped to historic levels coinciding we needed to get back to basics and pres- Steve Brown’s words is it relates directly with the Housing crash and Recession. ent the Credit Union system in a much to our presence at the NAR Exhibit. During this time the housing industry favorable light, particularly to the na- Along with a group of devoted par- and all its connected branches, have re- tion’s Realtors®. ticipants from our Sponsoring Credit structured for the future. Fortunately At our ACUMA 2014 Annual Con- Unions (The NAR is a weekend event ACUMA had been involved with the ference we were fortunate to have the each year in November) we stood not too NAR since 2003 and established a sound NAR’s President address our audience. far away from Wells Fargo in terms of foundation relative to Credit Unions’ Steve Brown spoke eloquently about physical location in the hall. We capital- emergence as a more viable alternative the importance of community as one ized on the opportunity to meet and greet professional Realtors® and a wide ar- The 2014 America’s Credit Union was located near the entrance ray of professionals who work in and around the housing industry. We have thoroughly enjoyed meeting thousands of people during our tenure. Several years ago we developed a contest of sorts whereby we select willing convention goers who are both professional Real- tors® and current members of a Credit Union. We asked for a very short sound bite responding to the question of “what do they like about their Credit Union?” We have several dozen great video clips from recent years and a few incredible testimonials to several of our ACUMA members for the great job you do! I think many of you would suspect if I reported the first thing on the mind of these Cred- it Union member/Realtors® was sending their clients or themselves for that matter over to their CU for their home

8 PIPELINE - January 2015 In the pipeline: Insights and observations on CU mortgage lending

loan. You may not be surprised that their top responses include, “I like they know my name”, “it’s the least expensive car loan I could find” to “a great way for me to send money to my child at college (age reference) and perhaps one of the most recognizable features, “free checking accounts.” Once we cover the basics I have attempted to probe further to get to what we do every day, home loans. Many are tuned and some even have loans with their CU. Mostly HELOCs but a loan is a loan! As those who know me can guess, I had to dig deeper. When I asked the question referring to first mortgage loans I would say 30% indicated they had a positive experience or funding. The balance did not even realize their CU offered The America’s Credit Unions NAR Exhibit Staff loans (in some cases people belonged to ® CUs not offering home loans) or they Realtor or Broker. This will start with egy to grow each Credit Union and focus share many of the old time beliefs that education and meeting in their offices on the future for millennial and even the CU was ONLY available to certain and perhaps invited them to your office. minority members is greatly improved people; CU staff do NOT work weekends You should be certain to have “the right working through the housing channel. I (the time Realtors® sit in Open Hous- person” engaged in the relationship from would be remiss if I did not add the fact es) or I have a great relationship with my the start. You must decide who the right originally offered 20 years and validated Originators and no one from any Credit person is but remember in your analy- many times since then. When you have a Union has ever visited our office. sis to evaluate your competition and de- home loan with a borrower, that borrower Several of our Exhibiting sponsors termine what they are doing since they is likely to acquire between four and eight got to meet Realtors® face-to-face for are likely competing for the same loans financial products from the financial in- the first time. I do actually have a few you are? Finally I feel very comfortable stitution providing their home loan. I video clips of Realtors® discussing encouraging you to comb through your think we will need updated strategies to their loan experience with one of our membership files. If we are able to find as meet the needs of multiple demographic ® CUs on site. It was great to hear but many Realtors who are members of groups in the marketplace and if you have there were far too few. a Credit Union then I believe it is key for not yet started you have a lot of catching My feeling is this provides great in- each credit union to know and establish up to do. sight to what Credit Unions need if you contact with your member who is a Re- I hope you got something out of all of ® want to participate in the Realtor® altor . Unfortunately I do NOT have this but in any case here are some images marketplace. We know sooner than later the magic formula or wisdom how you of our fabulous weekend last November. the Refi-mania will diminish. Competi- do this but with Social Media and a local If you have a comment or a question, tion for Purchase money loans has al- or community presence that should be a please do NOT hesitate to contact me at ready increased and despite changing good starting point. [email protected] or post a comment regulations it may be difficult getting With recognition to all our ACUMA on our LinkedIn Group, ACUMA. applications in the future. members who contributed to our NAR ACUMA has been focusing on these Sponsorship we thank Great opportunities for networking with REALTORS® at the NAR issues for the past few years. To some you. ACUMA is pleased degree our increase in market share was to facilitate this exhibit due to refinance transactions, no Real- and put the Credit Union tor® and a relatively simplified transac- Brand on display. The fu- tion, in real estate lending terms. Each ture will indeed be chal- Credit Union needs to validate your Pur- lenging. A new genera- chase money loan strategy. Starting with, tion of buyers with per- do you have one? We have observed haps different lifestyle many successful internal programs and priorities has already affiliations with their party marketing made their voice heard organizations. One of the key ingredients in the marketplace. I for has to be the communication with the one still believe the strat-

January 2015 - PIPELINE 9 In the pipeline: Insights and observations on CU mortgage lending

Credit Union Uses eRegistry for eNotes to Bring 21st Century Efficiency to its Mortgage Process

Technology creates much efficiency I was asked to explore eNotes. At that for us every day. We shop on line, depos- time, the credit union had a paperless ap- it a check simply by taking a photo of it plication process, but we still used fold- and sending it via a mobile app, pay bills ers for files, generated paper docs and A big realization on line and even receive direct deposits sent document images that were printed during this process electronically. Each of these processes on paper at closing. The vision was pa- simplifies our lives every day. perless from the application process to is the benefit of In the mortgage industry, an eMort- signing and funding the loan. We were gage happens when critical loan docu- successful in our vision and the first eS- data over paper— mentation – specifically the promissory igning occurred in October of 2007. it reduces our note, closing documents and security A big realization during this process instrument, are created electronically, is the benefit of data over paper—it re- ecological footprint. executed electronically, transferred elec- duces our ecological footprint. There is tronically and ultimately stored elec- less wasted paper, less toner usage and There is less tronically. MERS® eRegistry plays a we experienced a reduction in courier wasted paper, less major role in this process because it is and shipping costs; as well as a reduc- the system of record that identifies who tion in our couriers’ carbon foot prints— toner usage and is in control of the eNote and where it this is big. In addition, the process was is stored electronically. And, yes, this is more efficient. There is no rekeying, re- we experienced a reality and it is done every day. sulting in greater accuracy. Once the data reduction in courier To explore how eMortgages impact is there, it never has to be moved—it is a credit union’s operations, its members just there. Paper can get lost or misfiled; and shipping costs. and even investors, we spoke with Steve eNotes provide for accurate data all the Wolf, System Administrator, Home way through the process. While there In addition, the Loans Department at Boeing Employees’ have been hiccups with eNotes, we’ve al- process was more Credit Union (BECU). Mr. Wolf shared ways been able to track them down and BECU’s experience using the MERS® they contribute to better transparency efficient. There is no eRegistry for eNotes. To provide some and compliance tracking. It is a beauti- perspective on its mortgage operation, ful thing and it is now a true paperless rekeying, resulting BECU originates more than $1 billion in process from beginning to end. in greater accuracy. mortgage loans per year and has more than 850,000 members. Q:How did employees like the new pro- Once the data is cess? How did eNotes come to your atten- there, it never has Q: tion? What made you inclined to learn There were early adopters who more? A: to be moved—it is embraced the change. Others focused just there. on how it had always been done and it A: In 2006, a goal at BECU was to elim- was a challenge for some employees. Ul- inate paper from the beginning to the timately, they came around. end of the mortgage loan process and

10 PIPELINE - January 2015 In the pipeline: Insights and observations on CU mortgage lending

credit union does not direct the eSign- Q:We discussed the credit union’s ex- ing closing process on purchases, as it A:We have not experienced any chal- perience, what has the member experi- does with an eSigning closing on refi- lenges servicing eNotes—including ence been with eClosings? nances. In most cases, realtors direct the with foreclosures or charge offs. They selection of a closing agent on purchase have been handled the same and have

transactions and many escrow compa- gone well during the past seven years The member experience helped A: nies may not have the eSigning pad, since the inception of eNotes. drive the process from the beginning. tools and the training needed for eSign- The electronic process is much sim- ings, so it cannot be done. This is some- pler because it really only includes two When starting the eNote process, times a challenge. However, if all the par- Q: signatures—a paper closing can be would you recommend using a trusted ties have the right tools, eClosings can be overwhelming and require signing be- vendor or creating your own internal sys- used for home purchases. tween 25 and 40 documents. Members tems to manage the process? benefit because of the speed of which What has the investor response closings can happen. Further, eNotes Q: We rely on our vendor partners been? A: have made it easier for us to meet the for the technology expertise. I cannot Consumer Finance Protection Bureau‘s imagine creating this process from start (CFPB) “Know Before You Owe” (KBYO) A:BECU primarily sells to Fannie Mae to finish—just the technology required requirement that takes effect on August if it does not hold the loan in portfolio. alone is intense. And, there are good 1, 2015. This is a new requirement that Fannie Mae has been enthusiastic and solutions out there—take advantage borrowers have the opportunity to re- helps drive the process. eNotes allow of what’s available. I definitely recom- view their documents three days before investors to receive loans faster, they mend using a vendor to help establish a signing. eNotes put BECU ahead of can review them electronically and the the eNote process. the curve because this requirement is credit union receives its funds faster already met. because there is no shipping involved. Q:In closing, is there anything you Other investors beyond just Fannie Mae would like to add? Q:I have heard you use the term “Cof- are beginning to see the benefits of the fee Shop Signing.” What does this mean? eNote process. We love our eSigning process. This A: is how we became involved with MER- What is different about servicing A:Members like eNotes because a Q: SCORP Holdings, Inc. and the MERS® eNotes? Are there challenges? closing can occur in the comfort of their eRegistry, and it has been a successful own home—or even at a coffee shop. A relationship. real benefit is that they are able to review documents before the signing. A closing can happen anywhere and documents can be signed on a tablet. In the beginning, we incented members with a 2015 gift card to use eClosings, but that is no UPCOMING EVENTS longer necessary. Members gravitate toward the eSignings on their own. eNotes You can count on ACUMA to provide efficiency, a quicker closing and provide an innovative program, there is no paper—it’s very cutting-edge. unmatched networking and an outstanding venue.

Q:Do members have to use eNotes Save the dates to join us in 2015! when refinancing or purchasing a home?

A:We give our members the option of an eNote process or the traditional paper based approach when they refinance or originate a home loan and the response has been favorable. In fact, 65 percent of ACUMA WORKSHOP ACUMA WORKSHOP 2015 Annual our mortgage lending is refinances and Hilton Union Square Hotel Westin Copley Plaza Conference of those refinances about 50 percent are San Francisco, CA Boston, MA Bellagio Las Vegas eClosings. The reason the emphasis is May 20-21 2015. June 30-July 1, 2015 September 14-16, 2015 primarily on refinances is because the Visit acuma.org for more information

January 2015 - PIPELINE 11 WIDEN YOUR OPPORTUNITIES

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© United Guaranty Corporation 2014. All rights reserved. United Guaranty is a marketing term for United Guaranty Residential Insurance Company and United Guaranty Mortgage Indemnity Company. 230 N. Elm St., Greensboro, NC 27401. Coverage is available through admitted company only. "United Guaranty" and “Performance Premiuim” are registered trademarks. In the pipeline: Insights and observations on CU mortgage lending

ACUMA Sets new record for 2014 Annual Conference Attendance… By Bob Dorsa

Last September, ACUMA reached a new milestone, bringing together nearly 400 mortgage banking professionals at our 18th Annual Conference. We have learned quite a lot in almost two decades. We take great pride that the public awareness of Credit Union mortgage lending is much higher than when we started in 1996. One of the initial goals for ACUMA was to “increase the awareness” of Cred- it Union mortgage lending. We have watched our market share more than General Ballroom with more than 350 participants and 22 Exhibiting Sponsors. quadruple from a lack luster of 2% in the mid-90s to in excess of 8% today. an event. That said, I recall a comment pants, more than 250 were in the hotel I believe this achievement is nothing made to me during our the conference Sunday. This was great and that group short of amazing and I would be the first by a speaker from outside our immedi- got the additional pre-conference work- one to say it is the resiliency and dedica- ate CU mortgage lending family. He was shops first thing Monday. These sessions tion of a core group of progressive credit quite impressed that the majority of our were all great. One discussion session, unions that has made it possible. CUs be- conference participants attend and en- Know-Before-You-Owe, comes to mind; lieving in the value this important prod- gage in the various breakout sessions. also covered were Loan Servicing, and uct provides to the overall growth and fi- A testament to the high value of our a growing focus on dealing with Millen- nancial stability of the credit union over- educational sessions and Networking nials and borrowers with very different all. ACUMA has grown to more than 260 Receptions, as well as the dedication of demographic characteristics than CUs of the nation’s leading mortgage lending our attendees. are accustomed to. These sessions were CUs. We are still adding members as So how was this year’s event differ- strictly voluntary and just about all of more and more credit unions figure out ent? When planning our 2014 Annual the seats were full. that without mortgage lending and all Conference we considered our agenda Next we headed to the formal pro- the related benefits, the future for their first. We looked at the critical topics gram. Our first Keynote Speaker was organization is bleak. and it was apparent that there were Steve Farber. His message on Leader- What does this have to do with many, too many, and we only had 2 and ship was in step with our overall focus last year’s record setting attendance? ½ days. At that point we made a deci- and was delivered with the right blend Yes, Las Vegas is an exciting venue for sion to add additional workshops prior of enthusiasm and thought-provoking to the formal start of nuggets to get the audience stimulated. our event, as many We then moved to our Day 1 Breakout people like to arrive sessions, Compliance, Working Through and enjoy Las Vegas Complex Regulations with Kris Kully prior to our event. and The Future of Government Lending We thought that some with Tim Rood. Once again full seating might be interested at both sessions. in getting right into it After a brief break was the first of Monday morning, be- our two Receptions featuring our Con- fore our official noon ference Exhibitors. Their displays lined conference start. We the perimeter of the beautiful Encore were amazed, of the Ballroom. It is great to see hundreds of nearly 400 partici- professional mortgage banking people Steve Farber - Discussing Leadership.

January 2015 - PIPELINE 13 In the pipeline: Insights and observations on CU mortgage lending

is a former corporate executive who turned in his fountain pen for a paint brush. While delivering a very inspirational message Erik painted not one, but TWO, incredible pieces of art. He began with a tease and illustration describing how people are generally cau- tious about taking risks. The unexpected result of Erik’s time with ACUMA was that in addition to his message, we retained two beautiful pieces of original art. After the session we held a silent auction Dr. Mark Zandi. of one of Erik’s paintings. Of all of the time our participants spend The winning bid was $2,000 at our events the Networking Receptions with the proceeds going to the generally rank among the most popular. NAR’s Realtors Relief Founda- Participants enjoyed the same dynamic tion. Knowing how difficult it atmosphere as the Day 1 reception. would be for anyone to follow Again the evening was filled with more Erik Wahl we then broke for dinners and Vegas night-life enjoyment, another fantastic Buffet Lunch which seems to be much more fun with provided by the Encore. friends and business partners. Day 2 afternoon was de- All of that bring us to the finale, Day voted to six breakout sessions. 3. We were fortunate to have as our Open- Erik Wahl, Unbelievable. The topics featured panel ing Speaker, Carrie Hunt, General Coun- chatting each other up on the single discussions addressing; Growing (creat- sel and Sr. VP from NAFCU. It has been focus of residential housing issues. I’m ing) ARM Loan products; Best Practices a longstanding goal of ACUMA to engage not really sure there is anything like it in Loan Participations and Loan Under- with our larger trade associations, particu- anywhere! After the networking many writing. Other breakout session topics larly those focused on the legislative front. of our devoted sponsoring participants covered, Construction Lending; Partner- Carrie is well versed on all of the mort- provided additional social activities for ing and Working with REALTORS®; and gage lending related issues and delivered the evening. Fortunately, one commod- a review of Reverse Mortgage Lending an astute update of what is and should be ity Las Vegas has in spades is hospital- markets today. After several hours of in- happening in the coming months. ity in the form of restaurants, shows and tense education it was time for our Day Following Carrie, was the President fun things to do, other than gaming. 2 afternoon Wine & Cheese Reception. of the National Association of REAL- Day 2 began early with a great Break- fast Buffet for 300. Obviously there are still a few folks who need more sleep and/or a quick workout prior to beginning their day’s activities. We began the program with the nationally renowned Economist Dr. Mark Zandi. ACUMA first met Dr. Zandi a decade ago and his rise to national acclaim endears him to our cause. We often see Dr. Zandi on CNBC or CNN. He has shared his annual economic forecast with Pipeline readers each year since 2009. (See page 30 for his report on 2015) As always Zandi’s forecast was spot on and he possess both el- egance and charisma in his connection with ACUMA members. Following Dr. Zandi was a speaker best described as Stage filled with President’s “truly talented and amazing.” Erik Wahl

14 PIPELINE - January 2015 In the pipeline: Insights and observations on CU mortgage lending

of Qualified Mort- ing with the online gages and prospects origination systems for the creation of to see what’s new! a secondary mar- In today’s world ket for selling Non- loan applicants are Qualified Mortgag- relatively hard to es. Speaking was identify and fre- Mitch Hochberg, quently the origina- a former attorney tor is immersed in with CFPB. Mitch, intense competition along with his for the loan. The new firm, Fenway panelists were quali- Summer, is very fied Originators and involved in address- Managers and their Steve Brown - President of the NAR. ing the prospects of Credit Unions rank making this a part high on the charts TORS® (NAR), Steve Brown. Steve’s of the mortgage banking industry and of Loan Originator Real Estate Brokerage firm has a rela- alleviating some issues already frustrat- production. Great tionship with a CUSO in Ohio. Steve ing some Credit Union lenders who are information and has observed firsthand the difference caught in the Non-QM world for loan ap- even in the late af- Tracy Ashfield - Co-Host of ACUMA’s between the “credit union” approach to plications from longtime CU members. ternoon on Day 3 Annual Conference. loan origination and servicing versus the After another sumptuous Buffet lunch still several hundred banking segment which has dominated it was off to the final two sessions in the people in attendance. As ACUMA’s Presi- for decades. afternoon. We began with a very inter- dent this is the best evidence I can see to I was enthused by Steve’s views on esting session presented by Karen Deis, validate the quality and appreciation of the similarities between Realtors® a mortgage industry veteran who took the all of the hard work we put in to hosting and Credit Unions. Both offer the very opportunity to review her best practices this event. best service to their respective clients as it pertains to achieving success in mort- As an added benefit, all of ACUMA’s and a great deal of emphasis is placed on gage banking. Of particular interest were members receive Podcast Digital Record- the community. I see this as a powerful several examples of documents she still ings of each and every session. There was message and perhaps a sign of how re- uses today with borrowers. a huge amount of material presented. It lationships in the housing marketplace Our final session onLoan Origination would be an injustice to return to the are changing. Borrowers and consum- featured two successful Loan Originator Credit Union with just slide presenta- ers want to deal with lenders who care Sales Managers. Nanette Graviet and tions. Having the digital recordings sim- about the borrower’s needs. Brown em- James Smith formed our panel with the plifies sharing and networking within phasized the importance of strengthen- incomparable Tracy Ashfield acting as each of our member Credit Union’s or- ing this important benefit for borrowers moderator. Unfortunately, gone are the ganizations, making it that much easier as the competition for loans gets even days of answering the phone and accept- to spread the word. This is just another tighter. Younger borrowers want to be ing applications from members or check- example of our continuing commitment engaged and involved in to provide as much value as the transaction and success possible to both those in at- will be reserved for lenders tendance and to those back subscribing to this value. It in the office. was also a great privilege to Our 2015 Fall Annual present Steve a check for Conference will be held at $2,000, the proceeds of our the Bellagio Resort and Ho- day 1 auction, made to the tel in Las Vegas beginning Realtors® Relief Foun- on September 14 and con- dation, which will help Re- cluding on September 16, altors® in need. We re- 2015. If you are NOT cur- tained one piece of art that rently a member and want we will auction in 2015 for information to join with another contribution to the us, please do NOT hesitate foundation. to contact me at bdorsa@ The final session of the acuma.org. ‘ morning was on the topic Networking Lunch begins with the Buffet LIne.

January 2015 - PIPELINE 15 THANK YOU We want to thank our over 300 members for the commitment they make to being Member’s top choice for real estate loans.

1st Mid America Credit Union, Bethalto, IL Coastal Federal Credit Union, Raleigh, NC Elevations Credit Union, Boulder, CO 1st United Services Credit Union, Pleasanton, CA CoastHills Federal Credit Union, Lompoc, CA Eli Lily FCU, Indianapolis, IN A+ Federal Credit Union, Austin, TX Colorado Credit Union, Littleton, CO Empower Federal Credit Union, Syracuse, NY ABNB Federal Credit Union, Chesapeake, VA Commonwealth Credit Union, Frankfort, KY Ent Federal Credit Union, Colorado Springs, CO Advantiis Credit Union, Milwaukee, OR Community CU of Florida, Rockledge, FL Envision Credit Union, Tallahassee, FL Advia Credit Union, Janesville, WI Community Financial, Plymouth, MI FAA Credit Union, Oklahoma City, OK Aerospace Federal Credit Union, El Segundo, CA Community First Credit Union, Appleton, WI Fairwinds Credit Union, Orlando, FL Affinity Plus Federal Credit Union, St. Paul, MN Community First CU of FL, Jacksonville, FL Fibre Credit Union, Longview, WA Air Academy Federal Credit Union, Colorado Springs, CO Community Mortgage Funding, LLC, Pomona, CA Financial Partners Credit Union, Downey, CA Air Force Federal Credit Union, San Antonio, TX Community Resource Credit Union, Baytown, TX First Entertainment Credit Union, Hollywood, CA Alaska USA Federal Credit Union, Anchorage, AK CommunityAmerica Credit Union, Lenexa, KS First Heritage Financial, LLC, Phildelphia, PA Align Credit Union, Lowell, MA Congressional FCU, Oakton, VA First Light Federal Credit Union, El Paso, TX Allegiance Credit Union, Oklahoma City, OK Consumers Credit Union, Mundelein, IL First New England FCU, East Hartford, CT Alliance Credit Union, San Jose, CA Consumers Credit Union (MI), Oshyemo, MI First Tech Credit Union, Beaverton, OR Alliant Credit Union, Chicago, IL Coors Credit Union, Golden, CO Five County Credit Union, Bath., ME AllSouth Federal Credit Union, Columbia, SC CoVantage Credit Union, Antigo, WI Five Star Credit Union, Dothan, AL Altra Federal Credit Union, LaCrosse, WI Credit Union Oak Lawn, IL Foothill Federal Credit Union, Arcadia, CA AmerChoice Federal Credit Union, Mechanicsburg, PA Credit Union Mortgage Association, Fairfax, VA FORUM Credit Union, Fishers, IN America’s First Federal Credit Union, Birmingham, AL Credit Union of America, Wichita, KS Fox Communities Credit Union, Appleton, WI American Airlines Emp. FCU, Fort Worth, TX Credit Union of Colorado, Denver, CO Ft. Knox Federal Credit Union, Radcliff, KY Andrews Federal Credit Union, Suitland, MD Credit Union of Southern California, Brea, CA Georgia United CU, Duluth, GA Anheuser-Busch Employees’ CU, St. Louis, MO CU Companies, New Brighton, MN Gesa Credit Union, Richland, WA Arch Mortgage Insurance Company, Walnut Creek, CA CU Home Mortgage Solutions, Seattle, WA Golden 1 Credit Union, Sacramento, CA Arizona State Credit Union, Phoenix, AZ CU Mortgage Direct. LLC., Sioux Falls, SD Great Lakes Credit Union, Naperville, IL Arkansas Federal Credit Union, Jacksonville, AR CUC Mortgage, Albany, NY Great River Federal Credit Union, St. Cloud, MN Atlantic Regional Federal Credit Union, Brunswick, ME CUMAnet, LLC, Basking Ridge, NJ Grow Financial FCU, Tampa, FL Baxter Credit Union, Vernon Hills, IL CUSO Mortgage (CA), Anaheim, CA GTE Financial, Tampa, FL Bay Ridge FCU, Brooklyn, NY CUSO Mortgage Corp., Hampden, ME Guardian Credit Union, Montgomery, AL Bayport Credit Union, Newport News, VA Cyprus Federal Credit Union, West Jordan, UT Hapo Community Credit Union, Richland, WA BECU, Tukwila, WA DATCU, Denton, TX Harborstone Credit Union, Tacoma, WA Bellco Credit Union, Greenwood Village, CO Delta Community Credit Union, Atlanta, GA Heartland Credit Union , Springfield, IL Bethpage FCU, Bethpage, NY Denali Alaskan FCU, Anchorage, AK Heartland Credit Union , Madison, WI Bourns Employees FCU, Riverside, CA Desco Federal Credit Union, Ashland, LA Hiway Federal Credit Union, St. Paul, MN California Credit Union, Glendale, CA Desert Schools FCU, Phoenix, AZ Honda Federal Credit Union, Marysville, OH Campus USA Credit Union, Gainesville, FL DFCU Financial, Dearborn, MI Horizon Credit Union CUSO, LLC, Spokane Valley, WA Casco FCU, Gorham, ME Digital Federal Credit Union, Marlboro, MA Hudson Valley FCU, Poughkeepsie, NY CBC Federal Credit Union, Oxnard, CA Dupaco Community Credit Union, Dubuque, IA IC Federal Credit Union, Fitchnurg, MA CEFCU, Peoria, IL DuPage Credit Union, Naperville, IL Idaho Central Credit Union, Chubbuck, ID Centris Federal Credit Union, Omaha, NE Dupont Community Credit Union, Waynesboro, VA Ideal Credit Union, Woodbury, MN CFE Federal Credit Union, Lake Mary, FL Eastman Credit Union, Kingsport, TN Jeanne D’Arc Credit Union, Lowell, MA Chevron Credit Union, Oakland, CA Educational Systems FCU, Greenbelt, MD Justice Federal Credit Union, Chantilly, VA Citadel Federal Credit Union, Exton, PA Educators Credit Union, Racine, WI Keesler Federal Credit Union, Biloxi, MS Citizens First Credit Union, Oshkosh, WI EECU, Fort Worth, TX Kern Schools FCU, Bakersfield, CA Kinecta Federal Credit Union, Manhattan Beach, CA Park View Federal Credit Union, Harrisonburg, VA St. Helens Community Credit Union, St. Helens, OR Knoxville TVA Employees CU, Knoxville, TN Partners Federal Credit Union, Lake Buena Vista, FL Stanford Federal Credit Union, Palo Alto, CA Lafayette Federal Credit Union, West Kensington, MD Patelco Credit Union, Citrus Heights, CA Summit Credit Union, Madison, WI Lake Michigan Credit Union, Grand Rapids, MI Pen Air Federal Credit Union, Pensacola, FL Suncoast Credit Union, Tampa, FL Landmark Credit Union, New Berlin, WI Pentagon Federal Credit Union, Alexandria, VA Sunmark Federal Credit Union, Latham, NY Langley Federal Credit Union, Newport News, VA Philadelphia Federal Credit Union, Philadelphia, PA Teachers Credit Union, South Bend, IN Leominster Credit Union, Leominster, MA Piedmont Advantage Credit Union, Winston-Salem, NC Technology Credit Union, San Jose, CA Local Government Federal Credit Union, Raleigh, NC Pima Federal Credit Union, Tucson, AZ Tennessee Valley Federal Credit Union, Chattanooga, TN Lockheed GA Empls FCU, Marietta, GA Police & Fire Federal Credit Union, Philadelphia, PA Texas Dow Employees Credit Union, Lake Jackson, TX Los Angeles Firemen’s Credit Union, Los Angeles, CA Polish & Slavic FCU, Brooklyn, NY Three Rivers FCU, Ft. Wayne, IN Los Angeles Police Federal Credit Union, Van Nuys, CA Premier America Credit Union, Chatsworth, CA Tinker Credit Union, Tinker AFB, OK Maine Savings FCU, Hampden, ME Premier Source Credit Union, E. Longmeadow, MA Tower Federal Credit Union, Laurel, MD MECU, Schaumburg, IL Professional FCU, Ft. Wayne, IN Town and Country Credit Union, Minot, ND Member First Mortgage, LLC, Grand Rapids, MI ProMedica FCU, Toledo, OH Travis Credit Union, Vacaville, CA Members Choice Credit Union, Houston, TX Purdue Employees Federal Credit Union, Lafayette, IN Tropical Financial Credit Union, Miramar, FL Members Mortgage Services, Hutchinson, KS Qualstar Credit Union, Redmond, WA Tru Home Solutions, Lenexa, KS Merck Sharp & Dohme Federal CU, Chalfont, PA Randolph-Brooks FCU, Universal City, TX TruChoice FCU, Portland, ME Meritrust Credit Union, Wichita, KS Red Canoe Credit Union, Longview, WA Truity Federal Credit Union, Bartlesville, OK Meriwest Mortgage Company, San Jose, CA Red Crown Credit Union, Tulsa., OK Truliant Federal Credit Union, Winston-Salem, NC Merrimack Valley Federal CU, Lawrence, MA Redstone Federal Credit Union, Huntsville, AL Tulsa Federal Credit Union, Tulsa, OK Metro 1st Mortgage, Omaha, NE Redwood Credit Union, Santa Rosa, CA Twin Star Credit Union, Lacey, WA Metropolitan Credit Union, Chelsea, MA River Region Credit Union, Jefferson City, MO Uncle Credit Union, Livermore, CA Michigan Community Credit Union, Jackson, MI Robins Federal Credit Union, Warner Robins, GA United Heritage Credit Union, Austin, TX Michigan Schools & Government CU, Clinton Township, MI Rogue Federal Credit Union, Medford, OR United Nations Federal Credit Union, Long Island City, NY Mill City Credit Union, Minnetonka, MN Royal Credit Union, Eau Claire, WI Unitus Community Credit Union, Portland, OR Missoula Federal Credit Union, Missoula, MT San Antonio Credit Union, San Antonio, TX University FCU RE Services, Austin, TX Mortgage Lending Services, LLC, Plymouth, MN San Diego County Credit Union, San Diego, CA University Federal Credit Union, Austin, TX Mountain America Credit Union, West Jordan, UT Schools First FCU, Santa Ana, CA University of Iowa Community CU, Iowa City, IA Municipal Credit Union, New York, NY Scott Credit Union, Edwardsville, IL University of VA Community CU, Charlottsville, VA myCUmortgage, Beavercreek, OH Seasons Federal Credit Union, Middletown, CT URW Community FCU, Danville, VA NASA Federal Credit Union, Upper Marlboro, MD Seattle Metropolitan CU, Seattle, WA USC Credit Union, Los Angeles, CA Navy Federal Credit Union, Merrifield, VA SECU, Lintchicum, MD USF Federal Credit Union, Tampa, FL Neighboorhood Mortgage Solutions, Frankenmuth, MI Security Service Federal Credit Union, San Antonio, TX UW Credit Union, Madison, WI Neighbors Credit Union, Saint Peters, MO Service Credit Union, Portsmouth, NH Vantage West Credit Union, Tucson, AZ NorthCountry FCU, Burlington, VT Sharonview FCU, Ft. Mill, SC Veridian Credit Union, Waterloo, IA Northern Federal Credit Union, Watertown, NY Shell FCU, Deer Park, TX Virginia Credit Union, Inc., Richmond, VA Northwest Federal Credit Union, Herndon, VA Silver State Schools Mortgage Co., Las Vegas, NV Vystar Credit Union, Jacksonville, FL Numerica Credit Union, Spokane, WA SIU Credit Union, Carbondale, IL Washington State ECU, Olympia, WA Ocean Communities FCU, Biddeford, ME Smart Financial Credit Union, Houston, TX Weokie Credit Union, Oklahoma City, OK Oklahoma Central Credit Union, Tulsa, OK South Carolina Federal Credit Union, N. Charleston, SC Westconsin Credit Union, Menomonie, WI Orange County’s Credit Union, Santa Ana, CA Southwest Airlines FCU, Dallas, TX Westerra Credit Union, Denver, CO Oregon State Credit Union, Corvallis, OR Spirit of Alaska FCU, Fairbanks, AK Whatcom Educational Credit Union, Bellingham, WA ORNL Federal Credit Union, Oak Ridge, TN Spokane Teachers Credit Union, Spokane, WA Wright-Patt Credit Union, Beavercreek, OH Pacific Credit Union, Fullerton, CA Xceed Federal Credit Union, El Segundo, CA Affiliated Organizations Accenutre Mortgage Cadence, Denver., CO MortgageFlex Systems, Inc., Jacksonville, FL Advantage Credit, Inc., Evergreen, CO Fannie Mae, Washington, DC National Closing Solutions, Roseville, CA American Reporting Company, Lynwood, WA Federal Home Loan Bank of Chicago, Chicago, IL National Mortgage Insurance Co., Emeryville, CA AmeriCU Mortgage Company, Troy, MI FICS, Addison, TX Optimalblue, Plano, TX Black Knight Financial Services, Inc., Jacksonville, FL First American, Santa Ana, CA PHH Mortgage, Mt. Laurel, NJ BOK Financial Correspondent Mortgage Serv, Tulsa, OK Freddie Mac, McLean, VA Prime Alliance Servicing by Cenlar, Ewing, NJ Cartus Corporation, Irving, TX Genworth Financial, Raliegh, NC Quicken Loans Mortgage Services, Charlotte, NC CORELogic, San Francisco, CA Guild Mortgage, San Diego, CA Radian Guaranty Inc., Philadelphia, PA Credit Plus, Inc, Salisbury, MD Intuvo, Santa Cruz, CA Secondary Marketing Resources, Wellesley, MA CU Appraisal Services, Fairborn, OH Investors Title Company, Glendale, CA SWBC, San Antonio, TX CU Members Mortgage, Dallas, TX Kroll Factual Data, Loveland, CO The Property Sciences Group, Pleasant Hill, CA CU Partners, Santa Ana, CA Law Offices of Morton W. Baird, II P.C., San Antonio, TX The Quality Control Center, West Palm Beach, FL CU Realty Services, Castaic, CA LenderLive Network, Inc., Glendale, CO The Stone Hill Group, Atlanta, GA CUNA Mutual Group, Milwaukee, WI LendingQB, Costa Mesa, CA United Guaranty/AIG, Greensboro, NC D+H, Mequon, WI MERSCorp, Holdings, Inc., Reston, VA Urban Lending Solutions, Inc., Broomfield, CO DGU Insurance Associates, Inc., Greensboro, NC MGIC, Milwaukee, WI Value Check, Highlands Ranch, CO Dovenmuehle Mortgage, Inc., Lake Zurich, IL MIAC Analytics, New York, NY vanWagenen Financial Services, Eden Prairie, MN Equifax Mortgage Solutions, Scottsdale, AZ Midwest Loan Services, Inc., Madison, WI Veros, Santa Ana, CA Essent Guaranty, Inc., Radnor, PA Mortgage Harmony Corp., McLean, VA ACInUMA the p MipelEMBine:ER Ins Beightsnefit and  observat Discionsoun onte CUd/ mortgagePriority lend Registring ation

2015 ACUMA Real Estate Lending Workshops

Why Should You Attend?

The mortgage lending world is continuing to evolve. And the pace is quickening. To stay on top of develop- ments requires tons of information to be processed from diverse areas. You’ll have a chance to ask questions and get the Attending one of ACUMA’s Real Estate Lending best advice for your credit union or CUSO, helping Workshops will arm you with the latest informa- you offer new and existing members the best mort- tion on all relevant fronts—purchase money strat- gage options in your own market. egies, regulatory/compliance changes, and opera- Can you afford not to attend one of these tional best practices. ACUMA workshop in 2015? We’ll bring together We’ll bring you face-to-face with top industry the important topics and experts—providing a experts for panel discussions and featured speakers high value education in just two days. Make plans sharing in-depth information on the topics that are now to participate and apply the knowledge gained important to you. to your own operation.

May 20-21 June 30 – July 1 Hilton San Francisco Union Square The Westin Copley Place San Francisco, CA Boston, MA

18 PIPELINE - January 2015 In the pipeline: Insights and observations on CU mortgage lending

Program Highlights

This year’s workshops bring together some of the best credit union leaders and industry experts for focused discussions on the real estate lending topics you want to know more about. Going Beyond the Regulations Amanda Phillips, Accenture This program goes well beyond the regulations. We will explore the operational and business model impact of the CFPB’s current regs as well as those yet to be in effect. Our focus will be on how to be compliant while developing best practices for efficiency and member satisfaction. We know that it’s not easy! We’ll also have a bonus segment! “When is an application an application?” Reg’s B, C, X and Z all have their own definitions of what is an “application” and what the proper course of action is for HMDA, Adverse Ac- tion, Disclosures etc. This bonus segment will help un- ravel one of mortgage banking’s muddiest mysteries and The Westin Copley Place, Boston, MA make sure you’re not caught at audit time! Servicer Oversight Taking the Mystery out of the FHLB John Burnett - San Francisco / Shuaib Hassan - Boston, Phoenix Collateral Advisors ( David Feldhaus, FHLB Are you worried that you have all your bases covered This session will show you what the FHLB can do and are complying with the GSE’s and the CFPB? Are to support your real estate lending strategy. We know you using a sub-servicer and worry you aren’t “oversee- it’s confusing, not all the banks operate with the same ing” everything you should be watching? Do you fear a products and services. We’ll show you how they func- servicing audit? This educational seminar will show you tion as a GSE, an investor, a lender and a partner. No what the difference is between auditing and oversight. matter where you are we’ll give you a road map to their We’ll review the oversight requirements to remain in membership requirements and solutions. regulatory compliance while maximizing servicing performance and ROI. The Ten Biggest Mistakes Loan Officers make? Brian Sacks We’ll show you the answers and give you a chance to stump one of the Top LO’s with your toughest Realtor objections, Member challenges and so on. We’ll put this “Top Gun” LO in the hot seat and you’ll learn from a pro!

Hilton San Francisco Union Square, San Francisco, CA Visit acumacommunity.org/workshop/ for details

January 2015 - PIPELINE 19 Feature Article

Millennials: Challenge and Opportunity by Ann Clurman and Rob Callender

20 PIPELINE - January 2015 Millennials: Challenge and Opportunity

78% of Millennials agree: “These days, you don’t need to own a home to have a good life.” Source: The Futures Company You only have to read the headlines to know that the worst economic downturn in more than seven decades disproportionately affected Millennials. The effects are oft-repeated and a bit ominous: This is a group of late starters and inexperienced entry-level employees hamstrung by a dearth of jobs during the downturn. As signs point to renewed economic vigor in the broader economy, these individuals remain far more likely to be unemployed, underemployed and loaded with debt than any other generation.

Many Millenials are “starting slowly and earning less, often taking jobs for low pay or accepting unpaid internships just to get a foot in the door. One-third are living with parents or are financially dependent on them. (Source: usatoday.com, 3.14)

January 2015 - PIPELINE 21 Cooportunity noun [koh-op-er-too-ni-tee]

A favorable time or occasion when all parties involved in the mortgage process experience success.

As a CUSO, myCUmortgage shares the Credit Union philosophy. We understand that when credit unions work through a collaborative cooperative, it creates a winning environment for everyone. You’ll benefit from increased member savings, expanded product offerings (FHA and VA loans) and credit union profitablility... just to name a few. Redefining your mortgage experience.

Find out how we help make Credit Unions GREAT real estate lenders! 877-912-8009 | www.myCUmortgage.com

Still, all the pundit doomsaying so usinesses everywhere are strug- prevalent in discussions about this gener- gling to understand what role Mil- ation misses an important reality: Genera- lennials play in their mid- to long- tions typically build on their predecessors’ term strategies. It’s a particularly discoveries and advances. In particular, vexing question for bankers, given Millennials tended to be shrewder, more that Millennials, at present, aren’t “easy confident consumers than Gen Xers of Bmoney” for the financial services sector. the same age. And the younger cohort’s As we’ll discuss within this report, Millen- 61% of market savvy seems to have extended nials remain financially constrained and Millennials say beyond simple purchase transactions. not a little wary of the financial system’s While it’s popular to bemoan Millennials machinations. They tend to be less inter- “it’s your as a drifting, listless, instant-gratification ested in old-line banking standbys such generation, a study by the St. Louis Fed as brick-and-mortar branches staffed by responsibility to pokes some holes in that stereotype. (For tellers, often preferring mobile solutions those unwilling to wade through 26 pages that many organizations are only now be- stand up for beliefs of Fed-speak, The Atlantic has a shorter, ginning to prioritize. These problems are more accessible distillation. widespread, but they’re particularly acute even if they are In brief, although the study shows that for credit unions. unpopular.” Millennials are less likely than their older Although credit unions could (and peers to own assets such as homes and should) benefit from the recognition that stocks, we view this finding as a natural they’re not like traditional banks, most Source: and expected function of their lifestage Millennials aren’t aware of these distinc- The Futures Company (young adults) and not their cohort (Mil- tions. Even more problematically, many lennials). In fact, comparing young adults don’t have more than a tangential under- in 2013 against those in 1989, the study standing of what it means to belong to a credit union. That’s finds that significantly more Millennial young adults own their a problem, but perhaps not an insurmountable one. As we’ll own home or an investment account—such as a 401(k) or an discuss extensively in this article, Millennials are open—even IRA—than did their Boomer/Xer forebears. Likewise, although eager—to reinvent the status quo. If credit unions can posi- young-adult stock ownership was much lower in 2013 than in tion themselves as the natural alternative to a suspect system, 2001, 2013 levels were nonetheless higher than in 1989. they can seize the mantle of disruptive innovator rather than And while net worth (in 2013 dollars) declined from 1989 also-ran. to 2013, levels of credit-card and automobile debt declined, as well. We see this as an encouraging sign that Millennials are responding rationally to their present reality and positioning Revision and Reinvention themselves for the future. Millennials’ attitudes have shifted broadly as they respond The finding that young-adult homeownership is higher than to a reality that’s substantially at odds with the one they were in 1989 feels especially counterintuitive given all the hand- raised to expect. For example, while homeownership is still an wringing over Millennial ownership rates. And it’s true that aspiration for many Millennials, it is by no means the perva- many Millennials are single and childless, so owning a home sive and collective dream characteristic of previous genera- (while perhaps vaguely aspirational in some way) is not mean- tions. Lack of funds (as we will see later) is only one player ingful to them as a place to raise a family. More young people shaping this mindset. Lifestyle preferences, personal lifestage than ever before feel they can live without home ownership: timetables, new notions of success and more, all play a role in They just don’t need it right now, and as they learn to live with- making home ownership less relevant at this time in their lives. out a home, it’s possible many will never come to see it as a

“Compared with young adults in 1989, young adults in 2013 were more likely to own homes, stocks, and retirement accounts. Moreover, young adults in 2013 were less likely to have high debt payment burdens than older adults, young adults in 1989, and young adults in 2001,” the study found. And the median value of bank accounts, retirement portfolios, and stocks held by young Americans were equal or higher than the value of the same holdings for young Americans in 1989.” (The Atlantic)

January 2015 - PIPELINE 23 Millennials: Challenge and Opportunity

must-have priority. cultivate consumers in their marketing communications and However, bar- product and service offerings. Generation matters. ring continued or increased job inse- curity or financial Generation Matters instability, we expect A generation is a group of people who grew up and came many Millennials of age together, linked through the shared life experiences of to take more con- their formative years. Economic conditions, pop culture, world 67% of crete steps toward events, politics, technology, heroes and villains, are all examples homeownership in of collective experiences that set the tone for a generation, give Millennials agree coming years. In fact, it direction, provide it with a sense of what’s possible, what’s “nowadays we 80 percent of Mil- valuable and what life skills are needed. While there will be a lennial homeowners diversity of opinions in any group, a generational cohort will are free to shape also feel that owning show a distinctive mix of core attitudes and values that affect ev- a home is one of their erything from saving and spending orientation to career choice our own identities proudest accomplish- and work style to media and communication behaviors, etc. ments. (Source: The Businesses whose core constituency is defined at least in and transform Futures Company) part by lifestage or living situation must recognize and respond ourselves in any Like it or not, Mil- to “generational change-overs”; age alone does not provide lennials are the fu- insights as to how consumers choose to fulfill the needs and way we want.” ture. It’s up to you to necessities of lifestage. Generation does. Most Matures lived begin to understand at home until marriage. Boomers added a stop along the way this cohort – and to between childhood home and married home, flocking to apart- Source: make your best case ment living and roommates (not to mention orange crates-as- The Futures Company to them. Insights bookcases!). Today, Millennials continue to upend traditional and timely perspec- lifestage-based assumptions about rites of passage and all sorts tives on a generation’ of ownership aspirations. thinking can help ensure that businesses are not operating under a set of incomplete orSIDEBAR: outdated assumptions The generations as they with birth years and pics

Figure 1 DefiningMatures: th 1945e gene andr prioration s

Baby Boomers: 1946-1964Matures: 1945 and prior Each generation has a broadGeneration brush X: 1965Baby-1978 Boomers: personality that brings 1946-1964 different priorities,Millennials: 1979-1996 perceptions, talents Generation X: and styles Centennials:to the 1997-present1965-1978 societal conditions common to all cohorts. Millennials: These acculturation 1979-1996 biases withstand the test of time.Meet the MillennialsCentennials: 1997-present Quick Facts

24 PIPELINE - January 2015 According to the U.S. Census Bureau’s Statistical Abstract of the United States: 2012, just over 69 million babies were born between 1979 and 1996. Although this population rate put them second to Baby Boomers in terms of generation size, the aging Boomer cohort will imminently make way for Millennials’ emergence as the most economically and culturally important cohort in the United States. Millennials: Challenge and Opportunity

and asserting their Meet the Millennials will in the market- Quick Facts place. Remember, the n According to the U.S. Census Bureau’s Statistical Abstract generation-defining of the United States: 2012, just over 69 million babies were individualism of Baby born between 1979 and 1996. Although this population Boomers has hardly rate put them second to Baby Boomers in terms of genera- waned and Boom- tion size, the aging Boomer cohort will imminently make ers, in turn, have not way for Millennials’ emergence as the most economically raised their Millennial 67% of and culturally important cohort in the United States. children to be any less individualistic. In fact, Millennials say it n 42% are married or part of an unmarried couple living to- Millennials grew up gether; 55% have never been married is important that in a world of unprece- n 36% are parents (compared to 78% of Xers, 79% of Boomers) dented self-invention, others see them as n Millennials are the last majority Non-Hispanic White gen- a world in which they eration, 41% of Millennials are Hispanic, African Ameri- have had the power someone who can can, or Asian American and control needed to participate in the cre- always see through ation (and the meaning) of all sorts of op- exaggeration Bubble, Bubble, Bust and Struggle tions—from blogging, The formative experience of the Millennial generation has and hype. to creating your own been one of ups and downs, highs and lows, leaps forward and running shoes to vot- big stumbles backward. This generation grew up through two ing someone “off the Source: bubbles, two busts, two wars and two centuries. They see new island.” The Futures Company possibilities, new approaches to success and new ways of living that are seemingly arriving daily. Globalization and cultur- al diversity have created a cross-pollination of ideas that they A demand are eager to soak up. for authenticity: Millennials prize and practice being true to themselves— and they are happy to let others be true to themselves as well. Drilling Down: A Values Roadmap Millennials appreciate clarity and take pride in their ability to Capturing the marketplace potential of Millennials re- see through hype and exaggeration. quires an up-to-date understanding of the unique characteristics and qualities the generation brings to lifestyle choices and marketplace decisions. Expectations of autonomy: Millennials relish independence, express comfort with do- An experience of authorship: ing things ‘my own way,’ regardless of how others approach Emboldened by a keen sense of importance (both at the in- life, and are more likely to try new things. Millennials’ individ- dividual and generational levels) and an unprecedented level of uality coexists alongside a powerful team ethos characteristic technology-proficiency, Millennials have always been invested of this generation. Millennials are just fine standing out within in defining their own dreams, inventing their own solutions the crowd.

It’s often a matter of what we call “Immediascene™-- large proportions of Millennials report exploiting their smartphones in retail settings. This opinion dominion creates a sense among Millennials that “I’m always everywhere with everyone,” fueling a belief that their purchases—blessed by friends and fellow shoppers—are both savvy and socially secure.

January 2015 - PIPELINE 25 Millennials: Challenge and Opportunity

Little appreciation for follow established conventions. Two long-term trends, both custom and convention: growing for decades and now at unprecedented levels among Social conven- young people today, are pushing hard against Millennials be- tions and hierarchies coming homeowners. Simply put, my-life-my-way Millenni- have little intrinsic als aren’t facing the same lifestyle needs as prior generations value to Millenni- at their age. One of these trends is the age of first marriage: als. This is perhaps young people today are not only marrying later, they at marry- most visible in the ing at record later ages. The average age of first marriage has Millennials: way Millennials ap- been rising ever since it bottomed out with Baby Boomers who proach their journey married in their very early twenties. In fact, only 26 percent of Prefer a life that’s through life: the 18- to 32-year-olds are married today, compared to 48 percent exciting but not Millennial trajectory back in 1980 when the Boomers were that age. through life is by de- The other of these two long-term trends is the age at which secure or stable: sire and will, rather women first have children. As with marriage, it is at a later than adherence to age than ever—just shy of 26 years old today, and first births 35% traditional linear life among women in their late thirties and early forties are on an stages. Greater flex- upward trend and are occurring in record numbers. Prefer a life that’s ibility in expectations and life choices with Passion points: secure and stable fewer constraints Believing “stuff weighs you down,” many Millennials are on personal iden- more drawn to contentedness “my way” than they are to cash, but not exciting: tity means that many cars and castles. Under Millennials’ watch, cars went from an 65% Millennials are reject- avatar of youthful freedom to a costly burden. ing pre-designed and Technology is a well-known passion point for the Millen- narrowly definednials. As digital trailblazers, Millennials grew up using tech- Source: roadmaps to their nology fluidly and fluently. Millennials made the digital world The Futures Company future, with many their own, they mapped it and they helped establish the rules. delaying their transi- It’s not an exaggeration to say that technology is the new narrowly defined roadmapstion into theto typical their statusfuture, symbol forwith many Millennials,many delaying replacing such their bedrock as- notion of adulthood. pects of life as clothes and automobiles. In fact, as John Morris, transitionAs discussed earlier, into Millennial the prioritiestypical are—at notion least pres- ofa retailadulthood. analyst at BMO Capital Markets lamented about the ently—depressing homeownership numbers. This is a tangible falling demand for clothes, “You try to get them talking about marketplace expression of Millennials’ reluctance to blindly what’s the next look, what they’re excited about purchasing in

Figure 2 a less structured path through life

26 PIPELINE - January 2015 As discussed earlier, Millennial priorities are—at least presently— depressing homeownership numbers. This is a tangible marketplace expression of Millennials’ reluctance to blindly follow established conventions. Two long-term trends, both growing for decades and now at unprecedented levels among young people today, are pushing hard against Millennials becoming homeowners. Simply put, my-life-my-way Millennials aren’t facing the same lifestyle needs as prior generations at their age. One of these trends is the age of first marriage: young people today are not only marrying later, they at marrying at record later ages. The average age of first marriage has been rising ever since it bottomed out with Baby Boomers who married in their very early twenties. In fact, only 26 percent of 18- to 32-year-olds are married today, compared to 48 percent back in 1980 when the Boomers were that age. Millennials: Challenge and Opportunity

apparel, and the conversation always circles back to the iPhone A new reality: Confidence tempered by reality and hardship: 6,” he said. “You get them talking about crop tops, you get a Shaped by Boomer (aka helicopter) parents and an educa- nice little debate about high-waist going, but the conversation tion system obsessed with protecting, guiding and instilling keeps shifting back.” self-esteem, Millennials grew up extremely ambitious, with an unshakeable confidence that they would get where they Among Millennials wanted to go quickly and easily thanks to the various personal I could not get by without my cellphone/smartphone 62% strengths that made them each unique and special. I would like to be able to make payments by 52% Now, careening from the longest peacetime economic ex- scanning my smartphone pansion in history to the worst economic downturn in seventy- I would rather communicate via text message than talk on 56% five years, pummeled by a challenging job market, and faced my cell phone/smartphone with ongoing changes to the fabric of society, the way Millen- Interested in a wearable device that records video of 45% nials look at life has been fundamentally altered. Their over- your every waking moment confidence has been forcibly removed, their sanguine sense of security has morphed into a heightened awareness of risk, Looking at digital uptake within financial services, the their youthful boldness has mellowed into an outlook that has chart below shows that young, high-net-worth investors often dialed down the daring and keyed up the caution. prefer digital to direct contact with their advisors. Even as the economy continues to improve, this altered mindset still prevails. Asked whether they’d prefer a life of dull High Net Worth Individuals* Worldwide Who Prefer stability or exciting volatility, more Millennials say they’re con- Direct vs. Digital Interaction with Wealth Managers, tent with a happy humdrum. by Age, March 2013 % of respondents in each group Stressed and self-aware: Stress continues to come at people of all ages from all direc- <40 29.1% tions. The average person is confounded by negative as well as 20.2% positive triggers: they’re bombarded by choices yet intrigued by options, too many to-dos, too little trust. Stress, of course, is 40-49 a risk factor for both anxiety and depression, leading to a new 24.8% urgency inspiring more conversation about—and response 24.0% to—mental illnesses and disorders. 50-59 Millennials are by no means immune from rising emotional 22.9% and mental health problems. The American Psychological Asso- 32% ciation’s “Stress in America” report found that the gap between 60-69 adults who say stress management is important and those who 21.7% say they manage their stress effectively is widest among Millen- 38.2% nials. Nineteen percent of Millennials say they have been told Total they’re suffering from depression, compared to 12% of Boom- 23.7% ers and 11% of Matures. (Source: The American Psychological 30.7% Association, 2013). And In the fall of 2010, the annual UCLA  Digital contact  Direct contact Freshman Study found an all-time low of 52% rated their emo- Note: top-3 box on a 10-point scale; *with $1+ million in investable assets tional health in either ‘the highest 10 percent or ‘above average.’” Source: Acpgermini and RBC Wealth Management, 2013 WorldWealth Report, June 5, 2013 (Source: The Freshman Study, conducted annually since 1966 by the Higher Education Research Institute at UCLA) 168595 www.emarketer.com

“There’s a lot of evidence that millennials don’t drive as much—or care as much for cars in general—as previous generations their own age did. They’re less likely to get driver’s licenses. They tend to take fewer car trips, and when they do, those trips are shorter. They’re also more likely than older generations to get around by alternative means: by foot, by bike, or by transit.” (Source: washingtonpost.com/blogs, 2014)

January 2015 - PIPELINE 27 Millennials: Challenge and Opportunity

Success recalibrated: “Earlier” financial savvy: In the face of new- “A January 2014 survey of U.S. investors by UBS found difficulties and Wealth Management found that Millennials’ risk toler- a road ahead that was ance was more closely aligned with seniors who lived clearly less straightfor- through the Great Depression than Gen X or Boomer ward than they’d been generations.” (eMarketer, February 2014, Digital Inves- led to expect, Millen- tors: Drawing From a Portfolio of Growing Online and 60% of nials did not flounder Mobile Options) long. Rather, they Millennials say gathered their wits Today, more consumers are feeling an urgent need to and began tackling build financial capabilities from a younger age. Needless to being debt free: is a the uncertainty they say, young people have shifted their financial expectations and faced. In true Mil- strategies based on what they saw happen during the Great sign of success and lennial fashion, the Recession and its aftermath. We can expect this to translate to accomplishment. transformation was a proactive approach to retirement planning and saving. quick and dramatic. A generation regrouped Ann Clurman is an Executive Vice-President at The Futures 43% of with a new mantra: Company. Described by US News and World Report magazine Millennials say they Don’t abandon expec- as “one of the best researchers and generation-watchers,” Ann is tations for success; a nationally recognized authority and lecturer on American con- are “very/fairly” cope and reconstruct. sumers. She is the co-author of Generation Ageless: How Baby Success by coping Boomers Are Changing the Way We Live Today…And They’re worried about is about succeeding Just Getting Started (2007) and Rocking the Ages, The Yankelov- by trying; what con- ich Report on Generational Marketing (1997). Ann is also co- getting out of debt. stitutes success is ef- author of Coming to Concurrence: Addressable Attitudes and fort, perseverance and the New Model for Marketing Productivity (2004), excerpts of 39% of adaptability, rather which have been published in BrandWeek and DIRECT. than fortune. In other Rob Callender is Director of Youth Insights for The Futures Millennials say words, grit, not get; Company and, in that capacity, serves as the company’s Youth playing the game is Global Knowledge Lead. During Rob’s 15 years at The Futures their debt level is more significant than Company, he’s appeared in such news outlets as the Associated ruining the quality winning or losing. Press, Mashable, USA Today, NPR, the Wall Street Journal, CNN, Success by re- Hollywood Reporter and Billboard, among others. of their life. constructing is about measuring happiness About The Futures Company Source: less by its market The Futures Company is an award-winning, global strategic value and more by the insight and innovation consultancy. Unparalleled global exper- The Futures Company meaning behind it. tise in foresight and futures enables The Futures Company to Be creative: play the unlock new sources of growth through a range of subscription hand you are dealt to services and research and consulting solutions. The Futures make something that fits your lifestyle. Be adaptable: never Company was formed through the integration of The Henley forget that flexibility trumps planning in an uncertain world. Centre, HeadlightVision, Yankelovich and most recently, TRU. Significantly, as they worked through revising their expec- The Futures Company is a Kantar company within WPP tations, Millennials set about paying down revolving debt at with teams in Europe, North America, Latin America and Asia. rate no one thought possible. In fact, today debt is now a major www.thefuturescompany.com Follow The Futures Com- factor shaping Millennials’ view of success. pany on Twitter @FuturesCo and Facebook.

What matters most on the dating scene today? According to The New York Times, an increasing number of daters today are placing priority not on looks, shared interests or intention of starting a family, but on the prospective partner’s credit score. Sites like www.creditscoredating.com give prospective dates insight into “the only grade that matters after you graduate.” (Source: The New York Times, 12.12)

28 PIPELINE - January 2015 Millennials: Challenge and Opportunity

A Millennial Guide to Life Developing winning strategies around Millennials requires understanding their expectations, ambitions and life skills. Here’s a sum-up to get you on your way.

MILLENNIALS…..

Expect to live their lives in constant, even relentless transition, defined by technology and connections

Relish the possibility of and satisfaction of reimagining everything

Are determined to live life on their own terms and timeframes, often ignoring traditional milestones (e.g., home ownership)

Know the future will be challenging and that they will have to work harder to succeed than ever before

Appreciate the virtue of having a back-up plan for inevitable glitches and setbacks

View debt as a paramount factor in their personal sense of accomplishment

Need flexibility and the ability to co-create from the marketplace

Are accustomed to a heightened state of security and risk

Expect to have conversations with brands, often in real time

Value brands and institutions that stay true to their essence

Evaluate organizations on their degree of authenticity, integrity, and good corporate citizenship

January 2015 - PIPELINE 29 Feature Article

30 PIPELINE - January 2015 U.S. Macro Outlook 2015

U.S. Macro Outlook 2015: Spirits Unleashed By Mark Zandi

Moody’s Analytics U.S. Macro Forecast for 2015 n Growth should accelerate in 2015 as higher wages spur more spending, construction and investment. n The sharp fall in oil prices will slow energy production but still be a net gain for the economy. n How fast the Federal Reserve raises interest rates, and how markets respond when they do, will be key to the coming year’s economic story. n As more millennials begin forming households, housing demand and construction will take off. n The aging population and a slower pace of technological change could weigh on the economy’s long-term potential. n Problems in Europe and China have the potential to hinder the U.S. expansion in 2015.

January 2015 - PIPELINE 31 n

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U.S. Macro Outlook 2015

The U.S. is also vulnerable n general, 2014 was a good year for the U.S. economy, to a softer global economy. With and 2015 should be even better. the euro zone and Japan flirt- Dismal Scientist The most encouraging development of the past year ing with recession, and China’s Apartment was the rapid decline in joblessness. At the current pace growth steadily throttling back, of job growth, the economy is fast approaching full em- the U.S. trade situation will construction ployment. The next critical step in the economy’s return to full erode. This will be made worse Ihealth is a meaningful acceleration in wage growth, which ap- by the recent surge in the value is already the U.S. Macro Outlook 2015:pears imminent. Spirits Unleashed of the dollar, which is sure to Most surprising has been the recent slide in oil prices, which, continue. If conditions don’t get bright spot in the By Mark Zandi if sustained, will provide a significant boost to growth. The U.S. any worse overseas, the U.S. re- DECEMBER 12, 2014 produces a lot more oil than it used to because of the shale revo- covery should hold firm. This is housing market, lution, and falling prices will take a toll on future energy develop- a big if. and it is sure to ment, but the country is still a significant net consumer of oil. As View the Moody's Analytics U.S. Macroconsumers Forecas put. lesst of what they earn into their gasoline tanks, get brighter. therefore, the holiday shopping will receive a lift. Weaker potential Arguably the biggest disappointment in 2014 was the The other developing con- Growth should accelerate in 2015sideways as housinghigher market. wages The spur surge more in mortgage spending, rates in construction late cern is the and U.S. investment.economy’s weak The sharp fall in oil prices will2013 slow and energy tight mortgage production credit hurt but home still sales be aand net construc gain -forpotential the economy. growth rate. Underly- tion. But mortgage rates have receded and the credit spigot ing labor-force and productivity How fast the Federal Reservehas raises begun interest to open. Manyrates, millennials and how who markets have delayed respond form- whengrowth they remains do, disappointing. will be key Their to the weakness coming will year's help re economic- ing households will begin to do so soon as the job market im- turn the economy to full employment more quickly, but if they story. proves, moreover, making housing a more significant source do not improve growth will be weaker over the longer term. A As more millennials begin formingof growth. households, housing demand and constructionpersistently will takelow rate o . of new business formation, which is the fodder for innovation and productivity gains, adds to worries. The aging population and a slower pace of technological change could weigh onHowever, the economy's it is premature-term lon potential. gto conclude that the economy’s The Fed factor supply side won’t come back to life as full employment ap- Problems in Europe and China haveThis highlights the potential a key threat to hinder to the economy the U.S. in theexpansion coming proaches.in 2015. The U.S. has a surfeit of potential workers who year; namely, the chance that the Federal Reserve will begin to stepped out of the job market during the tough times; some of raise interest rates. The Fed needs to engineer short- and long- them will step back in as wage growth and job opportunities In general, 2014 was a good year forterm the rates U.S. higher, economy, consistent and with 2015the improving should job be market, even in better. return. Business formation and investment should also recover a way that keeps the housing recovery on track. Policymakers as the psychological shadow of the Great Recession fades and have all the tools they need and have gained valuable experi- risk-taking revives. The most encouraging developmentence of in the communicating past year with was financial the rapid markets. decline in joblessness. At the current pace of job growth, the economy is fast approaching full employment. TheYet next the process critical of normalizing step in the monetary econom’s policy returny may to not full be health is a meaningful acceleration in wage growth, which appears imminent . as graceful as we hope. Wage resurrection A key missing ingredient to a stronger economy has been real wage growth. Despite Figure 1 Better Economic Times Ahead the increasingly robust job creation, the economy is still climbing out of the deep hole created by the Great Recession. Unemployment % and underemployment are now falling fast, 4 10 but there is still slack in the labor market equal  Unemployment rate (R) ▪▪▪▪ Real GDP growth (L) to approximately 1.25% of the labor force. 9 At the current underlying pace of job growth—about 225,000 per month—this slack 3 8 will be absorbed by mid-2016, assuming stable labor force participation. If participation picks 7 up as disenfranchised workers come back into the labor force, the economy will return to full 2 6 employment by the end of 2016. 5 Although full employment is still some distance away, wage growth should soon pick 1 4 up. Data indicate it already has begun to do 10 11 12 13 14 15F 16F 17F 18F 19F 20F so. For much of the recovery, wages have grown only about 2% per year, the rate of Sources: FDIC, Moody’s Analytics inflation. This means workers have not been

January 2015 - PIPELINE 33

Most surprising has been the recent slide in oil prices, which, if sustained, will provide a signicant boost to growth. The U.S. produces a lot more oil than it used to because of the shale revolution, and falling prices will take a toll on future energy development, but the country is still a signicant net consumer of oil. As consumers put less of what they earn into their gasoline tanks, therefore, the holiday shopping will receive a lift .

Arguably the biggest disappointment in 2014 was the sideways housing market. The surge in mortgage rates in late 2013 and tight mortgage credit hurt home sales and construction. But mortgage rates have receded and the credit spigot has begun to open. Many millennials who have delayed forming households will begin to do so soon as the job market improves, moreover, making housing a more signicant source of growth .

The Fed factor

This highlights a key threat to the economy in the coming year; namely, the chance that the Federal Reserve will begin to raise interest rates. The Fed needs to engineer shor- andt long-term rates higher, consistent with the improving job market, in a way that keeps the housing recovery on track. Policymakers have all the tools they need and have gained valuable experience in communicating with nancial markets.

Yet the process of normalizing monetary policy may not be as graceful as we hope.

The U.S. is also vulnerable to a softer global economy. With the euro zone and Japan irting with recession, and’s growth China steadily throttling back, the U.S. trade situation will erode. This will be made worse by the recent surge in the value of the dollar, which is sure to continue. If conditions don’t get any worse overseas, the U.S. recovery should hold rm. This is a big if.

Weaker potential

The other developing concern is the U.S. econom’s weaky potential growth rate. Underlying labo-forcer and productivity growth remains disappointing. Their weakness will help return the economy to full employment more quickly, but if they do not improve growth will be weaker over the longer term. A persistently low rate of new business formation, which is the fodder for innovation and productivity gains, adds to worries .

However, it is premature to conclude that the econom’s supplyy side won’t come back to life as full employment approaches. The U.S. has a surfeit of potential workers who stepped out of the job market during the tough times; some of them will step back in as wage growth and job opportunities return. Business formation and investment should also recover as the psychological shadow of the Great Recession fades and risk-taking revives .

Wage resurrection

A key missing ingredient to a stronger economy has been real wage growth. Despite the increasingly robust job creation, the economy is still climbing out of the deep hole created by the Great Recession. Unemployment and underemployment are now falling fast, but there is still slack in the labor market equal to approximately 1.25% of the labor force.

At the current underlying pace of job growth—about 225,000 per month—this slack will be absorbed by mi-2016,d assuming stable labor U.S. Macro Ouforcetlook participation. 2015 If participation picks up as disenfranchised workers come back into the labor force, the economy will return to full employment by the end of 2016.

Although full employment is still some distance away, wage growth should soon pick up. Data indicate it already has begun to do so. For much of the recovery, wages have grown only about 2% per year, the rate of in ation. This means workers have not been rewarded for increases in productivity, and is why the prot share of national income has risen to a record high. rewarded for increases in productivity, and is why the profit share of national income has Figure 2 Wage Growth set to Accelerate risen to a record high. As the economy reaches full employment, pay should grow fast enough to cover 2001 Q1 to current both inflation and productivity gains. As- suming underlying productivity growth is 4.0 Y-axis=Employment cost index near 1.5% per year, nominal annual wage 3.5 Dismal Scientist growth should steadily accelerate to 3.5% private wage and salary, over the next two years. 3.0 % change yr. ago, 2-qtr lead Current trend lines look good. Wages as measured by data from human-resource company2.5 ADP tell an even more positive story . Spend versus save Evidence is mounting that this anticipat- 2.0 Stronger wage growth will support stronger consumer spending as long as consumers’t save do nit all. Given the wealth e ects powered by ed acceleration has begun. Wage growth as 1.5 X-axis=Unemployed record stock prices and better housingmeasured values, by the saving employment rates cost should, index, the if anything, perdecline. job opening, Easier # credit and more relaxed consumer attitudes toward borrowing also point to lowermost savingcomprehensive and greater and consistent spending. measure 1.0 of compensation, hit bottom at 1.5% three 0 1 2 3 4 5 6 7 years ago. Growth is now definitively above Higher wages should also boost consumer2%, and the sentiment. trend lines look Perceptions good. Wages as about Sources: the economy BLS, Moody’s Analytics have been lackluster despite the better job market. measured by data from human-resource com- Americans judge the economy basedpany on ADP whether tell an even their more paypositive is rising story. faster than ination,consumers and couldwhether mean this’smore average yea purchasesr pay of increase big-ticket wasitems bigger than last yea’s.r This has not beenStronger the case wage until growth now. will Improvedsupport stronger moods consumer among such consumers as vehicles, couldwhose sales mean are morealready purchasesback to prerecession-ticket of bi g spending as long as consumers don’t save it all. Given the levels because of lower gas prices and easy credit. Next could items such as vehicles, whose saleswealthAs are the already effects economy powered back reaches byto record prerecession stockfull employment,prices levels and better because hous pay- should ofbe houses,lower grow salesgas fast ofprices which enough and have easy beento cover flat credit. since both Next mortgage in ation could rates beand houses, productivity gains. Assuming underlying sales of which have been at sinceing productivitymortgage values, saving rates growth rates jumped should, is near moreif anything, 1.5% than per decline. a year,year Easier ago.nominal jumped annual more wagethan a year growth ago. should steadily accelerate to 3.5% over the next two years. credit and more relaxed consumer attitudes toward borrowing also point to lower saving and greater spending. Energy surprise SpendHigher versus wages should save also boost consumer sentiment. Per- Energy surprise ceptions about the economy have been lackluster despite the Further boosting both consumer spirits and the economy’s better job market. Americans judge the economy based on prospects is the surprising slide in oil prices. At near $60 per Further boosting both consumer spiritswhetherEvidence and their theis pay mounting economis rising’s prospectsfastery that than this inflation, isanticipated the surprising and whether acceleration slidebarrel, in crude oil has prices. prices begun. haveAt nearWage fallen $60 about growth per 40% barrel, assince measured summer.crude pricesIf by the employment cost index, the most have fallen about 40% since summer.thiscomprehensive Ifyear’s sustained, average pay lower and increase consistent prices was willbigger measure lift than global last ofyear’s. real compensation, GDPsustained, growth lower hitrates prices bottom in will2015 liftat byglobal1.5% more realthree thanGDP years growth half ago. a rates percentage Growth is now denitively above 2%, and the point, and just under that in the U.S. This has not been the case until now. Improved moods among in 2015 by more than half a percentage point, and just under MOODY'S ANALYTICS / Dismal Scientist / Copyright© 2014 / www.dismal.comthat in the U.S. 2 / 8 Global Economy Saudi Arabia is crucial to where oil prices Figure 3 gets an Energy Boost are headed next. The Saudis’ decision not to scale back production to offset supply growth in the U.S. and elsewhere was the proximate % change in 2015 real GDP due to lower oil prices cause for the plunge in prices. Softer global demand growth and a robust dollar also India contributed, but if Saudi Arabia had reined Turkey in production as it has in times past, prices Japan would have held firm. China The Saudis appear to believe that the Euro zone global surfeit of oil is here to stay and the bur- Global den of balancing supply and demand must be U.S. shared more broadly. They can financially ab- Based on WTI of $70 sorb the fall in revenue, at least for a while, U.K. per barrel in 2015 Canada given the savings they built when prices were Norway high. A lower global oil price also likely fits Russia their geopolitical strategy. Saudi Arabia’s ad- versaries—Iran, Russia, and the insurgency -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 calling itself the Islamic State—are all suffer- Source: Moody’s Analytics ing badly from the lower prices.

- Saudi Arabia is crucial34 to PIPELINE where oil prices January are headed 2015 next. The Saudi’ decisions not to scale back production to o set supply growth in the U.S. and elsewhere was the proximate cause for the plunge in prices. Softer global demand growth and a robust dollar also contributed, but if Saudi Arabia had reined in production as it has in times past, prices would have held rm.

The Saudis appear to believe that the global surfeit of oil is here to stay and the burden of balancing supply and demand must be shared more broadly. They can nancially absorb the fall in revenue, at least for a while, given the savings they built when prices were high. A lower global oil price also likely ts their geopolitical strategy. Saudi Arabi’s adversariea —s Iran, Russia, and the insurgency calling itself the Islamic State—are all su ering badly from the lower prices.

Bottom of the barrel?

We believe oil is close to a bottom, and will slowly climb back to $100 per barrel over the next three years. Lower prices will eventually force cuts in production, mostly where costs are high, such as the North Sea and the Arctic, but even investment-cost in lo U.S.w shale production will weaken. Lower prices will also prop up oil deman—possiblyd faster than expected, judging from a recent surge in sales of-guzzling gas SUVs.

The principal economic beneciaries of this will be consumers, who will enjoy what amounts to a meaningful tax cut. In the U.S., this is expected to equal close to $100 billion in 2015, or 0.6% of income. Global-related oil investment and production will be hurt, but U.S. shale producers, whose average brea-evenk cost is closer to $60 per barrel, should do relatively well. On net, the oil price decline is expected to lift U.S. GDP growth next year by 0.4 percentage point.

Tight mortgage credit com- Bottom of the barrel? bined with a previous jump in We believe oil is close to a bottom, and will slowly climb mortgage rates significantly The most back to $100 per barrel over the next three years. Lower prices crimped first-time homebuyers. will eventually force cuts in production, mostly where costs are The lack of first-timers makes it encouraging high, such as the North Sea and the Arctic, but even investment difficult for trade-up buyers to in low-cost U.S. shale production will weaken. Lower prices development of sell their homes, ultimately hurt- will also prop up oil demand—possibly faster than expected, ing sales of new homes and sin- judging from a recent surge in sales of gas-guzzling SUVs. the past year was gle-family construction. The principal economic beneficiaries of this will be con- This too should change soon. sumers, who will enjoy what amounts to a meaningful tax cut. the rapid decline Mortgage finance giants Fannie In the U.S., this is expected to equal close to $100 billion in Mae and Freddie Mac recently in joblessness. At 2015, or 0.6% of income. Global oil-related investment and pro- signaled a greater willingness duction will be hurt, but U.S. shale producers, whose average to lend by lowering their mini- the current pace break-even cost is closer to $60 per barrel, should do relatively Dismal Scientist mum down payment require- welt. On net, the oil price decline is expected to lift U.S. GDP of job growth, the ment from 5% to 3%. They have growth next year by 0.4 percentage point. Hopes for housing also relaxed the representations economy is fast and warranties they require on the loans they buy. This should approaching full Hopes for housing ease lenders’ concerns about be- Housing’s recovery has been disappointing,Housings but recovery that is has expected been disappointing, to change but in that2015. is While home sales, construction, prices and rents have ing forced to buy back loans that employment. expected to change in 2015. While home sales, construction, come a long way since the housing bust ended three years ago, the market is far fromeventually normal, get at into least trouble, in terms thus of sales and construction. prices and rents have come a long way since the housing bust encouraging more new lending. House prices and rents are now roughlyended consistentthree years ago, with the markethousehold is far from incomes, normal, atbut least sales are still almost 15% below what would be considered Housing starts are expected to ramp up from just over 1 in terms of sales and construction. House prices and rents are typical, and housing starts are o by on-third.e million units this year to nearly 2 million units in 2017. This now roughly consistent with household incomes, but sales are is much more than the estimated 1.7 million units required to still almost 15% below what would be considered typical, and meet demand in a typical year, and reflects the unleashing of Housing has been held back by a combinationhousing starts are of offfactors. by one-third. The heretofore tough job market has been hard on millennials, who have been slow pent-up demand by those millennial households. Housing has been held back by a combination of factors. to form households. There are more than 3 million more- to18 34-year-olds living with theirThe parents increased todayconstruction than also there represents were a priorlot more to jobs. the The heretofore tough job market has been hard on millenni- All the current slack in the labor market will be absorbed by recession. Many of these twenty- andals, earl whoy-thirt havey been-somethings slow to form will households. form households There are more and move into apartments as the job market tightens. stronger housing construction. Apartment construction is already thethan bright3 million spot more in18 tothe 34 housingyear-olds living market, with their and parents it is sure to get brighter . today than there were prior to the recession. Many of these twenty- and early-thirty-somethings will form households and Tight mortgage credit combined withmove a intoprevious apartments jump as thein mortgagejob market tightens. rates signicantlyApartment In terestcrimped -rtimeate rsrisk homebuyers.t The lack of rs-timerst Forecasting interest rates is generally foolhardy, but a construction is already the bright spot in the housing market, makes it dicult for trad-eup buyers to sell their homes, ultimately hurting sales of newquickly homes improving and singl- familyeconomye construction makes it prudent . to prepare for and it is sure to get brighter. higher rates over the next several years. If everything sticks roughly to script, the Federal Figure 4 Mortgage Lending Reserve will normalize short- and long-term Standards Remain Tight rates as the job market tightens. More jobs and stronger wage growth will trump the ill % of originations by vintage of credit score effects of higher rates on the housing market 100 and broader economy. 90  700+  660-699  620-659  <620 When the economy is healthy, the fed- 80 eral funds rate should be approximately 4% 70 and the 10-year Treasury yield closer to 5%. 60 While much improved from recent years, 50 the U.S. economy is far from healthy. Full employment is still in the distance, infla- 40 tion remains stubbornly below the Federal 30 Reserve’s target, and the financial system is 20 adjusting to stiffer regulatory requirements 10 and increasingly tough capital and liquid- 0 ity standards. The Fed’s balance sheet is also 05 06 07 08 09 10 11 12 13 14 bloated with Treasury and mortgage securi- Sources: Equifax, Moody’s Analytics ties following several rounds of quantitative easing. This will put downward pressure on

January 2015 - PIPELINE 35 This too should change soon. Mortgage nance giants Fannie Mae and Freddie Mac recently signaled a greater willingness to lend by lowering their minimum down payment requirement from 5% to 3%. They have also relaxed the representations and warranties they require on the loans they buy. This should ease lender’ concernss about being forced to buy back loans that eventually get into trouble, thus encouraging more new lending .

Housing starts are expected to ramp up from just over 1 million units this year to nearly 2 million units in 2017. This is much more than the estimated 1.7 million units required to meet demand in a typical year, and reects the unleashing- ofup pen demandt by those millennial households.

The increased construction also represents a lot more jobs. All the current slack in the labor market will be absorbed by stronger housing construction .

Interest rate risk

Forecasting interest rates is generally foolhardy, but a quickly improving economy makes it prudent to prepare for higher rates over the next several years. If everything sticks roughly to script, the Federal Reserve will normalize- andshort long-term rates as the job market tightens. More jobs and stronger wage growth will trump the ill e ects of higher rates on the housing market and broader economy .

When the economy is healthy, the federal funds rate should be approximately 4% and -theyear 10 Treasury yield closer to 5%. While much improved from recent years, the U.S. economy is far from healthy. Full employment is still in the distance, ination remains stubbornly below the Federal Reserv’se target, and the nancial system is adjusting to sti er regulatory requirements and increasingly tough capital and liquidity standards. The Fed’s balance sheet is also bloated with Treasury and mortgage securities following several rounds of quantitative easing. This will put downward pressure on lon-termg rates until these securities mature, which could take until the 2020s .

Dismal Scientist proaches, bond investors may panic again. Figure 5 Slow Exit by the Fed They may fear that the Fed will be forced to raise short-term rates more aggressively to contain inflation. Housing and the global Assets held outright on the Fed’s balance sheet, $ bil economy would be hurt, posing a threat to our sanguine outlook. 4,500 Forecast Given the surprising decline in long-term 4,000 rates this year, it is also worth considering 3,500 that they may remain lower longer than 3,000 anticipated. With the Bank of Japan aggressively buying bonds and the European Cen- 2,500 tral Bank likely to step up its own bond pur- 2,000 chases, U.S. long-term rates could also be held 1,500 down. Stiffer bank liquidity requirements, 1,000 which require large multinational banks to 500 hold larger and more liquid bond portfolios, 0 may also contribute. Lower than expected 06 07 08 09 1 0 11 12 13 14 15 16 17 18 19 20 21 22 23 long-term rates would be a plus for housing and economic growth. Source: Moody’s Analytics

Overseas trouble long-term rates until these securities mature, which could take The U.S. economy is less sensitive than most to changes in until the 2020s. global conditions, but it isn’t immune. And there is plenty of All this suggests that the Fed’s normalizationAll this of suggests interest that rates the Fed’s should normalization occur slowly. of interest Policymakers trouble overseas. will With begin the raisingvalue of- termthe shor dollar trates surging, in mi thed- U.S. 2015, but rates wo’nt approach 4% untilrates earlyshould 2018. occur Theslowly. 1- year0Policymakers Treasury will yield, begin currentlyraising trade near balance 2.25%, is sure wo ’tot nmake deteriorate. it back Global to trade, 5% whichon a to date consistent basis for the foreseeableshort-term future . rates in mid- 2015, but rates won’t approach 4% hasn’t been a factor in the U.S. recovery, will soon become a until early 2018. The 10-year Treasury yield, currently near meaningful drag. 2.25%, won’t make it back to 5% on a consistent basis for the Most worrisome are the euro zone’s travails. The single- But bond traders are notoriously ckle,foreseeable and theyfuture. may not follow the’s Fed script. This couldcurrency be seen region in isthe flirting summer with anotherof 2013, recession, when and the-Fed itsn un- But bond traders are notoriously fickle, and they may not employment is already painfully high. Political fissures are Chairman Ben Bernanke began talkingfollow about the Fed’s ending script. ThisQE. couldTraders be seen thought in the summer Bernanke of waswidening signaling in nearly an all imminentthe euro zone’s rise -memberterm in shor rates, countries.t and Eu - they sold bonds. Lon-gterm rates jumped2013, .when then-Fed Chairman Ben Bernanke began talking ro-skeptic political parties with mixed commitments to meet- about ending QE. Traders thought Bernanke was signaling an ing their nations’ debt obligations are gaining strength. If one imminent rise in short-term rates, and they sold bonds. Long- of these parties appears set to gain control of a government, Investor nerves term rates jumped. global investors could again question the European resolve to keep the euro zone together. Another round of financial turmoil would ensue. Fed ocials moved quickly to calm trader’ nerves,s and bondIn yieldsvestor nhaveerves since receded, but the housing market was hurt badly. Emerging economies that rely on foreign bond investors to fund largeFed current officials account moved de cits,quickly such as Brazil, India, South Africa and Turkey, are still struggling with the aftermathEuro-skeptic of that spike in rates . to calm traders’ nerves, and bond The ECB steps in yields have since receded, but the The European Central Bank is expected to forestall such a political parties housing market was hurt badly. scenario. The ECB has ramped up its bond-buying program in Another similarly debilitating surge in lon-termg rates seemsEmerging less likely economies given that their rely decline on recent this months year, by but purchasing it’t ca ben dismissed. covered bonds As and the asset-backed economy with mixed foreign bond investors to fund securities. This won’t be enough, however, and the ECB will approaches full employment, wage growth picks up andlarge the rstcurrent Fed account rate hike deficits, approaches, next buy supranational bond investors European may bonds, panic such again. as those They issued may fear that the Fed will be forced tocommitments raise shor-termt rates more aggressivelysuch as Brazil, India,to contain South Africa ination. by the Housing European andInvestment the global Bank. It economywill be politically would harder be hurt, and Turkey, are still struggling for the ECB to buy individual nations’ sovereign bonds, but it posing a threat to our sanguineto meeting outlook. their with the aftermath of that spike is increasingly likely to do so. While the economic stimulus nations’ debt in rates. won’t be as large as those provided by quantitative easing in Given the surprising decline in long-term rates this year, it is alsoAnother worth similarly considering debilitating that the they U.S. andmay U.K., remain it could lower still help longer by lowering than the anticipated. euro’s value obligations are surge in long-term rates seems and countering deflation fears. With the Bank of Japan aggressively buying bonds and theless European likely given theirCentral decline Bank this likelyIt to is astep stretch up to itsthink own the bondECB’s actions purchases, can jump-start-term U.S. lonthe g rates could also be held down.gaining Stier strength. bank liquidity requirements,year, but it whichcan’t be require dismissed. large euro multinational zone economy. That banks requires to hold broad larger economic and and more fiscal liquid As the economy approaches full reform, particularly in France and Italy. It is also reasonable to bond portfolios, may also contribute. Lower than expectedemployment, -longterm rates wage would growth picksbe a plusworry for the housing ECB won’t and do enough economic to head growthoff another . European up and the first Fed rate hike ap- debt crisis. That would be a problem for the U.S. Overseas trouble 36 PIPELINE - January 2015

The U.S. economy is less sensitive than most to changes in global conditions, but’t itimmune. isn And there is plenty of trouble overseas. With the value of the dollar surging, the U.S. trade balance is sure to deteriorate. Global trade, which to date’t been hasn a factor in the U.S. recovery, will soon become a meaningful drag .

Most worrisome are the euro zon’se travails. The single-currency region is irting with another recession, and its unemployment is already painfully high. Political ssures are widening in nearly all the euro’ szon membere countries. Eur-oskeptic political parties with mixed commitments to meeting their nations’ debt obligations are gaining strength. If one of these parties appears set to gain control of a government, global investors could again question the European resolve to keep the euro zone together. Another round of nancial turmoil would ensue .

The ECB steps in

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The European Central Bank is expected to forestall such a scenario. The ECB has ramped up its-buying bond program in recent months by purchasing covered bonds and asse-backedt securities. This won’t be enough, however, and the ECB will next buy supranational European bonds, such as those issued by the European Investment Bank. It will be politically harder for the ECB to buy individual’ sovereign nations bonds, but it is increasingly likely to do so. While the economic stimulus’t wo ben as large as those provided by quantitative easing in the U.S. and U.K., it could still help by lowering the eur’s valueo and countering de ation fears .

It is a stretch to think the EC’Bs actions can jump-start the euro zone economy. That requires broad economic and scal reform, particularly in France and Italy. It is also reasonable to worry the ECB wo’t don enough to head o another European debt crisis. That would be a problem for the U.S.

Growth and risk in China

China’s struggles to hit its own economic growth targets poses another threat. Chinese policymakers recognize they have signicant structural problems, and have been willing to give up some growth to address them. Most notably, Chinese real estate markets are U.S. Macro Ouoverbuilt,tlook 2015 and speculation has been rampant. Many stat-ownede enterprises are unproductive. Corruption is endemic and environmental degradation epic .

Most disconcerting, leverage has soared in China, comparable to other countries that have suered severe nancial crises. Much of this debt is held by local governments and nancial institutions that have nanced the runaway real estate activity .

Growth and risk in China Figure 6 Ominous Echoes in China’s struggles to hit its own economic China’s Debt Growth growth targets poses another threat. Chinese Gross debt as a % of GDP 5 yrs before nancial crisis policymakers recognize they have significant 275 structural problems, and have been willing 32pp 13pp to give up some growth to address them. 250 43pp Most notably, Chinese real estate markets are 225 overbuilt, and speculation has been rampant. 24pp Many state-owned enterprises are unproduc- 200 38pp tive. Corruption is endemic and environmen- 175 tal degradation epic. Most disconcerting, leverage has soared 150 in China, comparable to other countries that 125 have suffered severe financial crises. Much of this debt is held by local governments and 100 financial institutions that have financed the U.S. U.K. Japan S. Korea China runaway real estate activity. (2003-07) (2003-07) (1986-90) (1994-98) (2009-13) Each time reform efforts have hit growth Sources: Various government sourcse, Moody’s Analytics too hard, however, Chinese officials have eased up and provided monetary and fiscal stimuli. Most re- timated potential has been a dismal 1.3% per year. This reflects cently, the Chinese central bank surprised financial markets both lackluster labor productivity growth of 1%, and paltry labor by cutting rates. China’s growth slowdown hasn’t been pain- force gains weighed down by falling participation. less,Each but time so far reformit has been eorts well-managed. have Thathit growth China’s financial too hard, however,A poor potential Chinese growth ocials rate has haveallowed eased slack in up the and la- provided monetary and scal stimuli. Most systemrecently, is relatively the Chinese closed and central authorities bank are surprised able to quickly nancial bor market markets to be absorbedby cutting more rates. quickly.’ Chins But growth oncea full slowdown employ- has’tn been painless, but so far it has change policy has helped. ment is achieved, unless potential picks up, economic growth been wel-lmanaged. That Chin’as nancial system iswill relatively slow sharply. closed This willand hurt authorities living standards, are able particularly to quickly change policy has helped . for lower-income households, and undermine the government’s PuPutin'stin’s ch choiceoices s precarious fiscal situation. Still, balancing reform and growth isn’t easy, and China’s The fall in potential growth rates was in part anticipated. managers may stumble. It wouldn’t take much of a misstep to The large baby-boom cohort has begun to retire in recent years, undermineStill, balancing already- reformreeling global and commodity growth ’istmarkets, neasy, andweak -Chinreducinga’s managers labor force may participation. stumble. More It wouldthan half’tn take the decline much of a misstep to undermine already- en fragile emerging economies, and upset financial markets. in participation since the recession hit is attributable to retiring Thereeling U.S. economy global wouldn’t commodity survive markets,this storm unscathed. weaken fragileboomers. emerging Some of economies, the slowdown isand likely upset temporary, nancial related markets.to The U.S. economy’t survive wouldn this stormRussia’s unscathed economic problems. are by themselves not a rea- the recession and its fallout. Fewer job opportunities have also son to worry, but the pressure they put on Russian President contributed to lower participation and less foreign immigration, Vladimir Putin could be. Sharply lower oil prices, Western eco- which is important to the growth of the working-age population. nomicRussia sanctions’s economic due to problemsRussia’s incursion are by into themselves Ukraine, and not a reason to worry, but the pressure they put on Russian President Vladimir Putin could thebe. collapsing Sharply ruble lower and oilresulting prices, higher Western inflation economic and interest sanctions due to Russi’s incursiona into Ukraine, and the collapsing ruble and resulting higher rates are suffocating Russia’s economy. The government’s fis- Shadows of the recession calin ation situation and is also interest rapidly eroding.rates are How suocating Putin will respond Russi’s economy.a Lagging Theproductivity governmen growth’s t isscal also probably situation partly is alsocycli- rapidly eroding. How Putin will respond toto this this is isdifficult dicult to forecast. to forecast. It is equally It is easyequally to imagine easy him to imaginecal, reflecting him the reining dark psychological in his adventurism shadow of the or recession ramping it up. His choices could have large implications for globalreining and U.S.in his economic adventurism growth or and. uncertainty created by political brinkmanship in Washing- ramping it up. His choices could ton. Businesses have been especially nervous, reluctant to use Despite these have large implications for global the cash they have built up during the recovery to expand and What ’s the U.S. potentialand U.S.? economic growth. fund more investment. Entrepreneurs have also been under- reasonable standably wary about starting businesses. Growth potential is thus expected to revive as the recession concerns,As the betting U.S. economy approachesWhat’s the U.S full. po teemployment,ntial? fades attention and full employment will shift toapproaches. the econom Some’s weak ysigns potential indicate growth rat—ethe pace at which the against the As the U.S. economy approach- this may be occurring, as labor force participation has stabilized MOODY'S ANALYTICS / Dismales full Scientist employment, / Copyright© attention 2014 will / www.dismal.comover the past year despite continued boomer retirements. For- 6 / 8 American economy shift to the economy’s weak po- eign immigration should rebound with the better job market, tential growth rate—the pace at and business confidence and investment have recently been remains a bad which the economy can consis- much better. Over the next five years, potential growth should tently grow without generating rise to 2.25% per year, equal to 0.75% labor force growth plus strategy. inflationary pressures. Since the 1.5% productivity growth. Great Recession, the economy’s es-

38 PIPELINE - January 2015 U.S. Macro Outlook 2015

population, central bank behav- Structural risks ior, and prices. Our customized However, there is a meaningful risk that this is overly opti- models, concise and timely re- mistic. Structural impediments to labor force and productivity ports, and one of the largest as- growth may not quickly recede. Workers who stepped out of sembled financial, economic and The next critical the job market during the tough times may not return, at least demographic databases support not to the degree hoped for. Their skills and marketability may firms and policymakers in stra- step in the have eroded so significantly that they are unable to find suit- tegic planning, product and sales able work. economy’s return forecasting, credit risk and sensi- The animal spirits that drive business formation and in- tivity management, and invest- vestment could also remain bottled up. An aging population to full health is ment research. Our customers in- may prove more of a brake on risk-taking than thought. En- clude multinational corporations, a meaningful trepreneurs tend to start companies in their thirties, and there governments at all levels, central is a dearth of thirty-somethings. An even more disconcerting banks and financial regulators, acceleration in possibility is a downshift in the pace of technological change. retailers, mutual funds, financial Perhaps technologies such as 3D manufacturing, drones and wage growth institutions, utilities, residential DNA sequencing don’t stack up to the productivity-enhancing and commercial real estate firms, power of the internet, which fueled growth in the 1990s and insurance companies, and profes- early 2000s. sional investors. Our web and print periodi- cals and special publications cover every U.S. state and metro- Don’t bet against the U.S. politan area; countries throughout Europe, Asia and the Ameri- Despite these reasonable concerns, betting against the cas; and the world’s major cities, plus the U.S. housing market American economy remains a bad strategy. The U.S. has and other industries. From our offices in the U.S., the United clearly had a difficult run over the past 15 years, and has been Kingdom, and Australia, we provide up-to-the-minute report- scarred by terrorism, wars and technology and housing bub- ing and analysis on the world’s major economies. bles. Lower- and middle-income households have seen living Moody’s Analytics added Economy.com to its portfolio standards decline. But the bad times are likely ending. Many in 2005. Its economics and consumer credit analytics arm is of the economic wrongs have been righted. Households have based in West Chester PA, a suburb of Philadelphia, with of- deleveraged, the financial system has recapitalized, and U.S. fices in London, Prague, and Sydney. More information is avail- businesses have reduced their cost structures and are highly able at www.economy.com. competitive. Serious problems remain and politics complicate © 2014. Moody’s Analytics, Inc. and/or its licensors and our ability to address them. But if history is any guide, we will. affiliates (together, Moody’s’). All rights reserved. ALL INFOR- MA’ ON CONTAINED HEREIN IS PROTECTED BY COPY- About Moody’s Analytics Economic & Consumer Credit Analytics RIGHT LAW AND NONE OF SUCH INFORMATION MAY Moody’s Analytics helps capital markets and credit risk BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, management professionals worldwide respond to an evolving FURTHER TRANSMITTED, TRANSFERRED, DISSEMINAT- marketplace with confidence. Through its team of economists, ED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSE- Moody’s Analytics is a leading independent provider of data, QUENT USE FOR ANY PURPOSE, IN WHOLE OR IN PART, analysis, modeling and forecasts on national and regional IN ANY FORM OR MANNER OR BY ANY MEANS WHAT- economies, financial markets, and credit risk. SOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR Moody’s Analytics tracks and analyzes trends in consumer WRITTEN CONSENT. credit and spending, output and income, mortgage activity,

All information contained herein is obtained by Moody’s from sources believed by it to be accurate and reliable, Because of the possibility of human and mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall Moody’s have any liability to any person or entity for (a) any iOS,S or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of Moody’s or any of its directors, officers, employees or, agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if Moody’s is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The financial reporting, analysis, projec- tions, observations, and other information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell, or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH OPINION OR INFORMATION 1S GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.

January 2015 - PIPELINE 39 Feature Article

The Intricate Art of Today’s Mortgage Underwriting By Jerry DeMuth

New scoring models, more experienced underwriters and more manual decision making are all part of today’s landscape for underwriters.

40 PIPELINE - January 2015 The Intricate Art of Today’s Mortgage Underwriting

Mortgage underwriting continues to change. Once too loose, then perhaps too tight, it now may be inching back closer to middle ground. n But there’s also little doubt, in most cases, that the underwriting process is being done more thoroughly, with many more steps required of the underwriters themselves. This is especially the case as more underwriting is done at least partly manually. And FICO® scores by themselves are becoming less determinative.

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707-1116 FHLB_WeatherAd_8.5x11-V2.indd 1 12/18/14 11:43 AM The Intricate Art of Today’s Mortgage Underwriting

ver the last two years, underwriting has definitely changed from what it was five or 10 years ago, with WHAT MAKES A GOOD UNDERWRITER? “From what we’re seeing in terms of underwriter applica- all the QM [qualified mortgage] restrictions [around] tions, the people we’re coming across who are applying [for “ the ability to repay. That’s where a lot has hap- jobs] really don’t have the depth of experience we’re looking pened,’ says Donald J. Frommeyer, a loan originator for. Underwriters who were really just junior underwriters at Mortgage Services III LLC (MSI), Indianapolis, and chief ex- and were only part of the process are the ones kind of getting ecutiveO officer and immediate past president of the National weeded out,” he says. Association of Mortgage Brokers (NAMB), Washington, D.C. They may have been called underwriters, but they really “But for the most part, I don’t know if underwriting has got- were nothing more than “income-verification clerks,” he says. ten better or worse-but it’s gotten different,” says Frommeyer. When seeking out underwriters for zIngenuity’s clients, “Now, some lenders spend a lot of time wanting to look Schultz explains, he seeks candidates with a range of experi- more at bank statements, wanting to know more about em- ence with different loan types and different lender types, be- ployment. It’s just a difference in the lender. I still think they’re cause “quality is really driven by where people worked and making good aggressive decisions on underwriting. But they’re whether they’ve seen lots of different types of loans,” he says. all striving for that ability to repay and making sure customers “There’s a stratification process that’s going on,” Schultz fall within the guidelines.” says. “Lenders are being more focused on who they’re letting “Just like anything, there’s a pendulum,” explains Mat Ish- do the more complex work, but at the same time there’s prob- bia, vice president, marketing, at Troy, Michigan—based Unit- ably a leveraging up with talent and getting poor performers ed Wholesale Mortgage. “It [underwriting] was way too loose, out of the process based on quality results.” and some rules and regulations were put in place and under- In the struggle to find underwriters who have been trained writers put some overlays and protective things in place. . . . to understand specific types of loans, whether conventional or Now it’s coming back to the middle, where it should be, where specialties such as self-employed borrowers, mortgage brokers it’s a little more reasonable.” now look to specific mortgage companies or specific under- Underwriting, with increased emphasis on borrower cred- writers within a company for placing their loans. itworthiness, often is no longer being left solely to automated “There are certain lenders we know that understand our underwriting (AU) systems, even when conventional mort- sophisticated borrowers. They have some flexibility and under- gages are being underwritten. There’s increased use of manual stand complex borrowers,” says Gloria Schulman, founder of underwriting, something that the Federal Housing Administra- Beverly Hills, California—based CenTek Capital Group, which tion (FHA) has increasingly pushed, including when Depart- specializes in jumbo loans to self-employed borrowers. ment of Housing and Urban Development—approved (HUD- Also, at these firms, she says, “Some approved) housing counseling is tapped by FHA borrowers. underwriters are more sophisticated “Our message to lenders is that they absolutely ought to than others.” And it is to these specific consider whether a borrower has undergone housing counsel- underwriters that CenTek’s loan pack- ing, because everybody knows, and we’ve done studies on this- ages are sent. borrowers that take advantage of housing counseling perform Frommeyer says he chooses lenders much better than those who do not,” says FHA spokesperson Underwriting, with based on what their underwriters do par- Brian Sullivan in an interview with Mortgage Banking. ticularly well. “From a risk perspective, that’s a good thing,” he says. “How- increased emphasis “We have certain companies that do ever, we wouldn’t go so far as to say that housing counseling VAs [Department of Veterans Affairs on borrower in and of itself would overcome financial material deficiencies loans] really well, certain companies that in a loan application. Whether or not it makes a difference in do FHAs really well and certain compa- creditworthiness, saying yes or no to these loan applications would be judged on nies that do conventional business re- a case-by-case basis, applying our new manual underwriting often is no longer ally well,” he points out, noting that this standards.” means underwriters at these companies Sullivan adds, “Broadly speaking, housing counseling is being left solely to are experienced at underwriting those relevant but it may not necessarily overcome material deficien- loan types. AU systems, even cies in the application.” Still other companies and their under- “There’s been a lot of sloppy underwriting,” maintains Kyle writers are especially good at handling when conventional G. Schultz, vice president of mortgage operations at Irving, mortgages for first-time homebuyers, Texas—based zIngenuity Inc., which provides contract under- mortgages are which often requires finding alternative writing, underwriting training, underwriting-hiring advice and credit, he adds. other services to smaller lenders. being underwritten. Sending loans to the appropriate “Underwriters lost their responsibility in the underwriting companies and their underwriters is a process. I think that everyone was relying on inputting data better and more successful option than into automated underwriting systems without a complete un- sending all your loans to the same com- derstanding of why they needed to keep validating it.” pany, Frommeyer makes clear.

January 2015 - PIPELINE 43 The Intricate Art of Today’s Mortgage Underwriting

as child support, alimony and percentage of income available DIFFERENT APPROACHES FOR DIFFERENT LENDER TYPES for mortgage payments, Knudsen says. The approaches and methodologies used by underwriters vary by the type of lender, explains Tisha D. Hartman, director of real estate lending at KeyPoint Credit Union, Santa Clara, Cal- ifornia, and former senior forensic underwriter at zIngenuity. GOING BEYOND CREDIT SCORES Underwriting today requires obtaining and understanding The most conservative and stringent are the lenders that more information about borrowers or, as some players describe cater solely to the wholesale market, she says. While they may it, more research and analysis. have a particular investor that has closed out a loan niche for Wells Fargo Home Mortgage no longer simply takes the them, the methodology behind the underwriting that goes into middle of the three FICO scores, according to Knudsen. each decision is going to be a lot more strict, she explains. “Today we use credit reports for our lending, and analyze At the opposite end of the spectrum, the lenders showing the and leverage those credit reports as opposed to just the score,” most flexibility, she says, are the large banks and credit unions she explains. that are going to park some of their loans in their portfolios. “The report tells you some things the score doesn’t. We re- Schultz says the level of understanding required of under- ally looked at lowering our FICOs in a couple areas and then writers who handle such complex loans as jumbos and those leveraging our underwriters’ expertise to underwrite the credit made to self-employed borrowers is “critical and [it] really de- that’s on the credit report, because there are things you can mands more time and demands a better-quality individual do- determine today [about] why a score might be low. We want ing that work.” to make sure we’re making a good decision and extending our Wells Fargo Home Mortgage, Des Moines, Iowa, recognized credit to creditworthy borrowers even if [that borrower] might the different skill sets required for underwriting complex port- have a lower credit score.” folio loans, 30 percent of which are non-QM, and for underwrit- KeyPoint Credit Union’s Hartman says that as an under- ing QM agency, FHA and VA loans, when it established separate writer, she has deviated many times from “what would be the underwriting teams for each in the third quarter of 2013. standard protocol, because I have a greater understanding of “It’s a very separate group of underwriters that underwrite what’s behind the numbers and I can make an argument and only portfolio loans and are located in only six locations across present that to the end investor or to the agency and get them the country,” says Allyson Knudsen, Wells Fargo’s executive to buy off on it because I understand the methodology. So it’s vice president and head of underwriting and production risk not always just about filling in the box-it’s about really under- management, who is based in Minneapolis. “And we actu- standing what you’re looking at and how that layers into the ally have a process where we have a panel review. Loans are rest of the file.” brought to the panel to talk about why you would or would not Underwriting, especially manual underwriting, needs to be want to put the loan on the balance sheet.” seen as both a science, with its guidelines and technology, and QM teams are also based in those six locations as well as as an art as you “extract a lot of information about a person’s in 11 QM-only underwriting locations, she says, and all their lifestyle and turn that into something meaningful and then loans are manually underwritten after automated engines pro- make a business lending decision,” Hartman points out. vide credit and ratio risk assessments. Whether underwriters are using an automated underwrit- In having two separate teams, Wells Fargo saw the difficul- ing system or doing manual underwriting “makes a big differ- ty of keeping up with the ever-changing ence, because sometimes something doesn’t make sense on underwriting knowledge required of paper but when you get the story, it does [make sense],” says each, even for conventional loans, she Sharmen Lane, director of education and a senior underwriting explains. instructor at Loan Officer School, New York. “It’s almost like “Because agencies change their “It’s almost like underwriters and loan officers need to be guidelines every day, those underwrit- private investigators today,” says Lane. “It’s all about research. underwriters ers have to keep up with all the agency Everybody back in the day [before AU] used to do this.” changes, and all the FHA and VA chang- She adds, “So sometimes if a loan makes good sense and and loan officers es,” Knudsen says. “So as clarifications, et you can back it up with documentation but it doesn’t quite fit cetera, are sent out, we want people to need to be private the box exactly perfect,” you still may be able sell that loan. be able to absorb all that change. Same investigators thing on the portfolio side: That they have expertise and judgment regarding today,” says Lane. our policies. In today’s environment, PROPENSITY TO PAY Jon R. Daurio, chairman and chief executive officer of Nik- it’s [asking] a lot for somebody to wear kael Capital Corporation, Tustin, California, a new company multiple hats. We believe we’ll have bet- that is targeting credit-scarred, low-FICO borrowers for refi- ter execution across both if we separate nance loans, says his company is ignoring FICO scores. Instead, them out.” after determining sufficient net disposable income, he says The portfolio team has more flexibility in documentation that Nikkael will look at propensity to pay, which, he main- requirements and the judgments they can make on such things tains, many people have ignored.

44 PIPELINE - January 2015 The Intricate Art of Today’s Mortgage Underwriting

Keypoint “What is in the borrower’s history that indicates that they A continuing underwriting issue, Credit Union’s have a propensity to make the payments? There are some peo- particularly with FHA mortgages, is the ple that have the ability to make the payment but then they’ll use of overlays. Hartman says decide not to make the payment,” he says. “We look at what caused the late payments. What actually overlays that is the borrower’s story? And what actually happened in ensur- THE ISSUE OF OVERLAYS establish higher ing that that life event is unlikely to occur again or has been KeyPoint Credit Union’s Hartman resolved? The only way to determine this is with manual un- says overlays that establish higher stan- standards is one derwriting,” Daurio says. dards is one way for lenders to protect His past experiences during a 20-year career, he adds, themselves from buybacks, should un- way for lenders showed that “FICO was not a good indicator of whether a bor- derwriting turn out to be inadequate. rower was a good credit risk.” As a result, he says, “I think peo- Overlays, she says, also provide more to protect ple are getting more comfortable with making loans to people flexibility as to what investors loans can themselves from who have hiccups in their credit.” be sold. San Jose, California—based FICO has been actively mak- “I think most lenders reacted [to the buybacks. ing changes to its FICO scoring processes, beginning with the housing market collapse] by tightening launch of FICO Score 8 in 2009. On Aug. 7, 2014, it announced lending standards and implementing that medical debts would be accounted for separately under significant overlays,” says BBVA Com- the new FICO Score 9, differentiating medical from non-med- pass’ Salzman. “Since then, the industry ical collection-agency accounts in order to be more predictive has seen an easing of both, particularly of a consumer’s likelihood to repay a debt. with FHA loans.” Broker Frommeyer says that medical debt has been a prob- Yet he admits that BBVA Compass “does have minimal lem he has encountered with some borrowers with lower cred- overlays in our Federal Housing Administration products. it scores. “I think [with FICO] looking at it differently is going They play an essential role in helping the bank mitigate po- to help a lot,” he predicts. tential risk.” Adoption, however, is likely to be slow. But because these overlays, like the bank’s loan guidelines, are proprietary, Salzman says he cannot provide specifics. Wells Fargo, says Knudsen, used credit overlays back when ADOPTING NEW SCORING MODELS it required higher credit scores for conventional mortgages. Freddie Mac, which does accept such newer models from Now, she notes, “We are looking at all our overlays as a matter the credit repositories as Equifax Beacon 5.0, Experian/Fair Isaac of course” to make sure the company provides “access to credit Risk Model V2 and TransUnion FICO Risk Score (Classic) 04– for all customers that are credit-ready.” two of which are required for all manually underwritten mort- That overlays might restrict loans to borrowers on the ba- gages–is currently analyzing the impact of FICO 8 but has not sis of race or national origin is a concern for FHA, says FHA begun on FICO 9, according to spokesman Brad German. spokesperson Sullivan. “These credit overlays might rise to un- “Retooling the mortgage industry around a reformulated fair lending practices,” he points out. credit score is a complex undertaking,” German points out, “We’re trying to encourage lenders to move away from all with all the players having to analyze any new score’s impact these credit overlays, like a credit score higher than what our on their systems, operations and ability to evaluate and price standards call for, that they’re tacking on,” he says. risk. “Even with our backing of the mortgage, lenders still may But many lenders and their underwriters, as well as the be reluctant,” Sullivan admits. “We’re trying to get them to agencies and FHA and VA, already have begun to look differ- overcome their shyness and get back to lending to these credit- ently at medical debt. qualified borrowers.” Houston-based BBVA Compass Bank, for example, uses “Underwriting is going to be a constantly evolving thing “the guidelines for medical collections debt that have been set for our world as we keep learning more about consumer be- by such specific investors as Fannie Mae, FHA and VA, and haviors and patterns and things like that,” says Hartman. “It’s consider the overall scope of the borrower’s credit profile,” ac- going to be a continuing, ongoing evolutionary process for all cording to Elliot Salzman, senior vice president and director of lenders.” consumer policy and underwriting for BBVA Compass. The bank also has made changes in its underwriting in or- Jerry DeMuth is a Chicago-based freelance writer. He can der to follow QM guidelines, he says. be reached at demuth933 @earthlink. net. “We now follow Appendix Q for all QM originations, with government-sponsored enterprise [GSE] and/or government Copyright 2014 Mortgage Banking(R) Magazine & Mort- products as an exception,” Salzman explains. gage Bankers Association, All Rights Reserved., Reprinted with “We’ve also developed a broad portfolio of non-QM prod- permission ucts. Additionally, we minimized the overlay on our FHA product, lowering our minimum score requirement to 580,” he says.

January 2015 - PIPELINE 45 Feature Article

The Infrastructure Predicament By Terry Wakefield

46 PIPELINE - January 2015 The Infrastructure Predicament

TECHNOLOGY APPLIED TO BUSINESS The first rule of any technology used in a business is that automation applied to an efficient operation will magnify efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency. n Bill Gates n

Panic is setting in! In my 40 years in the residential mortgage business, I have never witnessed a higher level of frustration and concern by C-level executives who run Here’s a U.S. mortgage companies. This article provides a replay three-way of a recent series of conference calls I have had with a conversation number of chief executive officers who are very concerned about how the origination about the state of the operational infrastructure that business can supports their respective businesses. be reimagined These calls have been condensed to a three-way with the help of WebExTM conversation involving myself (Terry) and technology and better business fictional CEOs Drew Smart and Bill Legacy. As Frank process Webb, star of the old TV series Dragnet (now I am really management. dating myself) would say, the names (except mine) have been changed to protect the innocent.

January 2015 - PIPELINE 47 The Infrastructure Predicament

Bill Legacy: Thanks for arranging this call, Terry. Drew, that magnitude? If my math is correct, costs have increased by how are you doing? nearly 230 percent since 2004. This is lunacy!” Drew Smart: Thanks for asking, but I have had better days. We pointed out the impact of reduced production volume, I just finished a board meeting, and my team and I were grilled escalating costs associated with the regulatory environment, about the explosion in our mortgage loan production expenses, and our existing infrastructure’s dependence on humans to or- the reduction in our transaction velocity and the mediocre cus- chestrate work that leads to a very expensive hiring-and-firing tomer service surveys we’ve gotten back from our borrowers cycle to adjust to volume cyclicality. He was not impressed and over the past year. In our defense, my chief operating officer said, “We have a structural problem that needs to be addressed- presented a series of figures that I’ll share with you. Can you or we should consider getting out of this business!” see my screen? Reluctantly, we moved on to Figure 2–average days to Bill Legacy and Terry Wakefield (simultaneously): Yeah, close. we see it. Another one of our directors runs a logistics company that Drew Smart: Here’s Figure 1, average loan origination and provides consulting services to local companies with large production expense. vehicle fleets. He’s a little more even-tempered, and asked if One of our key directors runs a business that manufactures we had statistics that track our transaction velocity, or average wireless office equipment. When he saw this figure, he literally time to close, going back 10 years. Fortunately, we were pre- screamed: “How can any industry survive a cost increase of pared for that question.

AVERAGE LOAN ORIGINATION AND PRODUCTION EXPENSE FIGURE 1 IN DOLLARS AND AS A PERCENTAGE OF AVERAGE BALANCE

Avg. Production Expense ($) 4.5% $8,000 Avg. Production Expense (% of Loan Balance)

4.0% Avg. Production Expense (% of Loan Balance) $7,000 3.5% $6,000 3.0% $5,000 2.5%

$4,000 2.0%

$3,000 1.5% Avg. Production Expense ($) Production Avg. $2,000 1.0%

$1,000 0.5%

$0 0% 2004 2005 2006 2007 2008 2009 2010 2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4 2013-Q1 2013-Q2 2013-Q3 2013-Q4 2014-Q1 2014-Q2

Sources: Mortgage Bankers Association (MBA), Federal Housing Finance Agency (FHFA)

TRANSACTION VELOCITY HAS FIGURE 3 INFRASTRUCTURE COLLAPSE FIGURE 2 EXTENDED TO ABOUT 40 DAYS, ADVERSELY IMPACTING REVENUE

Average Days to Close Avg. Avg. Jan Feb Mar Apr Total loan production expenses (per loan) $6,932 2012 2013 2014 2014 2014 2014 Origination expense at 1% and assumes an ($2500) Re nance 49 45 44 40 37 37 average loan ammount of $250,000 Purchase 46 45 47 42 41 40 Loan production personnel expense $4,423 All 48 46 45 41 40 39 Loan production direct labor expense at 60% $2,659

Source: Ellie Mae Origination Insight Report, Sept. 2013 Sources: MBA’s Q2 2014 Quarterly Mortgage Bankers Performance Report, The Wake eld Company

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The Infrastructure Predicament

From 2003 through 2009, our trans- Bill Legacy: Terry, I agree with you- action velocity averaged 15 days from “The mortgage but every time we explore options, we application to closing for refinance trans- are faced with evaluating the capabilities actions and 24 days for purchase money industry has a of the traditional loan origination system transactions. After a few seconds of si- [LOS] vendor community. Something is lence, he asked if we understood the im- structural problem missing. What is it? pact of transaction velocity on revenue Drew Smart: Ditto. Where can we and customer service. that relates directly turn? Our chief financial officer responded Terry Wakefield: Before we go down that the current, much slower transac- to an outdated that path, let me take control of the We- tion velocity has reduced our annual per- operational bEx and show you Figure 3-the infrastruc- transaction revenue by approximately 50 ture collapse. percent. The director sat stunned. infrastructure.” This dives a little deeper into Drew’s Another director asked how this re- first figure. Like Drew, we subscribe to the duction in transaction velocity impacted Terry Wakefield Mortgage Bankers Association’s [MBA’s] our customers’ perception of our service Quarterly Mortgage Bankers Performance levels. I produced a report that showed Report. only 60 percent of borrowers we gave Historically, loan production direct la- mortgages to within the last 12 months re- bor expense represents approximately 60 sponded that they would come back to us percent of loan production expense. But, for their next mortgage. The board chair- in first-quarter 2014, the industry reached man and founder of our firm rose to his feet and barked in his a historic high of $3,315 per closed loan. In second-quarter Southern drawl, “Houston, we have a problem.” 2014 things improved, but loan production direct labor costs Bill Legacy: Drew, I hate to admit it, but the declining prof- remain over $2,600 per closed loan. it-I mean, growing losses- in our mortgage operation caused a This stunning statistic points to the industry’s fundamen- similar experience at our board meeting two weeks ago. I did tal infrastructure problem. Humans continue to orchestrate not present the same slides that you did, but I was told to have the work. Since 2003, we have conducted detailed process a plan in place to restore profitability to the mortgage opera- architecture analysis in 34 different loan production environ- tion within the next six weeks or the topic is going to shift to ments representing all channels of origination. While there is exiting the mortgage business. a perception that individual lenders have some form of ‘secret It didn’t help that I had to report we had just finalized a set- sauce’ that drives their respective loan production environ- tlement in the amount of $220 million with the Federal Hous- ments, our experience demonstrates just the opposite. ing Finance Agency [FHFA] for mortgages delivered to Fannie All lenders preform the same tasks, but not necessarily in Mae in the period of 2005 to 2008. the same order or by workers with the same titles. Lets face Our chairman remarked we are now officially a member of it–for the past several years, more than 90 percent of all mort- the “club” that has paid over $120 billion–and rising–in buy- gages have been purchased or securitized by government-spon- backs, legal fees, settlements and fines to various regulators sored enterprises [GSEs] Fannie Mae, Freddie Mac or insured and secondary market investors. He asked if this is the end of by the Federal Housing Administration [FHA]. So, if 90 percent our exposure. I could not reassure him. end up with the GSEs or FHA, one would think that a common Terry Wakefield: Bill and Drew, I can assure you that you manufacturing process would exist to produce mortgages in are not alone. We hear stories like yours every day. Some ex- the United States, and that platform would significantly reduce ecutives blame the Consumer Financial Protection Bureau production costs over time. [CFPB] and/or FHFA. Some blame the inevitability of volume Bill Legacy: Terry, I think I know where you are headed. cyclicality. Others blame government policies that encouraged A few weeks ago, I had a three-hour meeting with our COO, the extension of credit to people who could not possibly repay and we met informally with 20 of our most experienced loan their mortgages. Others blame greedy loan officers and unscru- production personnel. They were honored we would take time pulous third-party loan originators. to have a frank discussion on how they did their jobs and what There is no question that the subprime crisis was fed by a we could do to make them more effective. chain of greed that permeated the entire spectrum of mortgage After an hour or so, light bulbs started going on. It was lending and servicing, but playing the blame game ignores the clear that each of these capable individuals had their own real problem. workarounds to overcome the deficiencies of the systems they Drew, your director is correct. The mortgage industry has a use to produce loans. These workarounds take the form of Post- structural problem that relates directly to outdated operational it® notes on computer screens, notebooks in desk drawers or, infrastructure. Fortunately, a small but growing number of worst of all, memorized tasks that reside in their respective lenders are facing facts and admitting that their current infra- minds. We have 220 people in this particular production envi- structure is to blame and must be reconfigured if they are go- ronment. I finally asked the audience: “Do we have 220 differing to prosper in this business. ent processes in place?” They all agreed.

50 PIPELINE - January 2015 The Infrastructure Predicament

Terry Wakefield: Bingo! Bill, you just “How is it possible what we refer to as the INPLOREtm Task hit the nail squarely on the head. How is to control costs, Level Database. INPLORE now contains it possible to control costs, ensure compli- detailed information on more than 3,700 ance and deliver great customer service ensure compliance specific loan origination and production when you have 220 undocumented and tasks. Using INPLORE in collaboration unsanctioned processes in place? It’s im- and deliver great with your production managers and su- possible. pervisors, it is possible to create what we Drew Smart: Terry, you and I have customer service refer to as an optimized production time had this discussion before. Lenders do when you have 220 summary [OPTS]. It is critical that senior not think of themselves as manufacturers. compliance personnel are involved in this We tend to obsess over the complexities undocumented effort to ensure that the OPTS output rep- of mortgage lending rather than focusing resents a compliant, optimized produc- on the common attributes of loan produc- and unsanctioned tion environment. tion. We’re always emphasizing increased Documenting the optimized state focuses market share and topline revenue growth. processes in place?” on three objectives: It sounds like we need to shift greater fo- c Removing non-value-added activities. cus to process definition and technology Wakefield We often hear frustration regarding work- that can execute a uniform, well-defined ers checking and rechecking the work per- process. formed by others. Terry Wakefield: Let me offer a relevant quote from Bill c Improving workflow, consolidating job functions and elimi- Gates here. He said, “The first rule of any technology used in nating functional divisions of labor. Functional divisions of a business is that automation applied to an efficient operation labor create expensive bottlenecks in cyclical industries like will magnify efficiency. The second is that automation applied mortgage lending. to an inefficient operation will magnify the inefficiency.” c Defining tasks that can be automated through deployment That absolutely nails it. I cannot recount how many times of software components not available in traditional loan origi- we have witnessed lenders applying technology to an ineffi- nation systems. cient process. The outcome is as predictable as Gates’ quote- Definition of an optimized process includes task level metrics inefficiency magnified. similar to those used to define the current state. That is, the Bill Legacy: OK, I am not going to quibble with Bill Gates. OPTS describes: the human or system that performs the task; But I have six weeks to convince my board that we should stay the impact of fallout; task frequency; adjusted task time; and in the mortgage business. Let’s talk about an action plan that adjusted task cost. will make the case resonate. Upon completion of process optimization, the number of Terry Wakefield: The first thing to do is to use proven tools tasks performed in the loan production environment is typi- to define the current state in your loan production environ- cally reduced to a range of 110 to 130 tasks-down from 300 to ment. You’re already off to a good start based on your three- 350 in the current state. Of those 110 to 130 tasks, somewhere hour meeting. I would involve those 20 people you have al- between 40 percent and 50 percent are automated, meaning ready gathered and break them into their respective functional that the task count performed by humans is reduced from 300 divisions of labor. Interview them to find out; 1) the names of to 350 down to 55 to 78 tasks. Direct labor production costs are the tasks currently performed; 2) who performs the task; 3) reduced to a range of $550 to $650 per closed loan, depending when pipeline fallout occurs; 4) how frequently the task oc- on the production channel. curs; 5) the calculation of adjusted task time to the fraction of Drew, in your case this would produce a savings of $2,150 a minute; and 6) the calculation of task cost to the penny. to $2,250 per closed loan. So, if you are closing 20,000 loans My guess is that after three to four weeks, you will have per year, you will realize direct labor cost savings of more than concurrence from these 20 people that there are currently 300 $40 million annually. to 350 different tasks taking place in the current state. These Drew Smart: You definitely have my attention. tasks result in a direct labor cost of approximately $2,600 per Bill Legacy: Mine, too. So, how does this process architec- closed loan. ture optimization work translate to automation? Once current-state definition is completed, you will have a Terry Wakefield: That’s the $64,000 question. Once the op- valuable baseline of direct labor cost data that you can use to timized state is defined at the task level, it must be thoroughly conduct return on investment [ROI] analysis on the technology documented at a step level. Think of tasks as defining what investments necessary to achieve an optimized state. work must be performed and steps as describing how each Drew Smart: Terry, I am confident that we already have a task is performed. Documenting step-level descriptions of task good handle on our loan production direct labor cost. Our cur- performance is hard and unglamorous work. rent direct labor loan production expense is right around $2,800 Bill Legacy: How is this possible, given the variability that per closed loan. Can we bypass this first step and move on? surfaces as loans are produced? Terry Wakefield: Sure. Each time we have analyzed a Terry Wakefield: That’s a great question, Bill. Task-level loan production environment, we have stored the output into detail addresses this variability by defining required tasks

January 2015 - PIPELINE 51 The Infrastructure Predicament

that apply to all loans and random tasks “The LOS needs Drew Smart: The last word I would that occur on an unscheduled basis or are use to describe our loan production envi- required based on loan-specific circum- to be demoted ronment is agile. We are very dependent stances. Variability is a reality in most in importance so on our LOS vendor to effectuate change, manufacturing processes. The next time and it costs us a lot of money. Have you you’re on the freeway, focus on the vari- that the software had direct experience using business rules ability of cars you see. Managing this vari- management software? ability requires human definition of an components...enable Terry Wakefield: We recently com- optimized manufacturing process and a pleted a project for a retail mortgage lend- heavy dependence on technology. automated work er to build a prototype with one of our Bill, to answer your question about au- business partners. In a matter of days, one tomation, think of task-level detail as the orchestration.” of our senior process architects authored sheet music that allows best-of-breed tech- Wakefield hundreds of rules to automate dozens of nology components to automate work or- mundane tasks contained in task-level de- chestration and eliminate human interfer- tail. No programmers were required-just a ence with the optimized process. Because gifted process architect with an intuitive task-level detail defines the optimized process down to the step understanding of business logic as defined in task-level detail. level, it also serves as the training manual for new employees Bill Legacy: I get the concept of extracting business logic and those who want to improve their value to the enterprise by from a hard-coded application. In fact, our head of IT met with learning cross-functional skills. Thus, task-level detail ensures a BRMS vendor at the last MBA technology conference, and he that there is no disconnect from what workers learn and how was impressed. Let’s hear more. they actually perform their work tasks. Terry Wakefield: The next software component is busi- Bill Legacy: So, task-level detail is the “code” that drives ness process management software [BPMS]. All commercially software performance. What are these software components available BPMS vendors deploy process-mapping tools to cre- that are not typically imbedded in an LOS? ate process maps that drive automated work orchestration. Terry Wakefield: Before I describe those software compo- Going back to the prototype project, we took six tasks in nents, let me emphasize that current LOSes do perform many task-level detail and used a leading BPMS vendor’s process- functions very well. They have solid product and pricing en- mapping tool to create a process map for each of the six tasks. gines, most are effectively integrated with settlement services Using easy-to-use click, drag and drop functionality, the same providers and documentation preparation firms, and they process architect I referred to earlier completed the six process can all ingest output from point-of-sale systems used by loan maps in two days. Again, no programmers involved. originators. So, I am not suggesting that you replace your LOS. Drew Smart: What do you mean by automated work or- However, the LOS needs to be demoted in importance so that chestration? the software components I am about to describe enable auto- Terry Wakefield: Simply stated, BPMS pushes work tasks mated work orchestration. to the right worker at the right time. Workers do not request Drew Smart: I am happy to hear that, because we just tasks; tasks are pushed to workers as the BPMS engine deter- spent a lot of money changing our LOS. mines when a task needs to be performed. Each time a task is Bill Legacy: We did the same last year-and to be honest, pushed to a worker, the worker’s performance is monitored in we have not experienced the productivity gains we expected. real time per the metrics in the OPTS and task-level detail. If Terry Wakefield: Bill, we hear your message from a lot of a worker has not performed a specific task in a while and is lenders. Getting back to Bill Gates, no technology will improve unsure of the steps to follow, each task pushed to a worker is an inefficient process. accompanied by a link to that task’s task-level detail. So, there Bill Legacy: So, let’s talk specifics. is only one source that guides each worker’s performance-the Terry Wakefield: Before I describe these software compo- BPMS process maps that emanate from task-level detail. If a nents, I should mention that they are all commercially avail- task is not in task-level detail, it cannot exist in the production able and have proven their value in many industries. Inexplica- environment. bly, they are not prevalent in the mortgage industry. Bill Legacy: So, the problem of having 220 different pro- The first of these is business rules management software cesses disappears? [BRMS]. Traditionally, business rules have been hard-coded di- Terry Wakefield: Exactly, Bill-but let me go further. As rectly into applications, like an LOS. Business logic is the most certain tasks designated by compliance or management are volatile aspect of a business application; however, the pains performed, BPMS triggers automated internal and/or exter- of maintaining rules in application code have become more nal communication through a set of management-prescribed obvious and significant as the pace of business demands more alerts, escalations and scripted messages. The time-stamping of agility. Agility requires that you externalize business rules logic tasks, the tracking of worker performance and the monitoring and manage this logic in a way that is easy to build and easy of task outcome creates an audit trail of all task performance to integrate as decision services while still meeting your enter- in the production environment. This level of auditability is pre- prise performance and scalability demands. cisely what the industry needs in order to proactively respond

52 PIPELINE - January 2015 The Infrastructure Predicament

“The tension to the demands of the CFPB and other regulatory agencies. So, in concert with BPMS, ECMS en- between mortgage Drew Smart: We have our first CFPB exam in two months, ables a borrower-specific virtual loan file and we are more than a little nervous. that includes an audit trail of- lenders and Terry Wakefield: That’s a good segue to the third critical c all of the approximately 4,000 dis- software component- enterprise content management soft- crete data elements aggregated dur- secondary market ware [ECMS]. To deal with the avalanche of paper received ing the loan origination and produc- from external sources and produced internally, we advocate tion process; lenders is totally establishing a document management center [DMC]. It would c the performance of all tasks con- unconstructive and focus on digitizing all data received from external sources us- tained in a task-level detail, including ing ECMS and depositing all digitized data in a borrower- spe- the system or worker who performed has imposed an cific virtual loan file. the task, task duration, task cost, task Based on our experience, there are approximately 4,000 outcome and task- specific alerts, esca- expense of more discrete data elements in a closed loan file. Advances in ECMS lations and messages; have made it possible to extract those 4,000 discrete data ele- than $120 billion ments from the documents they reside on, and deposit those c all internal and external communica- data elements into the virtual loan file along with an image of tion, including voice, email, text mes- on the residential all external and internally produced documents. sages and social media interactions mortgage industry.” Bill Legacy: Wait a minute. Are you suggesting that we that occurred during the loan origina- process all of our loan transactions electronically? Is that even tion and production process; Wakefield legally possible? c all documents received from the bor- Terry Wakefield: E-SIGN [Electronic Signatures in Global rower and other external sources, and and National Commerce Act] legislation enacted in 2000 per- all documents produced internally, mits a lender to conduct a mortgage transaction in a purely including federal and state-specific disclosures and time electronic fashion, provided that the borrower consents. The stamps of when all documents were delivered to the bor- way communication patterns are changing, I am convinced rower; and that a growing percentage of borrowers will consent to an elec- c all secondary market transaction documentation and, if tronic transaction versus the painful fulfillment experience you also service loans, all loan servicing and loss-mitigation that currently plagues the industry. transaction data. Drew Smart: So, we may need two fulfillment environ- ments-one that caters to borrowers who consent to an electron- Basically, the virtual loan file provides 100 percent data ic transaction and another for those who don’t. transparency of the entire loan life cycle. This is profound Terry Wakefield: You’re right, but I would look at it with compared with today’s environment, where loan-level data is a different twist. You already have the non-electronic environ- trapped in myriad systems and databases. ment. Why not launch a greenfield project to build the elec- Now, the coup de grâce. The virtual loan file allows sec- tronic environment, and expand it as more borrowers consent? ondary market investors to conduct their quality control of You can control the expansion of the electronic environment loans prior to the funding of the loan by the lender, basically by inviting borrowers as electronic capacity scales. I’d bet that eliminating buyback exposure. The tension between mortgage within three years, you’ll be processing more loans in the elec- lenders and secondary market investors is totally unconstruc- tronic environment than in the current one. tive and has imposed an expense of more than $120 billion Bill Legacy: Terry, I have to get to another meeting in 15 on the residential mortgage industry. The technology exists to minutes. Can we wrap this up? dissipate this tension and re-establish trust through the deploy- Terry Wakefield: Sure, Bill. Let me conclude. ment of best-of-breed technology. Assuming the borrower consents to an electronic mort- Drew Smart: Pardon my skepticism, but do you have any gage process, let’s look at the consequences. The DMC’s role additional information you can send me and our COO that in digitizing all external documentation received from the bor- goes into greater detail? If you do, and it validates this call, rower, and storing the images and extracted relevant data from we’ll want to meet with you soon. those images in a borrower-specific virtual loan file, prevents Bill Legacy: Terry, send it to me as well. any paper from entering the loan production environment and Terry Wakefield: I’ll send you both a PowerPointTM deck enables a paperless workflow. Production workers have access later today. Thanks for your time today. I really appreciate it. only to the virtual loan file as tasks are pushed to them. BPMS provides access to only that segment of the virtual loan file that Terry Wakefield is chief executive officer of The Wakefield is relevant to the task the worker receives. Company LLC, Mequon, Wisconsin. He can be reached at twake- Best-of-breed ECMS continually populates the virtual loan [email protected]. file with images and data extracted from external documents and all documents produced internally during the loan pro- Copyright 2014 Mortgage Banking(R) Magazine & Mort- duction process. BPMS continually updates the virtual loan file gage Bankers Association, All Rights Reserved., Reprinted with with data on worker task performance. permission

January 2015 - PIPELINE 53 Get out of mortgage hassles

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ACUMA_8.5x11_Light_bulb_12-23-14.indd 1 12/24/14 8:47 AM Market Share

Market Share– Credit Unions Are Holding On! Tracy Ashfield This time last year I talked about mortgage loan market As you review the Top 300 ranking report and historic share for credit unions and the pride that went with seeing it share, take a look at how the share of ARM loans has increased climb to 6.5% at the end of third quarter 2013. The question I in 2014. It hasn’t topped 15% since 2006, when I suspect the posed is, would credit unions be able to hold on to that share in increase was driven by interest rates. 2014? We knew we wouldn’t be riding the refinance wave, and What is at work this time? I believe much of current ARM the share would instead have to be earned with purchase loans. lending involves loans that don’t meet the Qualified Mortgage Well, it feels great to be here in January 2015 and know the requirements. We continue to hear that most credit unions share didn’t just stay stable, it grew. As of third quarter 2014, are committed to making non-QM loans, but the absence of a credit union market share had grown to 8%. secondary market causes liquidity concerns. I have seen some Impressive. And the credit goes to all the lenders who devel- amazing niche ARM products this year. Kudos to the credit oped purchase money business plans. For some it was a focus unions working hard to meet the needs of members that might on professional development: recruiting sales leaders and creat- otherwise fall outside the QM box! ing compensation plans that motivated folks to get out there I suspect in the near future we won’t have to speculate and ask for the business. For others it was creating niche prod- about non-QM statistics. Why? Today the NCUA 5300 call ucts designed to help first-time homebuyers achieve their dream report is noticeably silent on the topic of QMs. My guess is, of home ownership. I also watched credit unions tighten their before too long we’ll see Schedule A amended to address non- belts and work to develop operational efficiencies to ensure they QM lending. More to report, yes, but if the reporting require- could offer competitive pricing. Many used a combination. One ments change, we may have more than anecdotal information thing for sure: lenders networked, rallied together and stay de- on non-QM lending. Stay tuned. termined to be their members’ choice for home loans.

Credit Union 1st Mortgage Market Shares 1989 - 2014 9%

0% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sep 2014 Sep

January 2015 - PIPELINE 55 Market Share

Credit Union market share didn’t just stay stable, it grew. As of third quarter 2014, CU market share had grown to 8%.

Credit Union 1st Mortgage Market Shares Detail 1989 - 2014 CU Share Credit Union 1st Mortgages Total U.S. Residential (MBA) of Total U.S. Year $ Granted (Blns) % ARMs # Granted (000’s) Average Mort Orig (Blns) Originations 1989 6.4 107 59,813 453 1.41% 1990 6.2 100 62,000 458 1.35% 1991 7.5 118 63,559 562 1.33% 1992 16.5 236 69,915 894 1.85% 1993 19.5 281 69,395 1,020 1.91% 1994 13.3 204 65,292 769 1.73% 1995 10.00 149 67,204 639 1.56% 1996 15.60 207 75,508 785 1.99% 1997 17.30 216 80,056 834 2.07% 1998 31.90 360 88,734 1,656 1.93% 1999 28.00 308 91,027 1,379 2.03% 2000 20.60 216 95,415 1,139 1.81% 2001 46.60 421 110,794 2,243 2.08% 2002 62.30 523 119,187 2,852 2.18% 2003 88.23 18.37% 719 122,666 3,810 2.32% 2004 57.20 16.55% 422 135,501 2,772 2.06% 2005 60.44 14.79% 408 148,309 3,027 2.00% 2006 54.44 15.16% 360 151,425 2,726 2.00% 2007 60.31 12.54% 363 166,163 2,307 2.61% 2008 70.29 12.50% 412 170,713 1,509 4.66% 2009 95.01 8.20% 574 165,620 1,995 4.76% 2010 84.51 8.45% 510 165,802 1,572 5.38% 2011 82.55 8.86% 513 160,994 1,262 6.54% 2012 124.08 6.59% 742 167,169 2,044 6.07% 2013 120.54 9.32% 702 171,724 1,845 6.53% Sept ‘14 68.10 15.55% 389 174,999 844 8.07%

56 PIPELINE - January 2015 The Top 300

The Top 300 – Leading the market share charge

Top 300 First Mortgage Granting CU Market Share as of September 30, 2014 $ Originated # Originated $ Outstanding 1st Mortgages 1st Mortgages 1st Mortgages $ Sold (Fixed & Adjustable) (Fixed & Adjustable) (Fixed & Adjustable) 1st Mortgages Top 300 1st Mortgages Originated CUs 52,592,185,603 253,116 197,886,047,256 17,714,480,218 All Originating CUs (3,359 CUs)* 68,104,522,773 389,165 289,017,116,438 22,187,986,355 Top 300 Share 77.2 65.0 68.5 80 *CUs who granted $10,000 or more 01/14 - 09/14

Top 300 First Mortgage Granting CU as of September 30, 2014 $ Originated # Originated $ Outstanding Name of 1st Mortgages 1st Mortgages 1st Mortgages $ Sold RE Loans Sold State Credit Union (Fixed & Adjustable) (Fixed & Adjustable) (Fixed & Adjustable) 1st Mortgages but Serviced by CU 1 VA Navy $5,574,302,908 23,464 $19,332,762,669 $2,025,910,046 $19,915,180,751 2 VA Pentagon $2,989,833,137 7,327 $10,285,450,847 $285,301,163 $4,416,976,855 3 NC State Employees’ $2,158,851,575 14,445 $12,939,098,631 $1,419,889 $254,774,509 4 CA Kinecta $1,655,356,538 3,723 $1,713,682,947 $1,169,812,370 $3,343,849,160 5 CA First Tech $1,001,455,835 2,695 $2,721,966,081 $248,633,732 $2,669,786,623 6 MI Lake Michigan $903,173,498 6,602 $1,665,180,706 $748,256,435 $4,728,863,300 7 WA BECU $807,704,721 3,289 $3,117,412,076 $243,380,172 $3,531,400,523 8 AK Alaska USA $784,119,817 3,231 $633,319,943 $683,467,289 $4,495,209,832 9 OH Wright-Patt $702,924,185 5,572 $489,414,596 $260,197,948 $2,875,346,614 10 NY Bethpage $653,093,475 2,183 $2,022,945,238 $241,427,738 $3,274,976,134 11 CA San Diego County $637,582,750 1,681 $2,823,135,274 $70,083,524 $703,169,352 12 CA Logix $554,874,480 1,540 $1,833,941,120 $111,502,921 $941,550,267 13 CA Patelco $492,528,672 1,286 $1,599,409,743 $89,770,654 $1,086,504,548 14 CA SchoolsFirst $463,507,385 1,553 $2,153,474,185 $66,742,207 $1,665,393,366 15 UT Mountain America $450,324,118 3,380 $1,314,679,379 $168,245,284 $1,206,202,628 16 ID Idaho Central $428,769,154 2,712 $556,178,205 $261,497,914 $862,390,732 17 CO Elevations $425,110,881 1,597 $467,855,631 $265,815,971 $1,532,149,717 18 UT America First $422,859,914 4,312 $766,032,587 $225,665,249 $2,221,068,018 19 OR OnPoint Community $409,169,083 3,752 $922,659,344 $148,523,066 $1,148,434,744 20 TX Security Service $399,347,524 2,113 $1,005,504,130 $68,707,919 $91,716,488 21 MA Digital $396,656,410 1,266 $2,077,108,970 $120,050,329 $1,055,055,354 22 IL BCU $373,479,171 1,791 $841,742,634 $197,469,437 $1,694,454,748 23 TX Randolph-Brooks $370,411,024 1,942 $1,713,957,268 $25,675,803 $297,974,354 24 TX University $370,010,325 1,357 $612,089,671 $218,624,781 $98,346,807

January 2015 - PIPELINE 57 The Top 300

25 WI Community First $357,922,599 2,781 $1,191,174,837 $6,780,100 $5,206,569 26 WI Summit $356,643,109 2,173 $833,640,273 $131,124,718 $1,404,681,461 27 CO Ent $345,035,105 1,889 $1,466,170,097 $35,724,406 $680,486,548 28 NC Coastal $339,231,638 1,031 $901,046,518 $141,723,919 $1,118,941,618 29 WI Royal $325,934,448 1,440 $629,614,042 $120,193,025 $1,539,435,683 30 CA Chevron $310,112,869 994 $1,684,154,321 $0 $21,838,463 31 WI University Of Wisconsin $308,986,333 1,759 $309,634,575 $211,584,000 $1,147,534,919 32 WI Landmark $306,014,432 2,097 $849,917,667 $174,345,769 $1,565,361,787 33 IL Alliant $302,681,590 512 $3,570,937,067 $25,567,394 $196,458,768 34 PA Citadel $295,956,646 730 $858,051,184 $30,880,887 $347,694,914 35 IL CEFCU $293,437,067 1,599 $2,123,639,848 $0 $120,482,777 36 CA The Golden 1 $284,798,889 1,168 $1,568,905,470 $10,491,559 $392,643,311 37 IA University Of Iowa Community $282,211,835 1,704 $1,237,166,236 $207,770,855 $121,781,643 38 MO CommunityAmerica $279,290,771 1,463 $587,863,787 $250,370,142 $1,359,957,343 39 GA Delta Community $269,155,707 1,296 $1,348,853,492 $26,408,599 $297,409,014 40 AZ Desert Schools $268,563,442 1,816 $430,097,263 $257,127,137 $1,618,011,287 41 DC Bank-Fund Staff $266,209,179 554 $1,734,560,556 $24,131,495 $457,336,307 42 CA Premier America $265,547,963 340 $908,872,118 $8,953,250 $233,072,609 43 CA Star One $259,301,662 724 $2,429,702,821 $0 $12,232,895 44 WA WSECU $259,121,690 824 $435,349,572 $81,426,588 $1,281,810,257 45 CA Mission $251,043,300 656 $695,126,493 $58,838,450 $784,529,102 46 CA KeyPoint $247,078,789 367 $374,579,125 $163,877,653 $167,681,588 47 FL VyStar $240,013,263 1,720 $1,844,053,552 $52,168,265 $298,127,237 48 TN Eastman $232,732,568 1,875 $1,448,532,391 $206,917 $7,271,034 49 NY State Employees $231,114,744 1,762 $662,619,564 $114,046,372 $1,233,765,593 50 NC Local Government $218,059,603 1,771 $400,483,237 $150,321,720 $0 51 NY CAP COM $216,485,688 1,415 $530,006,489 $78,099,252 $765,585,074 52 CA Provident $213,770,660 484 $743,978,493 $76,196,110 $1,180,144,491 53 FL GTE Financial $213,765,548 1,243 $362,632,136 $183,153,895 $1,379,566,637 54 WI Altra $211,117,044 1,231 $385,093,220 $107,814,405 $810,348,491 55 FL Suncoast $209,011,803 1,614 $1,748,498,880 $3,919,843 $408,136,363 56 CA California $208,438,758 477 $430,360,979 $57,785,436 $591,864,289 57 NY Visions $207,687,500 992 $1,210,715,010 $5,935,818 $79,666,808 58 CA Evangelical Christian $207,578,046 61 $681,882,558 $134,690,777 $1,193,362,970 59 CO Bellco $205,062,178 1,055 $761,932,904 $49,917,401 $521,950,086 60 TX Advancial $204,058,161 592 $433,702,080 $89,608,196 $296,826,178 61 CA Redwood $197,811,650 611 $952,922,004 $73,616,600 $557,106,579 62 CA Xceed Financial $193,050,351 371 $535,815,497 $9,571,812 $66,598,954 63 VT New England $192,228,939 1,041 $462,634,825 $122,863,746 $1,242,459,348 64 CA Stanford $185,732,758 269 $676,115,216 $40,855,687 $468,193,408 65 OR Advantis $182,776,538 694 $371,314,401 $85,992,447 $629,225,901 66 CA Wescom $180,985,040 577 $759,401,332 $61,259,850 $1,211,378,033 67 NY Teachers $180,844,132 689 $1,099,209,937 $48,487,007 $1,298,305,151 68 NY Hudson Valley $179,536,450 903 $694,127,028 $90,235,671 $1,249,458,004 69 TX TDECU $176,222,875 1,308 $715,164,681 $102,611,995 $306,398,565 70 IA Veridian $174,964,640 1,188 $742,326,598 $55,399,161 $584,820

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71 PA Police And Fire $174,789,217 1,078 $1,373,326,453 $43,019,692 $511,384,762 72 CA Firefighters First $172,687,196 393 $530,769,838 $6,483,465 $118,591,954 73 AZ Arizona State $172,021,667 810 $511,304,049 $76,361,100 $623,246,612 74 TX American Airlines $165,845,490 869 $1,842,505,058 $0 $6,786,205 75 CA Technology $162,976,107 240 $606,078,361 $6,821,883 $176,865,519 76 IN Forum $161,189,818 804 $304,066,770 $91,530,159 $638,967,971 77 MN Wings Financial $152,413,846 706 $595,731,515 $55,397,179 $394,576,240 78 NV One Nevada $152,226,396 801 $162,879,938 $121,598,605 $174,816,666 79 CA NuVision $151,138,213 439 $462,129,905 $67,990,386 $449,010,628 80 PA Members 1st $150,249,206 1,025 $574,912,012 $69,420,579 $0 81 CA SAFE $148,523,511 609 $520,394,449 $87,168,933 $612,775,134 82 UT Goldenwest $147,399,135 777 $283,623,180 $88,994,932 $222,107 83 WI Westconsin $145,204,454 1,406 $372,214,497 $89,565,130 $766,241,025 84 CA Travis $141,177,386 595 $375,070,830 $54,294,659 $297,466,672 85 CA Financial Partners $140,497,658 348 $395,121,612 $49,026,706 $555,177,118 86 CA California Coast $139,171,938 478 $554,207,039 $40,560,397 $52,593,044 87 VA Northwest $139,094,300 518 $396,331,698 $108,978,279 $1,466,059,667 88 MN TruStone Financial $136,138,264 708 $285,404,142 $100,052,326 $369,056,731 89 MI Michigan State University $134,543,213 878 $760,986,305 $341,295 $0 90 IN Teachers $134,390,711 630 $835,020,274 $2,048,859 $4,038,591 91 CA Orange County’s $134,389,247 523 $446,421,745 $38,963,867 $283,019,064 92 MD SECU of Maryland $133,533,275 648 $1,035,999,604 $76,663,000 $812,636,345 93 RI Navigant $131,886,338 600 $797,877,952 $23,272,372 $146,543,896 94 MI DFCU Financial $130,554,703 794 $675,738,883 $95,050,369 $447,050,707 95 MD NASA $128,428,813 332 $421,324,929 $29,793,859 $16,962,584 96 IA Dupaco Community $124,498,862 883 $279,377,205 $61,132,890 $561,616,350 97 RI Pawtucket $122,171,700 754 $1,040,283,827 $10,091,722 $211,895,493 98 CA Partners $121,686,259 442 $404,089,776 $44,492,090 $520,806,048 99 ND Town and Country $119,907,028 543 $155,135,237 $72,198,471 $0 100 MI United $119,819,893 567 $717,176,771 $27,843,291 $64,556,914 101 VA Apple $119,797,907 294 $629,643,038 $46,003,434 $275,250,044 102 IN Purdue $119,257,630 563 $374,353,678 $58,092,114 $413,309,032 103 GA Georgia’s Own $117,560,600 453 $411,887,936 $17,887,023 $70,017,900 104 NY United Nations $117,273,543 322 $1,017,950,593 $9,160,840 $74,655,816 105 WA Spokane Teachers $116,195,841 689 $812,279,840 $8,535,016 $176,991,113 106 IA Collins Community $114,932,270 721 $321,942,469 $33,018,325 $0 107 UT Utah Community $113,199,986 609 $191,575,967 $74,508,344 $65,832,698 108 CA San Francisco Fire $111,510,242 258 $380,422,082 $24,633,300 $258,284,442 109 WI Covantage $110,689,920 1,080 $526,296,836 $13,293,153 $149,957,845 110 IN Beacon $109,926,388 350 $596,022,182 $0 $0 111 TX Navy Army Community $109,316,869 872 $791,878,000 $0 $0 112 WA Whatcom Educational $108,833,546 511 $538,200,946 $72,379,161 $364,985,803 113 IN Eli Lilly $108,826,954 554 $326,156,760 $32,503,684 $0 114 NY Self Reliance New York $108,738,195 205 $647,977,524 $0 $0 115 VA Virginia $108,707,993 668 $510,795,812 $12,813,262 $180,444,215 116 NY ESL $107,305,000 723 $383,693,669 $70,280,902 $1,024,194,142

60 PIPELINE - January 2015 The Top 300

117 MN Central Minnesota $106,962,182 597 $349,173,730 $31,397,111 $132,864,379 118 NJ Affinity $106,796,505 341 $1,183,255,835 $5,187,972 $225,993,419 119 TN ORNL $106,779,596 751 $478,593,952 $45,154,750 $594,748,196 120 CA North Island $106,386,961 168 $434,949,317 $7,076,750 $140,760,399 121 IL Deere Employees $105,681,483 638 $333,814,134 $20,974,000 $0 122 NM Sandia Laboratory $104,118,564 388 $639,360,838 $4,321,625 $0 123 NC Truliant $103,128,205 748 $449,399,487 $15,064,630 $0 124 NY Nassau Educators $102,632,060 217 $566,103,400 $28,476,000 $318,492,412 125 NJ Polish & Slavic $100,894,970 420 $723,641,192 $8,411,129 $86,815,072 126 FL Fairwinds $99,205,199 661 $511,805,555 $1,945,740 $146,859,140 127 OK Truity $99,035,192 505 $159,588,349 $66,294,332 $444,161,431 128 WI Educators $98,965,847 922 $632,365,370 $9,291,219 $163,659,552 129 MA Jeanne D’Arc $98,650,042 256 $538,145,533 $33,313,029 $127,537,840 130 NY Sunmark $98,058,884 501 $138,797,935 $42,532,299 $0 131 IL Great Lakes $96,099,864 284 $170,849,907 $38,520,631 $166,299,426 132 CA Meriwest $95,165,672 149 $339,158,478 $142,385,850 $812,491,068 133 MD Tower $95,120,265 399 $462,419,140 $59,358,919 $1,113,486,188 134 CT American Eagle $94,615,997 436 $413,539,088 $19,082,062 $298,630,444 135 TX GECU $94,031,120 973 $409,515,346 $42,043,090 $275,151,481 136 CT Charter Oak $93,839,835 606 $487,896,605 $16,990,490 $117,449,753 137 CA Western $93,637,186 292 $585,317,777 $27,274,760 $312,227,176 138 WI Capital $91,905,240 905 $461,862,887 $8,272,866 $165,297,390 139 NH St. Mary’s Bank $91,409,453 501 $280,262,279 $57,462,901 $398,736,989 140 WI Fox Communities $90,020,840 967 $614,612,505 $4,822,500 $62,366,417 141 AL Redstone $89,373,355 625 $381,293,986 $57,135,572 $677,778,631 142 MA Metro $88,202,221 302 $444,710,147 $42,098,705 $511,318,614 143 PA TruMark Financial $87,192,907 358 $482,481,835 $37,092,211 $406,776,586 144 WI Marine $87,068,581 1,100 $206,137,393 $57,260,143 $575,610,813 145 FL Space Coast $86,334,805 503 $816,730,835 $41,140,415 $942,738,313 146 WA Numerica $85,592,147 481 $376,959,663 $30,938,067 $353,011,485 147 NY Melrose $84,849,149 102 $366,504,021 $0 $855,544 148 NM New Mexico Educators $84,499,445 462 $401,086,255 $41,653,144 $223,186,052 149 CA American First $84,493,434 212 $181,958,961 $26,764,500 $429,670,283 150 PA Pennsylvania State Employees $83,746,760 613 $444,986,710 $7,354,615 $262,817,931 151 NY Corning $82,737,758 549 $260,071,106 $26,113,816 $372,167,393 152 VA Langley $82,261,455 573 $291,903,102 $9,240,700 $129,941,073 153 OH Superior $81,380,015 812 $187,766,790 $56,729,487 $697,348,833 154 OK Weokie $80,585,723 411 $261,386,669 $4,812,939 $155,768,112 155 WA iQ $80,431,906 322 $133,927,782 $39,594,845 $50,514,968 156 VA State Department $80,428,141 237 $497,252,490 $43,546,725 $114,718,262 157 AL APCO Employees $79,933,286 489 $400,291,885 $0 $0 158 MN Affinity Plus $79,769,830 533 $414,333,939 $148,365,600 $1,580,167,391 159 NY Empower $78,977,859 676 $218,237,636 $59,279,781 $426,944,446 160 FL Grow Financial $78,341,973 478 $528,672,979 $21,182,771 $140,534,735 161 TN Ascend $78,201,625 636 $515,846,982 $0 $0 162 NV Silver State Schools $77,859,620 319 $324,586,867 $20,600,610 $183,916,602

January 2015 - PIPELINE 61 The Top 300

163 WA Columbia $77,701,641 359 $326,618,081 $43,258,670 $153,631,391 164 MA Workers’ $75,468,900 332 $456,107,951 $25,082,711 $182,905,167 165 AZ Vantage West $74,094,022 311 $236,690,297 $7,970,660 $0 166 MN Mayo Employees $73,672,075 409 $103,493,551 $0 $0 167 WA Verity $73,566,587 337 $141,060,310 $41,757,000 $277,361,028 168 NE Centris $73,398,753 499 $175,910,116 $42,853,850 $238,416,823 169 MO Anheuser-Busch Employees $73,098,804 395 $377,986,859 $29,924,222 $299,534,247 170 CA First Entertainment $72,786,322 172 $330,787,097 $10,375,075 $97,853,454 171 SC Founders $71,566,933 2,279 $620,231,361 $0 $0 172 GA Robins $71,552,536 522 $303,041,763 $33,698,397 $266,156,176 173 FL MidFlorida $70,940,194 325 $607,628,484 $64,954,105 $386,949,160 174 VT Vermont State Employees $70,863,434 533 $262,120,570 $34,873,860 $346,172,812 175 CA Ventura County $70,515,751 222 $145,287,445 $12,730,223 $6,595,822 176 WA Gesa $70,041,544 403 $232,886,583 $26,817,724 $293,333,577 177 SD Dakotaland $69,848,548 670 $87,887,114 $19,730,914 $136,288,228 178 PA Franklin Mint $69,404,107 274 $201,772,643 $85,148,996 $402,533,443 179 KY L & N $69,081,157 501 $361,254,955 $1,267,011 $169,512,640 180 IN Centra $68,158,685 389 $306,850,625 $19,000,100 $152,701,004 181 NY CFCU Community $68,105,773 395 $378,915,647 $7,708,481 $167,880,025 182 CA SF Police $66,862,507 167 $298,900,804 $0 $0 183 MI Michigan Schools and Government $66,731,469 387 $463,906,363 $0 $7,883,672 184 MO First Community $66,723,612 441 $358,037,523 $8,735,307 $550,980,469 185 VA Dupont Community $66,635,066 436 $427,659,952 $12,610,247 $7,718,837 186 MT Whitefish $66,361,820 416 $546,493,728 $0 $0 187 FL Tropical Financial $66,303,761 254 $199,094,519 $31,615,658 $213,111,419 188 SC Sharonview $65,734,377 427 $489,558,989 $766,500 $16,892,449 189 MA Rockland $65,280,810 230 $366,170,790 $28,628,384 $125,572,037 190 CO Credit Union of Colorado $65,055,001 400 $242,378,843 $28,006,095 $130,791,430 191 CA Point Loma $64,983,961 147 $178,369,790 $0 $17,128,018 192 IN Indiana Members $64,692,092 416 $377,460,922 $18,813,005 $27,877,584 193 OR Unitus Community $64,260,186 311 $182,795,299 $41,022,128 $381,100,790 194 MA Greylock $64,071,611 359 $450,309,133 $22,043,459 $433,136,000 195 CA CoastHills $63,597,134 292 $325,002,501 $5,427,150 $98,290,555 196 PA American Heritage $63,514,807 313 $377,686,858 $104,454,144 $814,337,725 197 MI Community Financial $63,349,906 351 $251,544,712 $21,207,472 $197,061,420 198 OH General Electric $63,154,303 326 $389,361,064 $2,376,325 $0 199 NC Allegacy $61,945,153 408 $236,504,712 $34,935,995 $220,678,133 200 CA Christian Community $61,788,563 119 $431,872,718 $7,736,250 $84,145,793 201 IN 3Rivers $61,655,795 371 $235,576,953 $18,466,912 $216,416,990 202 AZ TruWest $61,055,172 221 $254,449,034 $25,174,341 $24,452,462 203 IN Evansville Teachers $61,050,976 587 $318,111,755 $15,824,040 $91,467,034 204 TX Shell $60,537,934 493 $133,493,289 $21,858,057 $99,599,789 205 NY AmeriCU $60,521,695 454 $262,428,904 $30,094,199 $226,825,308 206 DC Congressional $60,398,099 193 $193,004,421 $10,458,815 $0 207 FL Achieva $59,718,038 304 $210,545,833 $17,967,572 $128,675,519 208 OH Seven Seventeen $59,356,764 528 $278,922,164 $4,782,085 $0

62 PIPELINE - January 2015 The Top 300

209 CO Public Service Employees $59,332,604 307 $151,232,065 $33,151,543 $208,014,828 210 OK TTCU $59,329,265 434 $175,455,250 $39,110,797 $159,416,414 211 IN Indiana University $59,289,784 374 $325,449,975 $9,848,821 $15,178,881 212 CA USE $59,184,988 270 $242,357,579 $32,163,305 $131,028,897 213 OR Oregon First Community $59,038,269 365 $216,885,022 $25,487,614 $246,838,676 214 NE Liberty First $58,958,297 428 $60,255,168 $39,082,167 $0 215 MA St. Anne’s Of Fall River $58,825,768 253 $411,534,745 $22,548,731 $320,267,399 216 MI Lake Trust $58,724,671 360 $518,720,514 $0 $26,871,054 217 CA Southland $58,217,100 184 $155,312,491 $32,806,150 $122,538,658 218 WI Westby Co-op $57,807,525 496 $140,535,551 $9,121,903 $129,945,671 219 MA Harvard University Employees $57,633,117 149 $208,930,399 $12,411,988 $130,584,269 220 TX First Community $57,630,730 299 $175,984,858 $19,859,141 $89,606,693 221 WA School Employees Credit Union Of Washington $57,543,053 454 $109,427,602 $0 $0 222 UT Deseret First $57,309,310 291 $121,623,740 $33,077,100 $0 223 MI Genisys $57,258,715 339 $342,415,381 $4,961,244 $44,395,617 224 IL Abbott Laboratories Employees $56,843,299 264 $167,744,193 $21,027,900 $0 225 CO Westerra $56,841,571 290 $385,641,645 $13,363,906 $155,776,974 226 TX United Heritage $56,234,140 325 $306,524,992 $15,953,385 $2,851,007 227 WA TwinStar $55,845,518 309 $126,008,908 $53,234,157 $215,526,198 228 SD Black Hills $55,822,502 299 $278,884,936 $5,860,119 $0 229 TX Texans $55,646,533 414 $226,447,273 $10,111,373 $5,614,590 230 TX Austin Telco $55,472,843 302 $274,170,040 $0 $0 231 WI CitizensFirst $55,402,813 464 $317,284,176 $15,209,564 $141,698,497 232 FL Campus USA $55,120,620 510 $304,712,194 $12,578,975 $58,212,624 233 MA Align $53,730,115 200 $215,484,586 $16,421,180 $177,402,430 234 ND First Community $53,484,329 250 $190,283,376 $12,203,106 $0 235 IN Interra $53,241,244 304 $251,706,830 $2,592,405 $0 236 WA Solarity $52,825,742 343 $172,286,713 $32,358,162 $147,568,623 237 SC South Carolina $52,490,175 320 $353,486,774 $11,386,475 $115,095,563 238 WI Thrivent $52,319,850 383 $182,277,901 $29,678,746 $345,880,528 239 MD National Institutes of Health $51,321,703 155 $162,514,635 $24,366,115 $329,013,773 240 TN Knoxville TVA Employees $50,308,079 652 $401,476,435 $6,724,856 $0 241 TX Firstmark $49,850,574 483 $295,187,687 $0 $0 242 IA Community 1st $49,588,942 458 $233,244,966 $7,897,574 $0 243 WA Salal $49,526,776 147 $100,058,570 $26,931,381 $214,288,514 244 AL America’s First $48,897,448 440 $368,537,166 $5,879,220 $0 245 VA University of VA Community $48,674,930 417 $93,405,345 $19,930,342 $0 246 CO Aventa $48,625,417 188 $26,165,194 $47,376,980 $62,790,777 247 MI Educational Community $48,600,216 376 $184,513,706 $16,081,018 $103,646,566 248 MN Spire $47,926,975 344 $197,651,651 $21,769,439 $0 249 MN US $47,844,530 296 $295,324,159 $0 $0 250 NY Municipal $47,676,222 196 $569,844,013 $0 $34,666,985 251 CO Air Academy $47,571,043 237 $119,841,134 $32,266,380 $0 252 TX FirstLight $47,105,653 281 $212,633,882 $9,644,896 $86,924,435 253 HI Hawaiian Tel $46,973,750 113 $184,750,572 $12,632,250 $0 254 UT University First $46,942,845 383 $101,733,250 $23,752,600 $197,583,185

January 2015 - PIPELINE 63 The Top 300

255 MI Dow Chemical Employees $46,841,849 344 $357,380,430 $322,700 $24,418,932 256 VA Chartway $46,784,643 292 $255,957,833 $27,871,972 $103,845,682 257 KS Heartland $46,642,458 763 $92,080,510 $14,405,121 $0 258 AL Listerhill $46,380,207 1,156 $218,006,645 $1,104,916 $0 259 IA Linn Area $45,811,658 320 $82,726,888 $16,154,814 $0 260 OH KEMBA Financial $45,435,853 370 $257,406,426 $10,079,752 $17,623,535 261 NC Self-Help $45,387,550 323 $264,422,836 $0 $0 262 ID Potlatch No 1 $45,236,148 316 $85,094,391 $40,114,183 $281,347,949 263 MI Honor $44,736,439 454 $208,602,217 $19,765,600 $235,397,684 264 LA Campus $44,398,672 153 $165,355,390 $4,177,110 $0 265 TX Members Choice $44,040,238 115 $145,725,007 $0 $0 266 NH Service $43,910,281 232 $472,617,813 $0 $0 267 MO Missouri $43,882,158 400 $39,387,966 $35,091,452 $396,979,103 268 CA America’s Christian $43,658,712 86 $160,321,880 $442,500 $167,040,522 269 IL Selfreliance Ukrainian American $43,514,080 130 $186,930,525 $0 $0 270 TX A+ $43,467,298 313 $177,005,112 $5,697,516 $0 271 CA Credit Union of Southern California $43,384,820 115 $221,388,476 $5,324,575 $57,628,028 272 NY Island $43,380,400 178 $188,616,584 $10,605,300 $154,831,288 273 CA Los Angeles $43,315,131 159 $253,684,981 $1,317,100 $290,000 274 WA Global $43,244,337 273 $71,902,181 $31,501,848 $2,042,781 275 SD Sioux Falls $43,181,120 282 $13,741,879 $42,819,560 $0 276 CA Uncle $42,992,936 96 $101,592,437 $0 $0 277 OR Oregon Community $42,979,727 252 $204,692,780 $0 $0 278 CA Los Angeles Police $42,926,342 158 $247,124,086 $7,619,350 $200,029,613 279 OR Selco Community $42,850,482 181 $251,011,555 $0 $0 280 MA Hanscom $42,838,311 175 $221,255,866 $26,377,817 $231,844,655 281 FL Pen Air $42,823,561 250 $174,122,659 $7,624,285 $28,994,079 282 TX Texas Tech $42,810,016 263 $15,947,492 $35,355,356 $0 283 CA San Francisco $42,754,072 100 $292,537,245 $0 $0 284 WI Connexus $42,502,326 231 $181,565,402 $9,562,656 $30,926,690 285 OR Rogue $42,427,874 275 $196,191,939 $17,173,821 $3,485,436 286 CA Farmers Insurance Group $42,391,958 101 $187,446,890 $2,527,220 $0 287 CT Connecticut State Employees $42,247,717 351 $254,362,756 $0 $0 288 IL Consumers $42,214,093 220 $120,901,470 $16,909,498 $276,900,889 289 UT Cyprus $42,201,252 255 $125,530,762 $13,968,525 $0 290 VA BayPort $42,024,736 218 $395,401,148 $4,317,180 $0 291 NM U.S. New Mexico $41,893,524 220 $159,910,043 $10,955,749 $0 292 WA Sound $41,880,330 243 $196,548,356 $15,695,172 $0 293 IL IH Mississippi Valley $41,663,905 285 $163,103,899 $25,433,221 $322,893,726 294 NY USAlliance $41,499,326 77 $239,262,407 $10,691,888 $213,846,082 295 OR OSU $41,464,394 210 $176,089,396 $25,320,668 $227,336,691 296 CA Kern Schools $41,391,750 218 $317,527,693 $7,532,300 $238,681,745 297 MA St. Mary’s $41,019,587 170 $261,115,665 $15,011,072 $77,533,409 298 CA Educational Employees $40,995,311 320 $233,296,412 $0 $0 299 MA Merrimack Valley $40,959,914 178 $146,690,231 $10,930,381 $168,916,413 300 IA DuTrac Community $40,947,671 310 $202,622,323 $16,574,369 $0

64 PIPELINE - January 2015 “An exceptionally challenging mortgage industry demands THE RIGHT TOOLS.”

As fast as the mortgage industry is changing, so are the tools to help us compete.

From an online mortgage application for members to the latest in business-to-

business platforms, CU Members Mortgage is dedicated to providing credit unions

with technology for better lending programs, evolving to meet the market, and

ensuring compliance every step of the way.

The market doesn’t stand still. Neither do we.

Randy Shannon, Vice President Correspondent Lending 28 Years in Mortgage Lending

www.cumembers.com 800-607-3474 Extension 3225 NMLS #401285 8.5x11_wBleed_AMC_Ad.pdf 1 5/8/14 1:14 PM