A new report from the National Credit Union Administration’s (NCUA) Office of the Chief Economist found that mortgage loans originated by credit unions generally carried lower interest rates than those from other lenders.
The report looked at Home Mortgage Disclosure Act data from 2018 and segmented that to a sample of 30-year, fixed-rate mortgage loans.
“The chief economist’s report observes that the discount in mortgage rates generally would reduce the life-of-the-loan payments by thousands of dollars,” the report stated.
In general, the report found that the median interest-rate spread for credit union mortgages was 9 to 14 basis points lower than for other originators, while the discount in rates for credit union loans generally was observed in both urban and rural areas.
“Statistics for three credit risk indicators – credit scores, combined loan-to-value ratios, and debt-to-income ratios – suggested that differences in mortgage rates were not likely the result of differences in credit risk,” the report stated.
Within the full sample used, the report stated the median rate spread for metropolitan areas was 12 basis points, while that grew to 14 basis points in non-metropolitan areas.
Among the 10 largest states, the difference ranged from a 7 basis point spread in Georgia, Illinois, New York and Ohio to 20 basis points in Florida. However, looking only at purchase mortgages, credit unions were actually 3 basis points higher than other lenders in North Carolina, ranging to an 18 basis point gap in favor of credit unions in Florida.
“When evaluating the observed discounts being offered by credit unions, it is important to assess whether such discounts would hold up if they were adjusted for credit-risk-related attributes,” the report stated. “While median credit union rates generally were lower than other originator rates, if credit union mortgages tended to be of higher credit quality, the result would not be particularly surprising.
“A comprehensive risk adjustment is beyond the scope of this analysis. However … for the United States as a whole, the full sample suggests that, relative to other mortgages, credit union loans, at the median, had slightly lower credit scores, nearly identical CLTV ratios and slightly lower DTI ratios. In other words, all else equal, one statistic indicated slightly higher credit risk, one indicated effectively identical risk, and one indicated lower risk.”
The report said that although the differences might appear slight, they could have a meaningful impact on borrowers.
“For borrowers in rural areas, who often have limited choices for mortgage providers, the 14 basis-point discount in the median rate spread would generally reduce life-of-loan payments by thousands of dollars. For a $175,000 mortgage, for instance, total principal and interest payments would be nearly $5,000 lower under a 3.60 percent interest rate versus a 3.74 percent rate,” the report stated.