Remember when everyone refinanced at 3%? Those people are stuck. They cannot upsize, downsize, or relocate without trading the best rate they will ever have for something in the sixes or higher. It is called the mortgage lock-in effect and it is freezing the housing market one family at a time.
Fred Campobasso, Chief Lending Officer at Great Lakes Credit Union, and Jonathan Arad, CEO of Takara, joined Sarah Snell Cooke of The Credit Union Connection to talk about DREAM, a program that sounds almost too clever to be real. It offers borrowers a meaningful discount to pay off their low-rate mortgages early, gets the credit union out of an underperforming portfolio segment at no loss. Fred is piloting it at Great Lakes right now. Jonathan engineered the math that makes it work.
DREAM stands for Discount for Real Estate Affordability and Mobility. A homeowner with a 2% or 3% pandemic-era mortgage who needs to move faces what Fred calls golden handcuffs. They are not going anywhere voluntarily when the alternative is a 6% or 7% rate. DREAM gives them a way out. Through Takara’s program, they can pay off that loan at a discount of 10 to 15%, effectively giving them a cash benefit that can offset rate shock on their next purchase, fund a larger down payment, or simply give them the financial breathing room to make the move they have been putting off.
Here’s the best part: The discount does not come from the credit union. Takara engineers the economics so the institution exits the underperforming loan without booking a loss.
Fred notes that Great Lakes worked closely with regulators who are watching the pilot with interest and gave the green light to launch. The entire pilot took about eight weeks to stand up from concept to go-live, which for a new mortgage product is remarkably fast. Jonathan credits that to the fact that DREAM is built on existing legal, accounting, and tax rails. Everyone who vets it sees something familiar, even though the concept is new.
“My hope is that more credit unions do this and pass the benefit along to their members. Because that’s why we’re here at the end of the day.” — Fred Campobasso
The member communication side is handled through Great Lakes’ wholly owned mortgage CUSO, Mortgage Forward, whose loan officers already have personal relationships with many of the members who hold these loans. Takara does not engage directly with members, so the relationship remains with the credit union. From the member’s perspective, they just know their credit union is taking care of them.
Jonathan points out that compressed margins, sluggish origination volume, asset liability management challenges and liquidity pressures are all problems credit unions are wrestling with right now. Many of them, he argues, trace back to the mortgage lock-in effect. DREAM is a lever that could free up a meaningful slice of a frozen housing market, and credit unions, as the portfolio lenders sitting on these loans, are uniquely positioned to deploy it.
NOTE: If transcription were this AI’s superpower, it would be a very disappointing superhero origin story.
Sarah Snell Cooke
Hello and welcome. I am Sarah Snell Cooke, your host here at The Credit Union Connection. Remember when everyone refinanced at 3%? Those people are stuck. They cannot move, cannot upgrade, cannot downsize because buying a new house means trading that sweet interest rate. It is called the mortgage lock-in effect and it is freezing the entire housing market. Today I am speaking with Fred Campobasso, chief lending officer at Great Lakes Credit Union, and Jonathan Arad, CEO at Takara, about the DREAM program, a solution that sounds too good to be true but apparently is not. They are offering borrowers a discount to pay off their low-rate mortgages early. Members get financial relief and mobility, and the credit union gets portfolio management. Here is the kicker: Takara’s financial engineering ensures the institution takes no loss. Fred is piloting this at Great Lakes and expecting strong member engagement. Jonathan is going to explain how the math actually works, and we are diving into why this might be the unlock the housing market desperately needs.
Hello, welcome everyone. I am joined today by Fred Campobasso. Welcome.
Fred Campobasso
Thank you.
Sarah Snell Cooke
Fred is the Chief Lending Officer at Great Lakes Credit Union. And I also have Jonathan Arad. Welcome.
Jonathan Arad
Thank you. Thank you for having me.
Sarah Snell Cooke
Jonathan is the CEO of Takara. Let us start with introductions. Fred, go ahead.
Fred Campobasso
I am the chief lending officer at Great Lakes Credit Union. We are located in Bannockburn, Illinois. We are a low-income designated credit union and we serve a wide area of Illinois, Indiana, and Wisconsin, primarily in the Chicago metro area and downstate Illinois.
Sarah Snell Cooke
And Jonathan?
Jonathan Arad
I am the CEO of Takara. Takara is a fintech company and our focus is promoting home ownership and home ownership affordability. We are solving a meaningful and big problem for many homeowners and borrowers across the US, but we do it through their lenders and through their existing financial institutions. That is how our relationship with Great Lakes began.
Sarah Snell Cooke
Affordability is a real issue right now. Fred, can you talk about how the mortgage lock-in effect from those pandemic-era 3% loans is affecting the credit union itself, and what you are hearing from members who want to move but feel trapped?
Fred Campobasso
I like to call it golden handcuffs. Jonathan likes to call it the lock-in effect. Those pandemic-era loans when rates were really low, Great Lakes Credit Union along with other institutions have segments in our mortgage portfolios that were made and held at the time. They are certainly underperforming at this point. From a borrower perspective, we are talking sub-3% in some cases. What is the incentive to pay that off? And a lot can change in a few years. Families grow or children move out. Maybe it is time to downsize. But what is the incentive for a member to move when they have that great low rate? And if they truly do need to move, what happens when they trade that for something in the sixes or higher? At one point rates were in the low eights. There is real rate shock there and people are genuinely stuck. That is the problem our members are experiencing, and it is a problem we have a solution for in working with Takara.
Sarah Snell Cooke
You have dubbed this the DREAM program. Jonathan, take us through how the model works.
Jonathan Arad
DREAM stands for Discount for Real Estate Affordability and Mobility. The homeowner is in the driver’s seat here. The problem we are solving for them is that if they want to move, they are financially penalized. They have to give up probably the best financial asset they will ever own, which is a 2% or 3% loan in a 6% or 7% environment. Who knows when those rates will come back, if ever. What DREAM is all about is alleviating that rate shock. We work with portfolio lenders like Great Lakes and through our program they can offer homeowners with those low-rate mortgages a way to pay off their loans with a meaningful discount. To give an example, if you have a 3% loan originated in the COVID era, you could pay off your loan through DREAM with a 10 to sometimes even 15% discount. What our program ensures is that the portfolio loan does not incur a loss on the balance sheet side, which is crucial for this to be a viable product at scale. We do not want to solve a problem for one or two members. We want to solve it for the community. When people are locked in their homes, it has a social effect. It freezes the community. We see this as an engine of growth, not just for the institution but for the community as a whole.
Sarah Snell Cooke
Obviously those mortgages are underperforming, but the credit union is paying to get out of them. Where is the win-win?
Jonathan Arad
That is always the first question I get. Where is the discount coming from? I will tread carefully here because we have to get a bit technical on the financial engineering side, which is what we do at Takara. The basic concept is that the discount to the borrower is not given by the institution. The institution is not offering the discount. What happens is that Takara is the entity that enables the institution to give a discount, but Takara is the one actually providing it. Through financial engineering on the back end and automation through technology, we can make sure the institution does not bear a loss even though the borrower paid at a discount.
Sarah Snell Cooke
Fred, how is this actually working out?
Fred Campobasso
We are just kicking off our DREAM pilot. We have a segment identified and we are starting in the next week or two. One thing I want to highlight about the logistics of launching a new product like this: from start to finish, this will have taken about eight weeks to launch. That is a very truncated timeline. We have had the great fortune of working with our regulators on this program. They are anxiously awaiting the outcome of the pilot and we have received the go-ahead to launch. We are excited about it. Not just because it is a benefit for Great Lakes, but because we are genuinely excited to see people be able to downsize or upsize and break out of the lock-in effect. We are a community-based credit union. This is going to help people move. It is a dream, and that is why we really like the program.
Sarah Snell Cooke
What kind of metrics are you using to measure success?
Fred Campobasso
Jonathan and I have a little wager going on how fast this pilot is going to fill up. Interest is going to be very strong. Beyond that, we measure success by getting folks out of their mortgages and seeing a strong likelihood that they will return to us for their next mortgage. Most importantly, from a member standpoint, there is an instant equity boost they receive that can help offset some of that rate shock. If they are getting a 10 to 15% savings, they can either buy down the rate or apply it as a larger down payment. It improves their lives in so many ways. Is that a true metric? Not in the traditional sense. But that is why we are here. People helping people.
Sarah Snell Cooke
What is the member communication strategy to avoid confusing them about how this works?
Fred Campobasso
Great Lakes has a wholly owned mortgage CUSO called Mortgage Forward, which is our origination and servicing arm. Our mortgage loan officers there will be reaching out, along with support from Mortgage Forward’s marketing team, to the members whose rates fall below our threshold, which is around 4.25% right now. They will be receiving collateral once we finish the pilot and open this up more broadly. We are going to share the DREAM story and the outcomes of the pilot with them, including testimonials. A member does not have to refinance with us to get this benefit. These are portfolio loans. Our Mortgage Forward team, in conjunction with Great Lakes, will be reaching out via various marketing efforts, and our mortgage loan officers already have personal relationships with many of these members.
Jonathan Arad
Takara as a principle does not engage with members directly. We consider that a sacred relationship and we do not get in the middle of it. We support the efforts of Great Lakes and Mortgage Forward. One of the key reasons we are focused in the credit union ecosystem is exactly because of that relationship and the member-centric decision-making process. From the member’s perspective, what they are actually getting is very simple: a discount to pay off their loan. If they want to come into the sausage factory and understand the mechanics, they are welcome to. But that is not a requirement and we find people are generally fine with just getting a meaningful benefit. The life event context matters here too. Whether it is a growing family, a job relocation, downsizing, divorce, or any other life event that is currently putting their lives on hold, if the member engagement team at Great Lakes or Mortgage Forward knows what that life event is, that can be the center of the communication.
Sarah Snell Cooke
Every CFO, CEO, and ALCO committee is going to ask about risk. What are the risks here, and are there specific member criteria to be eligible for DREAM?
Fred Campobasso
On the criteria side: this is all math-based. If someone has a rate of 5.5% or 6%, this program is not for them. It is really for those underperforming loans. The lower the rate, the greater the discount. Takara has built a calculator engine we can use so members can understand exactly what their discount would be. On the risk side, I have vetted this at length internally with our CFO, our CEO, and our credit committee. We have kicked the tires on this to the nth degree. There really is no risk to the credit union. We are not taking a loss. It is a benefit to the member. I can say that with confidence after months of due diligence.
Jonathan Arad
That is music to my ears, and I cannot say I am surprised. We have gone to great lengths to design the DREAM program on existing rails across accounting, taxation, regulation, and compliance. Every element of the due diligence process, whether it is an accountant, a lawyer, or a tax professional, they see things that are familiar because the rails are already there. That is probably one of the most important things about what we built at Takara. We can introduce an innovative concept relatively quickly and prudently because everyone vetting it recognizes the operational and legal framework underneath it.
Sarah Snell Cooke
What is your vision for scaling DREAM across other credit unions?
Jonathan Arad
The mortgage lock-in is more concentrated in the credit union space than in the banking space because the member is at the center of the decision-making process and long-term relationships are often built around mortgage. From a market segment perspective, it is a perfect match for us. We also very much appreciate the collaborative nature of the credit union industry. Credit unions do not just share their successes. They share their problems and look for solutions. I have been at conferences and genuinely surprised at how openly credit union leaders externalize the challenges they are trying to solve. You do not see that with banks or other fintechs. That collaborative DNA is very supportive of spreading the word once this pilot is successful, which I am sure it will be.
Sarah Snell Cooke
Can any credit union implement DREAM regardless of size?
Jonathan Arad
The short answer is yes. But for it to be worth the institution’s effort, they need to have a meaningful portfolio of low fixed-rate mortgages. Any institution with over $100 million of these loans on their balance sheet is viable. However, working with Great Lakes and Mortgage Forward as a CUSO also opens up the possibility of working with smaller institutions through a one-to-many distribution channel via white-labeling of our solution. That would be step two, but it is a real opportunity.
Sarah Snell Cooke
I always allow my guests final thoughts. Fred, you first.
Fred Campobasso
I was just at a conference in Oakbrook, the Credit Union Growth and Innovation Conference, and the number of credit union peers who were very interested in this program was incredible. A lot of them do have that portfolio problem. My hope is that more credit unions do this and pass the benefit along to their members. Because that is why we are here at the end of the day.
Sarah Snell Cooke
Jonathan, your final thoughts for our credit union audience.
Jonathan Arad
Two things. First, when I talk to credit unions at conferences, many of them do not connect the problems they are trying to solve, whether that is origination volume, compressed margins, asset-liability management, or liquidity, to the mortgage lock-in effect. A lot of those issues are actually subsets of the same root problem. There is almost a dogma that this is just the reality and you have to work around it. One of the things we are most looking forward to is showing that the big problem can actually be solved. Second, we are incredibly proud and happy to have found a partner like Great Lakes and Mortgage Forward. I cannot count how many times I have heard institutions say they put innovation and being first to market at the top of their priorities versus how many are actually willing to do it. The fact that they did is a testament to the leadership and culture of the organization. And of course, to the benefit their members are going to get because of it.
Sarah Snell Cooke
Awesome. Thank you gentlemen so much. I appreciate it. Enjoy the rest of your days.
Fred Campobasso
Thank you so much, Sarah.
Jonathan Arad
Thank you, Sarah.