Nearly every day, publications across America are reporting ominous rumbling sounds within the economy. Interest rates are rising, and the Fed is expected to push rates higher. Gas prices are topping $3 a gallon in many markets. Hurricanes have had a direct and devastating effect upon more than one-million people. Card delinquencies are increasing, personal debt levels are high, and during the second quarter savings rates hit a new low. And next week newer and tougher bankruptcy laws will take effect.
Overriding much of that are worries that so many Americans stretched to finance homes using interest-only mortgages and adjustable-rate mortgages (ARMs) they can afford only if rates remained low.
Are member finances about to fall like the leaves? Analysts told The Credit Union Journal that in general they believe it's still too early to tell, but also agree they expect delinquencies on all types of loans, especially credit cards, will rise (see related story, below).
"It will be harder and harder for people to make payments, but that doesn't mean the world is coming to an end," CUNA Economist and Vice President of Economics and Statistics Mike Schenk said. "Some will fall off the edge, but we don't see a crisis."
While Americans are carrying more debt than ever, Schenk said it doesn't automatically mean the economic sky is falling. Schenk said for a highly developed economy such as the U.S., the 120% debt-to-income ratio is actually in the normal range.
"We're not the poster children for spend thrifts," Schenk acknowledged. "It does concern us. We're not exactly sure where the tipping point is."
Experts are advising credit unions to stay flexible, keep their eyes on the horizon and work with members who may fall behind before they do fall behind. No one is predicting disaster, but experts acknowledge the economy has taken some big hits and might face some more before the end of 2005.
Federal Reserve Chairman Alan Greenspan recently warned of the potential negative effect of the high percentage of home equity-secured financing nationally that has been used by consumers to finance purchases. NAFCU Senior Economist Jeff Taylor said credit unions have informed him that some home equity payment issues have begun to show up as rates have increased, but added that they were isolated pockets and not a nationwide problem at present. Greenspan cautioned that mortgage rate increases would prompt consumers to pay down credit lines rather than finance more purchases, and credit unions are seeing some of that come to fruition. "Things are going to slow down a bit," Taylor said.
Meanwhile, the tougher bankruptcy rules that go into effect next week are also being felt. With bankruptcy filings averaging 9,000 each day, Taylor discounted the volume as an indication of rising economic distress, but rather a recognition that if one is going to file, it's best to file now.
"The rush is not because energy prices are up. People are saying this is my last chance to get out with less hardship," he said.
Moreover, while the price at the pump is getting most of the media coverage, Taylor said the price of natural gas and home heating oil is also on the increase, and winter has yet to set in across the northern U.S.
"Winter will be the real bellwether. Natural gas is the thing that's really going to be a problem," he said.
As for the economy overall, Taylor said the "household is in pretty good shape" but doesn't have much wiggle room to take another big hit. Like others, he recommended credit unions do their own due-diligence on potential trouble spots, look ahead for problems and work with their members.
In Broomall, Penn., Franklin Mint FCU Senior Loan Officer Allan Stevens said the high number of home equity loans has a "potentially negative effect," but added that the typical equity borrower is mostly an upstanding member who showed effort in planning and perseverance to get a mortgage in the first place. "They are typically more creditworthy. We haven't seen any increase in delinquency," he said.
Stevens said his main concern is interest-only loans and loans with negative amortization. Franklin Mint FCU presently has $94 million in home equity loans and $38 million in home equity lines of credit.
As rates and gas prices rise, Stevens said Franklin Mint won't sit around and wait for bad days to arrive. The credit union is holding monthly loan review meetings looking for trouble signs, is formalizing its own consumer counseling service, and will go as far as deferring payments or taking interest-only payments for a few months for members feeling a pinch. If a member has a long-term problem, then it's time to refinance, he said.
"We're not in the business of owning people's homes. We'll work with them," he said. "It's like having a bunch of tools in your tool box."
In hurricane stricken Moss Point, Miss., Singing River FCU President James B. Smith said much of his loan activity has been suspended because of the storm. Area residents are delaying new loan applications of any sort while they wait for payments from FEMA or their insurance companies. Reflecting the advice of experts, Smith said Singing River is adjusting its practices to keep their members on board and in the black. Smith said the credit union will now consider 100% financing, suspending origination fees and extending loans to 20 years at 6%, all designed to fight off any potential foreclosures.
"I'm willing to take on some measurable risk to keep these good members paying," he said. "Otherwise, we're going to see some catastrophic losses."
