WARRENVILLE, Ill. - The Federal Reserve may be trying to urge consumers to borrow and spend their way toward a stronger economy, but credit unions shouldn’t expect members to be breaking down the door for loans, some experts suggest.
Credit Union Journal asked several corporate credit unions what they expect to see in the wake of the recent Fed action
Ron Koza, chief investment officer for Members United Corporate Credit Union, said the signs of a recession are quite clear, and that when it comes to housing, the market may even be in a “depression.” Credit unions, said Koza, need to start preparing for the ramifications, including increased liquidity and decreased lending–but also opportunities to grow as members’ PFI.
“Clearly, we are near a recession. The actions of the administration with regard to the proposed stimulus package, and the very strong action by the Fed to act one week ahead of the scheduled meeting and institute a 75-basis point cut, demonstrates that. The fact both parties in Congress are acting very quickly to move ahead with an economic stimulus package is significant. The government is acting on two fronts, which is a statement in itself,” Koza observed. “We may not be in a recession just yet, but we may be on the verge. Certainly we are in a housing recession and on the verge of a housing depression.
“I give credit to the administration for doing a lot of the things it needs to. It is working on a plan to help homeowners facing mortgage resets. The stimulus package will help the economy move forward. The rate cuts mean a lot of homeowners will be able to qualify for repricing.”
Preventative Medicine
Eastern Corporate FCU SVP-business development and strategic planning called the rate cut a large dose of preventative medicine for the U.S. economy, saying the Fed got in front of what he believed had the potential to be a “large crisis.”
“The problems could have been even bigger than what we’ve experienced in the past few months, but the rate cut appears to have calmed the stock markets. They were off today [Jan. 22], but not as much as they could have been,” said Bernstein.
If the economy teeters into recession–and indeed some economists say this has already happened–every thing from loan demand to yield curves will feel the impact.
“If the economy starts to weaken significantly, loan demand likely will decline. The second thing is there is a really weak equity market. Consumer spending is driven by three key issues: a person’s job outlook–is money still coming in; the value of the consumer’s house, and the equity market,” Koza observed. “We are seeing home price appreciation slow or become negative, which hurts consumers’ outlook. People are more worried about their jobs, concerned about the decline in house values, and it is harder to get credit right now. All three of these combine to reduce consumer activity, which means fewer loans for credit unions.”
In the shorter term, Bernstein noted that the yield curve had a “very unusual shape by the end of the day.”
He said EasCorp had spent the day talking with many of its members, and “there has been a collective groan when they learned what the new limits to their investments will be.”
There had been a surge in investment activity at EasCorp for most of the fourth quarter, particularly November and December, Bernstein reported. He said much of this activity involved locking in rates before rate cuts, which were expected to be down the line.
According to Bernstein, EasCorp’s total deposits as of Dec. 31 were approximately $1.8 billion, and the share certificate portion of that was $1.1 billion–the largest in EasCorp history.
“We didn’t see a change in liquidity patterns at the credit unions themselves. We saw it as credit unions looking to lengthen their portfolios a little bit before rates dropped.”
It could be that pattern is about to change, Koza suggested. “I expect there will be share growth increase this year. This means more liquidity on credit union balance sheets, which means pressure on return on assets and net interest margins,” he said. “It will make 2008 a tough year.”
Not All Bad News
But it isn’t all bad news. “The good implications of the slowdown are the opportunities that will exist for credit unions due to tighter lending standards. Many mortgage lenders are out of the market, and credit unions will have the opportunity to fill the gap. They can find consumers who are having a hard time finding another lender. This is an opportunity to become the PFI, the primary financial institution.”
Change In Investment Strategy
Corporates will be gearing up for a change in credit union investment strategies as a result of the market shakeout, he added. “If a credit union sees liquidity really bloom–say from 80% loan to share to 50% loan to share–it will have to find a way to create additional return,” he advised. “Credit unions might need to be a little more aggressive in managing their investment portfolio.”
Another reason for credit unions to pay more attention to their investment strategy: the intended result of the rate cut–a bump in lending–may not materialize. “I don’t know that overall loan demand will go up,” Koza offered. “There will be a re-fi wave because when mortgage rates go down, people refinance. There are a lot of borrowers with poor credit who were getting loans they should not have, and credit unions still won’t lend to them.”
