COLORADO SPRINGS, Colo.-While economists analyze the national data on the strong uptick in mortgage lending, credit unions such as Ent FCU here are seeing it locally.
"Our refinance applications picked up significantly after that announcement," said Jon Paukovich, VP of mortgage lending for Ent FCU, which dropped its 30-year, fixed-rate dropped to 5.375% from 5.875%. The $2.6-billion CU, based in Colorado Springs, Colo., has reached $280 million in mortgage business in 11 months. "A record year at Ent," he said.
The St. Paul, Minn.-based Affinity Plus FCU has experienced the same refinance rush, explained VP Brian Volkmann, whose shop met its 2008 mortgage loan target in May. The $1.3-billion credit union, which has moved $250 million in mortgage loans in 2008, is preparing for what could be an even better year, explained Volkmann. The CU plans to introduce a unique offering in January to rebate closing costs to members on a monthly basis over a three-year period.
"We want to do whatever we can to put money in our members' pockets," Volkmann said. "We're hitting 6.75% earlier this year and then rates dropped to 5.5%-that's a lot of extra money for members each month."
If mortgage business takes off, it may be difficult for credit unions to drop deposit rates and manage already tight net income margins, economists agree. "There's interest rate pressure from banks that are fighting for deposits," said Dave Colby, chief economist at CUNA Mutual Group. "Clearly everyone is pressed on spread, and this will squeeze things even more. Hopefully credit unions can adjust CD rates. But they are competing against institutions that are desperate for money. GMAC Bank is advertising 4.25% for one year now. You are competing against two different business models for cost of funds-those that are highly efficient with no back office, like ING Direct, and the ones desperate for cash and liquidity."
Pressure to lower deposit rates may not be felt by all, offered CUNA Economist Steve Rick, who pointed out that credit unions are sitting on record net worth levels and may choose to keep deposit rates where they are. "Because credit unions have very large capital levels now, they may let their net income fall just to maintain market share," he said (see related coverage, page 23).
Most credit unions that spoke with Credit Union Journal shared that they have no current plans to drop deposit rates. Ent's net worth stands at 11%, and as a result is not considering dropping deposit rates or adding fees.
In Harrisburg, Penn., the $3.2-billion Pennsylvania State Employees CU said adding fees to make up for shrinking margins is never an option, according to Bill Zysk, VP of lending. But Zysk did not rule out dropping deposit rates, which are currently near the top of the local market.
"Whether we drop rates or not is simply a function of what happens in the economy. If everyone else is dropping them, and there is pressure to lower rates, then we put it all into the asset liability model and see what happens."
To simply sit on net worth is a mistake, warned NAFCU Economist Tun Wai, who predicts CUs could face liquidity issues in 2009. "Thankfully we have a strong capital position. But you can't sustain yourself with low net income for any length of time because eventually your capital will start eroding . . . I think the big question that may come in short order sometime next year is the whole issue of liquidity. I think credit unions feel right now they are in a fairly good liquidity position compared with other financials. But then comes the issue of how do you balance members who are being laid off and don't have money to put into the credit union, with the need to get them to expand their savings so you have sufficient enough liquidity to expand into real estate."
If the 30-year fixed rate drops to 5%, more credit unions may wrestle with the decision to sit back or become more aggressive with first mortgages, suggested Julio Rios, director of mortgage lending at the $1-billion University of Wisconsin CU in Madison. UOWCU has felt the mortgage crunch, with lending staff "working late into the evenings" to meet the refinance demand when rates dipped below 5.5%, Rios said. "That 5.5%-5.375% must be the sweet spot for those who have purchased a home over the last 18 months. Now the question is how do we get people off the fence to buy homes? It's going to be driven by rate. There are a lot of bargains now for first-time home buyers."
Wai offered a "word of caution" to credit unions moving aggressively into real estate lending. "Look at the opportunity from a long-term perspective," he said, noting the lack of demand from the secondary market and that loans made today could likely be on the books for years. "It's one thing to say I can get immediate gain in my revenue stream. But you have to think in terms of asset liability management. What is your capacity for the risk? What is your capacity to hold onto the instrument and how long, even if the loans are performing, can I sustain a low return associated with them?"
CUNA Mutual's Colby provided advice, as well. "Credit unions do the good underwriting, both on the borrower and the collateral, and make good mortgage loans-which certainly return better yields than any investment they can make-and they're helping out members, which is why they are in business."
"The banks are still being very cautious," said Wai. "I recently had a conversation with someone from Fannie Mae who said credit unions are the only ones making mortgage loans now. With big providers like Countrywide leaving... I certainly see credit unions getting more involved in real estate lending."
