WASHINGTON-President Barack Obama delivered a one-two punch last week with his signing of the economic stimulus package and unveiling his foreclosure prevention plan, both of which could be good news for credit unions.
"Details are greatly lacking, but anything that loosens up the market is a good thing for credit unions," said CUNA Mutual Group Economist Dave Colby, of the foreclosure prevention proposal. "If this helps bring an end to the downward spiral in the market, then that is helpful."
The problem is that a big part of this equation is the psychological factor, which can be a double-edged sword. On the one side is the importance of building up consumers' self-esteem. On the other side is the slippery slope that is the "moral hazard:" the potential for homeowners who are in a position to continue paying their mortgages to start questioning why they should have to hold up their end of the deal when countless others are not.
"This really depends on how much the American people feel better about themselves, frankly," Colby explained, noting that stimulus packages and the like partly count on boosting consumer confidence so they will go out and consume again. "But on the other side, you get into the moral hazard area, and I don't even want to go there."
But it's a very real hazard. In fact, it's one that should sound familiar to credit unions, themselves. "Credit unions are saying the same thing [with respect to TARP and other federal funding]," Colby observed. "They're saying 'I did the right thing and turned down these loans, but I'm still paying for them now that they've gone bad, how is that fair?'"
Under Obama's $75-billion housing relief plan, incentive payments will be made available to mortgage lenders to prevent foreclosure for up to 4 million people. "We're in an interesting situation," said Bob Dorsa, head of the American CU Mortgage Association. "For the most part, credit unions are in the second position in the hierarchy, and I'm encouraged by the statistic that 93% of all mortgage loans are still performing. But we have this undercurrent that people are on the ropes, and that's a problem."
And, of course, any sort of cramdown measure is scary, he added. "But if loan modification becomes the most immediate solution, the most widely accepted solution," then that should be amenable to credit unions, many of whom are already offering workout loans for their members. "We still need to gather the details of what Obama really wants to do. Jamie Dimon of JPMorganChase called the plan 'elegant,' so that is interesting."
But what really concerns Dorsa is the lack of focus on how credit unions can be part of the solution, and in the process greatly improve their position in the marketplace.
"Let's face it, we have a lot of distractions right now, particularly with the frustration over the corporate bailout, but we cannot take our eye off the ball and the real opportunity for credit unions. This puts us in the game. It's a tremendous opportunity to strengthen the creditunion system. If President Obama manages to resolve the economic problems while we're not looking, that will leave us on the outside looking in."
