LAS VEGAS-Two factors that led to significant changes to the international credit market continue to affect credit unions: the securitization of U.S. mortgage loans and international deregulation.
That was the message from Max Wolff, a senior economist with Beryl Consulting Group, a New Jersey-based hedge fund research and advisory firm. He said the period of 2001 to 2007 was a "wild ride" that saw American consumers borrowing at an unprecedented rate. Not only did U.S. mortgage debt double in six years, the average American home became "an international speculative asset, which we have never seen before."
"Why did the U.S. house become the single most exciting asset on earth? First, we borrowed 50 cents of every available borrowed dollar on earth — this despite the fact we have 21% of the world's GDP and only 4.5% of its population," Wolff explained. "American consumers have been borrowing since the 1980s, but those international lenders eventually figured house loans were safe. U.S. consumer finance became a correlated investment product, and securitization boomed."
The problem, according to Wolff, is the buying and selling of mortgage-backed securities began to "distort the relationship people have with their houses." Also, a cycle of dependency began: house prices soared during the real estate boom earlier this decade, but the equity in the homes did not come close to matching the debt involved.
"This set up the crash," Wolff declared. "This is a problem because the same thing is happening in the U.S. stock markets from March until now. There is cheap money available because the Fed has rates so low, and there are virtually no returns on 'safe' assets, forcing people into risky assets."
But there are "signs of life" in the economy, according to Wolff. He said the U.S. has likely now seen a "bottoming" in the worst real estate markets, and he believes the states with the highest foreclosure and delinquency rates — California, Nevada, Arizona and Florida — will not keep those titles for long.
However: "There is a new game being played by the banks: 'Extend and pretend.' I am nervous about the change in the calendar to 2010 because banks stopped booking losses in 2009 when their accountants told them they couldn't book any more losses for the year," he said.
Credit unions will face challenges in the new financial landscape, Wolff warned. He said traditional banking relationships will return, meaning mid-sized and regional lenders will have opportunities.
"Regional and small banks will continue to fail," he said. "Credit unions will benefit by not being banks; by not having a bad reputation."
