GALVESTON, Texas-Brian Turner has an admission: "everyone" thinks he's an "idiot," but he's not swayed when it comes to his opinion on interest rate risk.
Specifically, he believes that avoiding booking mortgage loans out of fears over interest rate risk may be hurting their bottom lines.
Turner, director and chief strategist for Plano, Texas-based Catalyst Corporate FCU, told attendees at the Texas league's meeting that "examiners tell credit unions not to put another 30-year loan on their books. But as a relative value, investing in a loan is better than investing in a mortgage-backed security. Credit unions are worried about rising rates, which is something that may or may not happen. They have to be careful that they don't overly fear a rising-rate environment because that throws away a capital opportunity."
Turner offered as an example an investment in a three-year, mortgage-backed security, which currently pays just 1.5%, versus a 30-year mortgage at an average of 3.99%. Because the relative value of mortgage loans "absorbs" an increase in market rates, he said the risk exposure to CUs "declines significantly" after the first 100 basis points of an upward rate move.
"There is very strong liquidity in the sector, which has put downward pressure on the cost of funds," he said. "Strong liquidity means credit unions would not have to rush to raise share rates if interest rates rise."
According to Turner, increases in one-year CD rates will be less than the increase in asset yields, and the increase in cost of funds will be at a "much slower" pace than asset yields.
Reviewing Concentration Risk
Another important factor, he said, is loan quality at credit unions has improved "across the board," even for smaller CUs. Because lenders do not earn as much money on "nominal" risk, Turner suggested some credit unions have "given away" 15 to 20 basis points of spread by being overly cautious.
"Concentration risk should be determined by what a credit union's capital liquidity profile and risk-to-earnings ratio can support," he counseled. "It should not result in limits based solely on a high-level percentage of total assets or portfolio allocation."
The Fed has signaled there will be little movement in overnight interest rates until 2014, Turner said, and he expects longer-term rates to remain controlled.
The economic recovery remains stunted, he said, with 2011 Gross Domestic Product growth at approximately 1.8% and GDP growth of 2.2% expected for 2012. Although the national unemployment rate has fallen to 8.3% from 9%, Turner said the decrease is a result of "smoke and mirrors" and does not count the people who have given up looking for a job.
"Things are still bad," he declared. "Consumers are not spending, and businesses are not spending. Consumer credit fell $150 billion in 18 months. Housing prices are down 33% from their peak in 2006. All of this tells us as an industry we need to retain the loans we have and attract a new generation of borrowers.
"The risk to credit unions is not net interest margin," he added, "it is bringing in new members. There is too high of a disparity in potential members to actual members."
