'Long, Lonely Road Ahead?'

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At least one analyst is projecting a "long, lonely stretch ahead" for credit unions.

In addition to a sharp decline in the number of credit unions over the next 36 months, the same analyst is predicting for credit unions product shifts, increased competition, a continued move to Internet banking, a further reliance on technology including biometric security measures, and the increasing use of homes to secure multiple loans.

But where the real dark news will be found at year-end 2008, according to Tim Lerew, will be credit unions struggling to recover from a crisis at Fannie Mae and Freddie Mac that triggers 30-year fixed mortgage rates above 9% for months, and nearly-empty branches caused by a biological hazard attack on a major bank.

Given that, it's not surprising that Tim Lerew, president of Elizabeth, Colo.-based financial institution consultancy Tim Lerew and Associates, told attendees of CUES' Directors Conference here that he foresees "a long, lonely stretch ahead." For starters, he believes there will be 32% fewer CUs in three years.

"Mergers, some voluntary and some compelled by regulators, will account for almost all the decline in the total number of credit unions," he said.

But membership growth will occur, especially at larger CUs, because of continued expansion of CU membership eligibility. Lerew said in 2008 more than 80% of the U.S. adult population will be eligible to join a credit union -an all-time high. However, it will be difficult for any one CU to take advantage, as the percentage of members who are eligible to join more than one CU will rise to 48% from 32% in 2005.

Mortgage Woes

Lerew, who said 80% of his clients are credit unions, sounded a warning for those heavily invested in the mortgage market. He said overall mortgage volume in 2008 would be 50% below the high-flying numbers posted in 2003, when rates were at generational lows. Instead, rates of 8% will be common-or higher if his prediction of a liquidity crisis at Fannie/Freddie comes true.

"Lack of adequate capital at the GSEs and a rising rate environment could trigger investor flight and regulatory action. We could see rates above 9% for several months in 2006. It would be a bigger hit to the economy than the s&l crisis in the 1980s."

CUs that have a significant portfolio of mortgage loans from 2003 that are in the 5.75% to 6% range will feel "upside down," he said.

Another negative prediction: Lerew said he fears simultaneous biohazard attacks inside several branches of a large, nationwide bank. The "attack" could be as simple as powder-filled envelopes. As a result, all financial institutions would have to implement extraordinary security measures formerly seen only in high-crime areas.

Asked if he really believes such an event is likely, Lerew replied: "Of course I hope it doesn't transpire, but it is possible because credit unions and banks are very open."

Not all of Lerew's predictions were as dire as biohazard attacks and mortgage crises. On the plus side, he said the 70% home ownership rate, combined with a dearth of mortgage refinancing activity, will push home equity lines of credit into the forefront-with aggressive pushes from the likes of Ford Motor Credit and GMAC.

CUs have the opportunity to counter what Lerew termed the "dark side" of home equity loans-predatory lenders that charge excessive fees and inappropriate insurance premiums.

"Many credit unions have success stories where they took people out of inappropriate loans and got them into loans with better interest rates and more appropriate terms that better meet the needs of members," he said. "The problem is, credit unions keep these stories under wraps. I want to see them on television."

Current HELC penetration is low, Lerew continued. He said 14% of CU members have fixed-rate mortgage loans at banks, and 17% have HELCs at banks. In contrast, just 2% of members have mortgages through their CUs, and 3% have HELCs.

"This is a shame, but it also is a tremendous opportunity," he assessed. "If 31% of our members have these products elsewhere, and only 5% are with us, we need to do a better job of marketing."

Lerew said CUs should consider offering HELCs with terms similar to those available at banks. He noted a credit union HELC typically prices loans with a 2% minimum repayment and caps the loan at 80% loan to equity. Many banks offer interest-only even on 100% LTV loans.

As a result, a typical $20,000 HELC at a credit union carries a $400 monthly minimum payment, compared to a $100 payment at a bank. To compete, but without letting their members get in over their heads, Lerew said CUs should consider offering an interest-only option if appropriate for the member, and LTV of 90% and even 95%.

Lerew predicted home equity loans will rise to 20% of loan balances in 2008, from just 4% in 2003. "Credit unions love them because of automatic repricing, which means asset/liability management," he said. "If we can get from 4% to 20% in the next three years, it will be a success story."

Ubiquitous Technology

By 2008, Lerew said more than 48-million U.S. households will perform web-based transactions with their financial institution, credit card issuer, brokerage or all three. "Free" online bill pay at banks will be commonplace, as 48 of the top 50 banks will make the service available at no cost to their customers. He wondered: can CUs continue to make members pay? "Because once a person has bill pay set up, it is more likely he or she will remain a loyal customer or member."

Self-service loan origination will continue to expand, he predicted. In three years, more than 12% of all non-commercial loans will be initiated or completed via the Internet or telephone, and the use of biometics will increase.

Member business lending will surge to 8% of assets in 2008 from just 2% in 2005, he said."

Mortgage-secured "wrap accounts" will gain in popularity, he said, referring to a product that uses a person's home as security for all types of loans.

Lerew had some good news. Today, only 44% of members consider their CU to be their primary financial institution. "Why? Convenience," he said. "But we are going to put more convenience and value into our products, which will raise the primary financial institution number to 54%."

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