Low Mortgage Rates Squeeze CUs

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WASHINGTON – The corporate bailout charge, pending NCUSIF assessment, credit card, overdraft and interchange fee reforms…as if credit unions didn’t have enough to worry about, rates on mortgages have been plummeting in recent months – just as mortgage lending has become more important.

Good for members, but bad for credit unions.

“This is an environment that credit unions are going to have to acclimate themselves to,” said Christopher Sullivan, chief financial officer for United Nations FCU, of the record low rates that are pushing good-yielding mortgage products off their books amid a flood of refinancings.

Most of the recent mortgage activity is refis, which pose a mixed bag for credit unions even as they collect new fees. It is bad for credit unions if it is their loan a member is refinancing into a lower-rate product, pointed out Bill Hampel, chief economist for CUNA. It’s also bad if the loan is being refinanced from another lender to a lower rate. But it can be good if the refi is of a loan the credit union is just servicing, meaning the credit union can earn servicing fees even while selling the loan to Fannie Mae or Freddie Mac, as most credit unions are doing.

The refi boom, in which members are moving into lower-rate loans, is forcing credit unions to sell their mortgage loans, means the less they be left holding in low-paying loans when rates move up again, according to Hampel.

Though second quarter data will not be released by NCUA for several days, Hampel said he believes most credit unions are selling all of the new mortgages they originate because of the historically low rates and the probability the low-rate environment will continue through the rest of the year.

This has created a tough choice for credit unions now left with investable funds while investment yields are still low, said Hampel, noting the increased pressure it is creating to keep savings rates, the cost of funds, at record lows. “All deposit rates are way down toward zero,” he told Credit Union Journal yesterday. As a result, savings growth for credit unions, which was booming a year ago at almost 8% a year, is half that, about 3.45%, for the first six months of 2010, according to CUNA’s monthly survey of 475 credit unions.

Credit unions, which used to lag the market when rates turned up or down, have had to react faster to the lower rate environment, which has seen mortgage rates fall for nine straight weeks. UN FCU’s Sullivan said the $3.2 billion New York-based credit union’s rate committee meets weekly and can adjusts rates accordingly. “We’re reasonably competitive on rates,” he said. “We’re in New York, the most competitive market in the United States, so we have to respond.”

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