Mortgages Great, Understanding Risk Greater
DALLAS-Mortgage lending may be one of the best ways to generate revenue in 2011, but before a CU begins aggressively booking real estate loans, it needs to understand where the risk is, cautions ALM First.
Tom Manley, ALM First partner, told Credit Union Journal that "keenly" understanding where risk lies takes on greater importance in such a low-rate environment and with CUs looking for ways to increase spread. "Do the risk measurements, but don't just settle with the standard measurements. You have to look at what the risk is down the road should rates really rise."
That means the standard "up 300" basis point risk analysis scenario isn't good enough, insisted Manley. "We think credit unions should not only be running that scenario, but look at the risk should rates rise 400 or 500 basis points."
Manley acknowledged that many credit unions are avoiding mortgage lending risk by selling off their loans, but Manley insisted that is the "expensive way to go. Because you are chopping so much yield off your balance sheet when you sell. You can help insulate that mortgage through the use of borrowing through the Home Loan Bank, for example. Borrowing is still relatively cheap. You can always borrow relatively cheaply to fund mortgage lending or other activities, like investment duration extension."
With investments, Manley passed on similar advice. "Know what you are doing by measuring risk. If you are buying investments that are higher yielding, you need to know your interest rate, credit, and cash flow risks."