Rising rates will muffle the boom in the mortgage market. What will that mean for credit unions?
First, they'll continue to ride the wave just a little bit longer. "Credit unions are actually seeing a little bit of a pick-up in mortgage activity because people are seeing that the rates are beginning to rise and that this could be the end of the low rates, so they're scrambling to lock in these rates while they still can," suggested Steve Rick, senior economist with CUNA. "Moving forward, as the rates pass the 6%, 6.5%, 7% range, credit unions will see a drop off in refinance activity and cooling of purchase activity."
But that doesn't necessarily spell trouble ahead.
"Hopefully we'll see a pick-up in consumer loans, credit cards, unsecured debt, even new auto loans, because instead of cashing out equity in the home to make purchases, people will turn to consumer loans," Rick said. "That means we could see more balanced loan growth and diversification of the portfolio. That would be a good thing, because it would mean less interest rate risk and higher yields."
The key, Rick suggested, is the strengthening economy, not only because people will feel confident they can afford to borrow but because credit unions can feel confident about making loans.
"In the past, credit unions had been restricted in their underwriting, but with the strengthening economy, credit unions can afford to be a little less stringent and grant some of those more marginal loans. They don't all have to be perfect A paper. Our industry is enjoying the lowest delinquency rates, so credit unions can loosen up the underwriting a little."
But don't count out real estate loans entirely, suggested NAFCU Economist Jeff Taylor. "We will be in a rising interest rate environment this year and next year. The Fed is definitely raising rates, but the one to watch is the 10-year Treasury, and it's been bouncing around quite a bit," he explained. "The 30-year fixed rate will get to the 7.5% range, and that's still an attractive rate, but not nearly as attractive as it had been. People will still see real estate as a good investment. Even if it gets all the way up to 8%, it's not that big of a deal. But the refi market is already dying out."
The Call To ARMs
As rates rise, credit unions should be prepared to offer adjustable rate mortgages to their members. "ARMs will be a big help in keeping the mortgage market going," Taylor advised. "Credit unions are talking to members about ARMs and that, combined with consumer confidence in an economy that is going well, will partially off-set the rise in rates, so people will still be buying homes."
And people will still be looking to use the equity they have in their homes, as well. "The home equity market will still be strong for a while, yet. There's still some equity that hasn't been taken out," he noted.
The real question, Taylor observed, is what will happen next year.
"Next year is a wild card. If mortgages go to 8.5%, that will dampen the market quite a bit. And there's still a big terrorism premium built in there," he noted. "I would think credit unions will really reinvest themselves in their consumer loans to help make up for the end of the refi boom. Car loans hopefully will be strong as we see the 0/0 deals start to go away. We're already seeing rebates and dealer incentives getting smaller and fewer, so that will help. But it's still going to be hard to make up for that huge [mortgage] book, as real estate loans make up 45% of credit unions loans, so that's a big chunk. Credit unions may also want to be looking at member business lending."
Taylor added that while he believes the housing market generally is in good shape, "we could see some bubbles in some markets and see a correction of prices in certain parts of the country. But over all, people are still going to believe real estate is a strong investment."
