The Lending Niche Within A Lending Niche

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MADISON, Wis.-One of the most effective strategies for credit unions to enhance the bottom line will also be the hardest, and that's reigniting lending.

Credit unions need to "certainly work a heck of a lot harder recapturing loans," said Dave Colby, chief economist for CUNA Mutual Group, pointing out that that may mean actively seeking out low loan-to-value mortgages that can be rewritten. To do that, credit unions will need look at their membership - particularly those members age 55 and older - and their mortgage information to determine if the rate can be lowered but the payment kept the same to pay the loan off sooner.

"The member benefits with that," said Colby, "and the credit union certainly gets a lot more spread income."

He added that with many older members who may have high equity positions in their homes, those loans may not be considered worth refinancing, "but if a credit union is going to scrape for every dollar they can as far as good, quality loans, I can't think of anything better. Here you have a low loan-to-value-a member that has a lot of skin in the game-and you can still get a much better interest rate spread than just about any other loan."

Colby also pointed to the possibility of writing shorter-term loans, noting that "30-year mortgages, in retrospect, are kind of silly if everyone moves eight times in their life. You're paying an awfully big premium to fix an interest rate for a period that you're never going to use."

Excluding the possibility of another market shock, Colby said that credit unions are in good shape as far as loan loss reserves, and "if we see some stability in the market" then CUs may be able to release some of those reserves, easing pressure on the bottom line.

"The focus needs to be on growing loans, which have a much higher yield spread than any investments," he said. "On balance I think we're going to be able to grow the bottom line, but it's going to be a struggle."

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