MADISON, Wis. - It's too soon to predict how much the latest round of interest rate cuts announced by the Federal Reserve on March 20 will spur consumers to put money back into a softening U.S. economy (see related story page 1.) Just as much uncertainty hangs over credit union economists trying to forecast how much gain credit unions will realize in their loan portfolios from first mortgages and refinancings, but if history repeats itself the benefit may have more to do with the types of loans a credit union offers than the prevailing interest rates. Mike Schenk, vice president of economics and statistics for CUNA says the current economic situation mirrors the last refinancing boom in 1998 and 1999. At that time, says Schenk, less than half of credit unions offered mortgages, and those that didn't-primarily small CUs-saw weaker loan growth overall than those that did. "When mortgage rates drop members not only see that as an opportunity to purchase homes and take out first mortgages, but also to refinance existing mortgages. They use the money not only to prepay first mortgages with higher rates, they also fold in their car loans and unsecured loans. Credit unions that don't offer mortgages stand to get hit twice - first because they can't compete for the mortgage loans, and second because the member winds up taking their consumer and unsecured loan dollars out of the credit union," says Schenk. In 1999, the Mortgage Bankers Association reports that refinancing volume was 34% and in 2000 it dropped to 19% due to higher interest rates. The MBA predicts that in 2001 refinancing will account for 41% of mortgage loan volume. "Whenever mortgage rates are significantly lower than the rates borrowers are paying on their existing loans, you tend to get this sort of refinancing behavior," says Bill Hampel, senior vice president and chief economist for CUNA. That doesn't worry Schenk too much because, "Credit unions that offer mortgages will always get their share of the refi business," he says. "For every credit union mortgage a member refinances outside the credit union, there's the first mortgage a member got from a bank that they refinance through a credit union. The mortgage dollars go both ways." Even if large credit unions are able to offer their members more refinancing opportunities, it's still a delicate decision for them just how much they should lower their rates, says NAFCU Economist Jeff Taylor. "They have to balance between offering lower interest rates, keeping the members' loan dollars, and considering their net income." So far, Taylor says NAFCU is not expecting federal credit unions' loan-to-share ratio to "change significantly" as a result of lowered interest rates. But refinancing definitely limits small credit unions' loan volume, says Hampel. "It's easier for them to lose loan volume than to pick some up because of the lower mortgage rates other credit unions and financials are offering," he says. Schenk agrees that when it comes to the distribution of loan portfolio dollar amounts affected by refinancings, "Smaller credit unions unfortunately tend to be disproportionately affected by this." Schenk does not see this creating a long term problem for small credit unions, nor is it a portent of an impending crisis for them. "Historically it hasn't taken long after a period of high refinancing for auto and uninsured lending to pick back up to the level it was at before," he said. But he does recommend that credit unions not currently offering mortgages to explore the possibility of either doing so directly or through a third party. "Of course you could make the argument that after members refinance and pay off a lot of high-rate debt they tend to feel richer, then take on more debt which often means taking out more unsecured debt," Schenk offers. "But considering that so much more of credit that used to be used for unsecured loans and auto loans and that's being extended today is related to mortgages and home equity loans because of the tax advantages for members, it makes sense for small credit unions to consider offering mortgages," Schenk says. Hampel suggests small credit unions talk with their league or large credit unions about the possibility of getting involved with participation loans. They should also consider offering mortgage loans and processing them through a third party. He also encourages them to continue to market and push their consumer and unsecured loans hard. "Small credit unions can expect to see a drain on their consumer loan volume as a result of the high number of refinances that are expected this year," says Hampel. "Refinances are not an unsurmountable obstacle, they're just another hurdle small credit unions will need to overcome." -
ekingoff@cutimes.com
