ARLINGTON, Va. -- The NAFCU Board met with Federal Reserve Governor Kevin Warsh and staffers on Dec. 4th, its 15th such annual meeting held to discuss credit union issues and present the findings of its 2007 Report on Credit Unions.
"We had a very good conversation with Governor Warsh and other Federal Reserve staffers," said NAFCU Chief Economist Dr. Tun Wai. "We gave them an overview of credit unions' situation in the financial marketplace. These talks are for the most part confidential, in order to allow a frank conversation, but I can tell you that we told them that credit unions were doing just fine. They are very interested in hearing about 'where the rubber meets the road' in terms of lending, particularly with regard to problems in the mortgage area."
The significance of such face-to-face meetings to promote CU initiatives is perceived as a lobbying plus for NAFCU, which represents some 800 credit unions.
Federally insured credit unions have a healthy net worth of approximately 11.7%, even better than last year's 11.5% and well above the 7% "well capitalized" standard. Return on Average Assets (ROA) is projected at 0.75% this year, some seven basis points lower than 2006 (0.82%). Delinquency remains low and real estate demand--particularly for first mortgages, which represent 76.1% of total loan growth--is "buoyed," said NAFCU. Overall, loan growth for 2007 is pegged to out-perform share growth, which was 4.8% during the first half of the year.
Real Estate Picture
NAFCU's report finds that CUs' first mortgage lending is sound, despite the current mortgage market turmoil. "We may have higher standards but CUs will still be affected. A good way to think of it was the remark made by American Airlines FCU President John Tippets, who said, 'We're not involved, but we're not immune.'"
First mortgage loans grew by 5.7% to $168.9 billion and other real estate loans rose by 2.4% to $86.4 Billion. Second quarter results show that real estate secured loans were 50.4% of total loans and 34.5% of total assets. CUs offering longer term loans (40 years) were up 1.3% from 21% last year and only 6.3% of CUs surveyed offered payment option loans, compared to 10 a year ago. Also, CUs offering interest only loans were down 2.8% from last year's 25%. NAFCU found that these categories are limited in scope at FCUs. CUs approve a higher percentage of loans to low- and moderate-income borrowers and do not charge significantly higher rates, said Wai, who added, "HMDA data bears that out."
CUs participating in the survey said all of their mortgage loans could be sold to the secondary market. Originations are also up, with 35.1% of responding CUs seeing an increase over last year and one-third attributing that spike to "recent problems with other mortgage providers." The ratio of adjustable rate mortgages dropped to total firsts dropped sharply in the past few years from a high of 27.6% in 2003 to 16.6% in June 2007. Delinquencies in first mortgages rose to 4.1% in June over 3.5% last year, as compared to banks' decrease from 16.6% to 16.4% but that amount is still four times as high as the ratio for all FICUs.
Impact of Rate Cuts?
Wai spoke about the likelihood of another rate reduction at the next meeting of the Federal Open Markets Committee on Dec. 13 and the habit of economy watchers and pundits of trying to read the tea leaves. Federal Reserve Chairman Ben Bernanke "needs to look at further changes due to inflationary problems that might impact consumer spending," said Wai. After the last reduction in the rate of a quarter-point Bernanke was reluctant, signaling a neutral position, but his concern now has to be an obvious slowdown in the fourth quarter. "He's seemed to speak with forked-tongue, but the question is whether we'll have a significant slowdown in Gross Domestic Product, or negative growth in GDP."
The credit crunch and continuing fear of the effect that high home foreclosure rates will have on consumer spending may be altering the Chairman's thinking, allowed Wai. The contrast with former Chairman Alan Greenspan is a marked one, he said.
"The speech Bernanke gave a few weeks ago--the 'transparency' speech-- was important, because it indicates that he'll consider the rising costs of food and energy. Oil is the grease that keeps the engine running and the simple truth is that so much of this is about expectations. If you think that gas prices will continue to go up you'll not spend so much. This energy effect has already been seen is rising consumer fears, the confidence level of American consumers is down. I think the Chairman has been more cognizant of that recently."
The credit crunch and the infusion of foreign money to bolster it also come into play. In all things the balance must be found and a comfort level achieved. "The Saudis are pretty upset at the rising cost of oil because they prefer a sustained market over a volatile one. They also want to keep the price level because it makes seeking alternative energy sources less palatable. And others realize that if the price of oil goes too high then people will start to conserve."
All of these shifts, said Wai, will play out over the long run, and the Fed's role is to prevent the slowdown from continuing. "I think they will cut the rate by another quarter-point (25 bps) while others are predicting more aggressive action of a half-point (50bps). We'll see."
Are banks and mortgage companies really turning off the credit spigot? "The important thing to watch is the small business arena," said Wai. "Small business is the job generator in America now, and I've heard that it is becoming harder for them to borrow money. Without the capital to grow, we could really see a problem. But I've also heard that the FDIC, whose premium is based on assets, may charge a premium to member banks. If they don't want to pay the higher premium they can simply stop making loans."
Risk standards may also be a factor in the drop of available credit, said Wai, who noted the relatively conservative nature of the NCUA toward increased risk, compared to Wall Street (and bankers') acceptance of risk. "NCUA will say to CUs, 'Don't make bad loans!' as opposed to Wall Street which assumes a level of risk and expects a portion of the portfolio to be a possible loss."
The turnaround in risk assessment may crimp the availability of credit somewhat, but A and B paper will always move swiftly. The change will come on the standards applied to C and D paper, he said. "Those that have the ability to sustain losses on lower loan quality will have to assess those standards. Credit unions already are facing a tight spread on earnings, so looking at a portfolio--particularly a real estate portfolio--means taking a hard look at the risk of possible losses into the future."