SAN DIMAS, Calif. -- Dwight Johnston is WesCorp's vice president of economic and market research, and provides daily and long-term economic commentary for the corporate. He also oversees WesCorp's training, seminars, Webcasts and investment publications.
WesCorp's Future Forum, which kicked off May 19 in San Diego, features a number of big league economic speakers this year, including Deutsche Bank Chief U.S. Economist Joe Lavorgna and former White House Director of Economic Policy Todd Buchholz. In a nod to the economic challenges that face California and other western states, this year's Future Forum is titled Weathering the Storm.
Credit Union Times sat down with Johnston to discuss the stormy economic weather out west, and what will be on the minds of Future Forum attendees this year.
Credit Union Times: What are some of the problems facing WesCorp members? And, more specifically, your members in California?
Johnston: Obviously, especially in the fourth quarter last year and first quarter this year, credit unions have had to increase loan loss reserves, because they've seen rising delinquencies and charge offs. They've been rightly sobered up, because it's been so many years since we've had to think about loan losses.
Ironically, most aren't coming from first mortgages because credit unions maintained high standards and didn't chase Internet lenders and make suspect mortgages. But those who did a lot of home equity lending are beginning to see problems there. And, in talking to credit unions in the state this year, a lot of them are surprised by the spillover effect into delinquencies on car loans, credit cards and other consumer loans. A lot of credit unions are seeing members falling behind who haven't ever done that before.
CU Times: What about rising gas, utility and food prices? Is that also having an effect?
Johnston: Some of that definitely has an impact, especially here in Southern California where we have such long commutes. Any metro area with heavy commuting is feeling that effect.
Over the last several years, an explosion in consumer debt has taken away the cushion most consumers had with disposable, discretionary income. Before, they could absorb price increases without changing behavior. But now, because of debt, there is less room to cushion those increases. Most can't even use home equity to get them out of trouble anymore. Credit crunches are bad news, and that's what we've got now, in a big way.
CU Times: So, what are you telling credit unions that need more loans on their books?
Johnston: There are some opportunities in lending. We are actually seeing a lot of credit unions increase their efforts in mortgage lending. They haven't suffered the big losses, and now that values are starting to make sense again, people are coming back.
There are still a lot of very qualified borrowers out there who need to refinance and have traditional equity stores in place. We can always question where bottom of housing market is, but as long as a credit union has strong underwriting, they can still book some good loans. First Financial Credit Union and [SchoolsFirst] Federal Credit Union have some great lending programs in place that are helping their members.
We also think one area of growth for credit unions is small business lending. There are a lot of attractive opportunities there, and we're seeing more interest in that, but it's still a relatively small number.
CU Times: What do you tell small credit unions that don't offer mortgages or business loans?
Johnston: Really, for small credit unions, it's tough. They already run lean, and for those who are dependent upon auto and personal loans, it's going to be a tough year, period. There's really no good outlet for them now, unless they get involved in conforming mortgage lending. I wish there was a magic wand for small credit unions. A strong niche, I suppose, will keep any small or mid-size credit union healthy, if they can do a good job serving a geographical area or group that is not being served elsewhere.
CU Times: What about the recent news about laid off teachers and other government workers? According to the California Teachers Association, more than 14,000 teachers have been laid off, thanks to an expected fiscal 2009 state budget deficit of more $16 billion.
Johnston: One concern is what the state budget will mean for municipal workers, teachers and the credit unions that serve them. Their ranks have always risen steadily over the years, so it would be a shock if a large percentage of those jobs were eliminated. I read today that the city of Vallejo just became the first California city to declare bankruptcy, an example of what can happen when a community's tax base is destroyed due to a collapse in the housing market.
The biggest employment hit has been in construction, which affects not just construction workers but all the related companies, too, like home improvement retailers. Not to mention the thousands of jobs in Orange County that were eliminated when all those subprime mortgage shops closed down. We might see some more layoffs when the Countrywide-Bank of America merger is completed. It's tough right now.
CU Times: What needs to happen before things can improve?
Johnston: First, we've got to find a bottom in home prices, which could happen sometime this year. Secondly, the securities market, we're starting to see some improvements there, but it's not ever going to be what it was two years ago. We burned the investor base worldwide, and when you talk about destroying an entire investor base, especially in a product that exploded to epic proportions, that's a huge deal. Once the system as a whole gets back into lending business, then we can start turning things around. When you get a credit crunch like this, it severely cramps economic growth, and recovery just takes time.
One of the things I like to point out to people is that if we just paid attention to history, we wouldn't have been surprised about our current situation. The only time we've had a boom this big was in the 1920s. Back then, you could margin stocks up to 95%, which didn't turn out so well. What's the only other asset you could margin that high? Houses. Apparently, that's not a good thing to do, either.