Credit Unions and CUNA Mutual Thrive on a Symbiotic Relationship
HOLLYWOOD, Fla. -- CUNA Mutual has been going gangbusters on is financial figures over the last few years, but this year is tough on everyone.
CUNA Mutual CEO Jeff Post told Credit Union Times in an interview from the Discovery Conference here that he did not expect to continue raking in the dough at the same rate the company had since he has run the ship. He said CUNA Mutual has certainly seen increased losses in primary mortgage insurance and a decline in earnings in investments.
CUNA Mutual has grown 25% in the past three years, but years like 2008 are exactly what their capital cushion is for. "Profitability in the credit union space is a dirty word, and it shouldn't be," Post said. He estimated that CUNA Mutual had profits in the past of about half what they should have been, and, he stressed, he's done it almost entirely without rate hikes; there was a plastic card increase.
CUNA Mutual's return on assets has been about 0.8%, roughly equivalent to credit unions', but not this year, Post said. "To be honest, I'd love to be 0.8% this year. It's not going to be 0.8% this year."
The economy is going to get worse before it gets better, but CUNA Mutual is well-equipped to handle the storm with its 25% capital, Post assured. "It probably will be fairly substantial. As we go into a recession, as credit unions suffer, we suffer," Post said.
However, CUNA Mutual is well-positioned with its geographic and product diversification. Post pointed out that some credit unions will have more trouble than others, like those in the hard-hit real estate markets in Florida and Nevada, whereas the local economies in Texas and the Washington, D.C.-area are generally better.
One way CUNA Mutual is working to buoy credit unions is helping them garner new, younger members. One pilot in particular Post sees having strong potential is a student loan program. "When they go through the application process, we're going to ask then, 'Do you belong to a credit union?'"
CUNA Mutual will do all the work for the credit union. When an Internet application for a student loan is filed online through its student lending partner, which is how nearly all are done, CUNA Mutual takes the information and recommends credit unions in the area of where the applicant lives and where he or she is going to school and offers a 50 basis point reduction if the student joins one of those credit unions.
The credit unions can also take the information to cross sell other products, including debit and credit cards and CUNA Mutual can cross sell insurance. Post emphasized that creating credit union awareness at that early stage is crucial in influencing their future financial choices and hopefully increase borrowing members bump the average member age back down. "This could be a huge home run for almost every credit union," he said. The pilot has 40 participating credit unions.
CUNA Mutual also offers a crop program for rural credit union CEOs and, prior to the mortgage meltdown, was looking at a securitization-type program but has scrapped that idea until there is a robust secondary market again. "It needs to come back. It has to come back," Post stated. "The credit unions and banks in this country can't take all the risk."
Above and Beyond
But CUNA Mutual offers more than just its for-profit insurance and investment products, among other things. True to its credit union roots, the company provides significant financial backing and other types of support to the cooperative movement.
Something that may not be widely known is that CUNA Mutual offers a revenue disbursement to the state credit union leagues for the business generated in their states. Additionally, CUNA Mutual is helping with the regulatory wrangling behind the scenes on Regulation Z, Truth-in-Lending. Additionally, CUNA Mutual has taken the lead on the unrelated business income tax battle, which is now waging in the courts of two states; the company has helped to provide education sessions around the country and performed legal legwork.
Post estimated that CUNA Mutual contributes somewhere between $40 million and $50 million to these efforts each year.
Away from sunny Florida, back in Madison, Wis., Post said the city was like an island after all the flooding because it is well-elevated but developed a moat around it. Employees in this area were not much hit, but their Waverly, Iowa, offices were quite a different story.
The smallest office in downtown Waverly, which housed 25-30 employees, was waterlogged; those staffers have been moved to a larger office in Waverly that managed to stay dry. Still, "a number of people" in those offices lost homes, according to Post.
The company did implement parts of its disaster plan.
CUNA Mutual, the insurer, doesn't expect to feel too much of the effects of the Midwestern floods. "We will take some losses, but flood is excluded," Post pointed out, though credit unions can purchase excess insurance. He said, more of the losses will be from things like a credit union employee trying to get into an effected office and slipping and falling.
Credit Unions Are Bucking the Trends by Gaining Mortgage Market Share
HOLLYWOOD, Fla. -- Robert H. Tort, director of private label solutions PHH Mortgage, said he had a very interesting conversation with an economist in a clothing store.
The economist said that the Internet bubble popping in 1999 led to today's real estate market problems. The gist of the idea was that when the bubble popped, investors turned to real estate and by 2003, a perfect storm of falling interest rates and increasing values led to the increase of subprime and alt-A credit as well as lax underwriting standards.
Wall Street made the same bet, in part based on the ratings agencies' assessments, the homeowners did--that values would continue to increase.
"But, what happened during that time was the homeowners made a bad bet, and the investors made a really bad bet," Tort said.
The rating agencies will have to make some serious education efforts to earn their credibility back and help reinvigorate securitizations. CUNA Mutual Group Director of Secondary Marketing Alan Bahr explained that the ratings agencies had an incomplete picture of the risks of the subprime market prior to the fall out. They were basing their ratings on essentially 10 years of historic data--10 really good years for the real estate market at the same time rates were falling. Prior to that, subprime was a very small percentage of the mortgages made.
"They didn't have the right data to analyze these deals," Bahr said. "Now they do. They've seen probably about as bad as it can get."
Also, part of what happened in the subprime crash was that investors got antsy with the A and B rated investments in collateralized debt obligations; they had higher risk with not as much return as the equity tranches. So, those A and B grade investments became their own subordinated CDOs.
Fortunately, credit unions, which have historically had trouble breaking 2% of the market are now around 3.5% as a result of their careful lending methods, Tort said.
Credit unions will want to save everyone, but they can't, he added. "Members will come to you with stories. You need to stay somewhat firm as to what you will and what you won't lend on," Tort advised.