Experts Assess the Future of CUs In a Brave New, Post-Bubble World
BALTIMORE --While credit unions generally so far have been able to stay clear of the fray, they are not entirely immune from the overall financial marketplace mess. Credit Union Times asked several industry leaders their opinions of the impact of the credit on bubble on several parts of their operations: lending--including mortgage, auto and student loans--as well as CUs basic structure and competitiveness.
Dennis Dollar, principal partner of Dollar Associates LLC; Bruce Beaudette, CEO of Sunmark Federal Credit Union; Dave Colby, chief economist at CUNA Mutual; and CUNA Mutual executives Bill Jolicoeur, vice president and product executive; Tom Keepers, director of project management; and Jeff Meyer, vice president of private student lending, participated. Here are the answers from the virtual roundtable:
Credit Union Times: What impact do you foresee on mortgage lending, student loan lending, auto lending and others?
Dennis Dollar: The current financial crisis will result in a serious tightening of credit. As is often the case, the pendulum swings from loose credit with resultant losses to tight credit with a lot of folks left out when they need a new car, first home or start up business. I fear that an overreaction to the current financial crisis could result in the next crisis being the inability of persons of modest means to access the necessary credit to become financially self-sufficient with a car, a home or a new business.
Bruce Beaudette: As far as mortgage lending goes, Sunmark has experienced mixed blessings since the mortgage bubble hit. On the one hand, with credit tightening and fewer mortgage lenders in business, we are getting applications that we might not have otherwise received, so our volume is pretty good. On the other hand, there is less home buying and refinancing so the two even each other out. We are expecting those dynamics to continue for the foreseeable future until the real estate market turns around, but we expect to hit our mortgage goals for 2008. We may be lowering our sights a bit in 2009 on mortgage volume.
Student loan lending has been very slow for us over the past two years as many colleges designated exclusive lenders for their students. I'm really not sure where the whole student loan industry is going right now with reforms being proposed and implemented. We would like to take part in making student loans in the future, but in light of the credit crunch, our own tight liquidity and the reforms, we'll have to wait and see.
Auto lending is tough right now, and the outlook isn't very good. We are holding our own with used auto loans right now, which has always been our specialty, but new auto sales are real slow. I believe the system is very clogged up because members want to downsize to more energy friendly vehicles, but they can't sell or trade in their SUV's because there is no market for them. We do offer rate specials for members that move to a more energy efficient vehicle as part of our "Going Green/Member Helping Member" promotion.
Dave Colby: Regarding mortgage lending, most of the crazies have left the street and many others who depend exclusively on the secondary markets have no money to lend. CUs have the opportunity to not only grow their share of U.S. mortgage originations but to set strict underwriting standards (for the borrower and the collateral) and price fairly based on their cost of funds and risk assessment. CUs will be there when others have failed.
The vehicle loan portfolio is currently contracting, especially new vehicle loans (payoffs and amortization clearly exceed new credit extensions) the cost for manufacturers and dealers to buy down financing rates (i.e. 0.0% financing) has increased dramatically. Not only has the base rate (Libor) increased because of the credit crisis, so have risk premiums. It is certainly less economically viable to buy down interest rates. We will likely see more price competition, more "buy like an employee" incentives going forward. Although credit unions will have more opportunities to get new vehicle financing, the reality is there will be many fewer vehicles to finance, especially over the next two years.
Bill Jolicoeur: While lending activity varies from area to area, the importance of a fully protected loan from life and disability exposures continues and CUs are taking advantage of the opportunity to sell these products. From these sales, the credit unions earn fee income. While lacking creditable statistical data, it seems intuitive to believe members are holding onto their existing automobiles and automobile loans longer while shedding other debt from credit cards. Credit unions benefit in two ways: additional interest income as well as additional fee income earned from the continuation of insurance protection on the loan.
Tom Keepers: Dealers are really fighting for every scrap of income so indirect sales are above plan. They're seeing members with higher negative equity coming in the door and they look at GAP as a nice fit; they're also financing lower loan amounts on lower MPG vehicles so they're cramming products on to the loan to get that loan balance up (they earn income as a percentage of the balance).
Direct sales to members via credit union loan staff are also strong this year considering the economy. Prevailing theories are that members see a flight to protect risk. Others are turning over their higher MPG vehicle in favor of better gas mileage. Credit unions see the value of GAP as a risk management tool as auto values fluctuate and this will occur for some time.
Jeff Meyer: The credit union member (i.e. the student borrower and co-signer) will see a few things play out in private student loans. The underwriting standards will likely tighten even more. With credit being as tight as it is, the underwriting will get tighter.
Prices on private student loans will increase. In order to attain the capital, offset the increased cost of capital and price it appropriately for the risk, the price of the loan, interest rates and origination fees, will likely increase.
Supply will be tight. With a number of private student loan suppliers previously reliant on the securitization market, fewer providers are expected in 2008/2009 than we have seen in the past. With supply tight and demand strong, upward price pressure will continue.
If the securitization market does return for private student loans, it is likely that the cost to securitize will go up. This, too, will create price pressure.
It is worth a note that the federal student loans will see moderate impact from the credit crisis. The ECASLA (Ensuring Continued Access to Student Loans Act) from May of 2008 increased borrower loan limits and permitted the Department of Education to provide liquidity to lenders on federal student loans. As such, lenders who relied on the securitization market for federal loans now have the Department of Education to buy the loans (in lieu of the securitization market) without an increase in the cost of the market.
CU Times: Beyond that, what impact do you foresee on the basic nature of the credit unions as a result of the credit bubble?
Dollar: I believe that the financial crisis will be a window of opportunity for credit unions. The surveys tell us that most of the public feels that the 'greedy, profit at any cost' banks and brokerage houses contributed greatly to this crisis and that they have lost credibility with much of the public. The opportunity for credit unions to emphasize their local member ownership and cooperative, not-for-profit structure will be golden in the months and years after this current fog lifts.
We don't know how long the current fog will last or how long we may lack visibility, but history tells us that the market pendulum always swings back eventually. When the fog clears, credit unions can seize the moment to point to our structure as not-for-profit financial cooperatives that insulated us from much of the subprime mortgage business that helped create the debacle. It will be a tremendous opportunity for nationwide branding of credit unions that I hope we do not miss.
Beaudette: It will be interesting to see what new regulations come forth on the banking industry from the recent financial woes. I am also interested in what happens if or when the government takes partial ownership of the banks. There could certainly be implications for credit unions with more government oversight on the banking industry. Would it be more likely and efficient for the government for credit unions to come under the banking/government regulators? That will be interesting to see. Obviously, I do not see that as positive for us but I do see it as a definite possibility as this moves forward.
Colby: First, I see a capital ratio reduction as lower earnings (capital growth) are combined with a modest surge in safe haven deposits (asset growth). The biggest risk I see is a change in the fundamental value of a credit union charter. There are two routes to this conclusion which include one outcome or the other or both. The biggest impact I see is that once we begin to see some stability on the financial markets there will be a swift move to implement the Treasury's Blueprint report--that is one regulator. I believe the financial crisis we are currently managing through has shortened the time we can have our own regulator. Given all the government has now obligated itself to spend to fight this crisis, it will need to find new sources of revenue. Credit union taxation is definitely back on the table.
Meyer: The credit union will see impact on private student loans from the credit crisis. Credit unions may well see an increase in demand. Families that relied on savings and home equity loans to pay for college may find that the finances available from these two sources have diminished through the credit crisis. As such, the funding gap will exist. Private student loans are a possible solution for the funding gap.
Credit unions that have private student loans on their books in repayment may see increases in delinquencies and defaults.
CU Times: I spoke to one consultant who seems to think that CUs need to improve financial competitiveness. Any thoughts along those lines especially in regard to where they will be in competition with banks and other financial institutions as we go through this mess and beyond? Will the situation help, hurt them or cause them to change in some way?
Dollar: Credit unions are facing tight spreads and are certainly in need of seeking greater economies of scale. Some of this can come through pricing of new products and services; however, some of it will have to come through greater efficiencies. This need for economies of scale will likely increase the number of credit union mergers over the next several years as credit unions position themselves to pick up some of the slack left by the bank mergers which accelerated during the financial crisis.
The financial marketplace will become more and more challenging with bigger players as the Merrill Lynches and Banks of America merge, but credit unions are uniquely positioned to capitalize on the credibility gap many banks and brokerage houses are suffering during this financial crisis. The greater the efficiency, the better positioned credit unions will be to compete with what will be much larger and national competitors. Credit unions are positioned to become the dominant community-based financial institutions in many communities following the current financial crisis. However, credit unions will have to maintain their efficiency and effectiveness in member service in order to capitalize on this opportunity.
Beaudette: It's really hard to say how we will compete with the banks as they change how they look and as there are fewer players with all of the mega-mergers and failures. There's no doubt the playing field is changing, but it's too early to tell what the impact on us will be. I do believe that credit unions will need to be leaner and more efficient in the future and that the party days may be over for all financial institutions. I do believe credit unions can capitalize politically on the fact that we were not a big part of this financial meltdown and have become a safe haven. I also think that it was a good thing that we had socked away plenty of capital, which really serves us well during these tough times.