But could that increase be a set-up for falling earnings for the industry? Speaking at the Georgia Central Credit Union Economic Symposium last week, CUNA Senior Economist Steven Rick asked if inflation and interest rates head back up, will it impact credit union earnings. Probably not, he said, because "controlled reflation" of the economy is expected. Among the reasons for this happening is new financial regulations that will lower the velocity of money, which is the rate of money turnover.
"Credit unions are booking 30-year mortgages at 4.8% to 5% and funding them with CDs. What will happen if rates go back up to 6%? Will credit union earnings be under water?" Rick asked, adding that there is some concern that this type of scenario was one of the factors that led to the savings and loan crisis years ago.
Rick said another reason why controlled reflation may occur, which could reveal more clues as to whether credit unions could experience falling earnings due to rapid mortgage growth, is that the Federal Reserve will counteract inflationary pressures caused by rising private-sector demand drawing down bank liquidity and raising short-term interest rates. The economy's "slack" or "output gap" is also the largest it's been since the early 1970s, he pointed out.
The housing scenario certainly continues to work in credit unions' favor even as the market is in a state of disequilibrium, Rick said. Indeed, the number of foreclosed homes is still rising, pushing home prices even lower as unemployment increases. The "vicious cycle" of the mortgage crisis has two "self-reinforcing spirals," he explained. Both loops start with falling home prices, which lead to negative equity, homeowners walking away or an involuntary foreclosures increase and a glut of homes on the market. The other loop has some of the same factors along with a decline in mortgage-backed securities, banks incurring losses as a result, bank capital declines and then a restriction in lending. At the end of it all, economic activity slows and unemployment increases.
"Why didn't housing rates fall in the 2001 recession?" Rick asked. "Because there was a lot of cheap and easy money and looser credit standards."
Rick said looking at past housing cycles where rates were down for four- to five-year stretches, he expects the current cycle to recover in the next two years, but it's still hard to say given the number of programs the government has rolled out to help it along.
Meanwhile, credit unions' earnings will probably not be affected by any rapid mortgage growth they may experience because worldwide growth will remain below potential for the next few years. There is also no possibility of a wage/price spiral with the unemployment rate headed into double-digit territory.