It’s no surprise that lending has been in the doldrums for many CUs the past few years but there could be an unexpected jolt triggered by fervor surrounding Bank Transfer Day Nov. 5.
“Consumers may be switching their business to credit unions for lower fees. Why not encourage them to bring their loans along as well, so they can experience the full benefits of credit union membership,” said Dave Colby, CUNA Mutual Group chief economist. “New strategies are required to grow loans.”
Looking at the latest data, the industry may be open to more approaches to boost sagging loan numbers. At $581 billion, total credit union loan portfolios are up 1.3% since March, but remained down 0.3% during the past year, according to CUNA Mutual’s October Credit Union Trends Report.
Despite positive loan growth in previous recessions, the current stubborn downturn has held on leading to stagnant lending for credit unions. Colby said other than used vehicle and credit card loans, interest rate risk avoidance strategies and the lack of consumer demand have generated year-over-year portfolio contraction for 19 consecutive months.
Since its peak in October 2009, the credit union loan portfolio was down 1.6% ($9.3 billion), even with a $4.5 billion (13.1%) increase in member business loans as of August, the data revealed.
“Our current economic forecast does not show any reversal of underlying trends. The recovery will be slow at best,” Colby said.
The brightest spot in many portfolios continues to be in the used vehicle category. At $107 billion, the loans represent 64% of total vehicle loans. Credit unions have expanded their used vehicle loan portfolio 3.7% year-to-date and 4.3% since August 2010.
Colby pointed out that prior to 1998, new vehicle loans held the dominant share. He considers this to be a structural trend rather than a result of the economic cycle. Looking ahead, overall vehicle loan growth is expected to remain muted well into 2013 with continued year-over-year contraction more likely to occur in the near-term, he added.
Meanwhile, real estate loans equaled 55% of all credit union loans and roughly 33% of total assets at the end of August, the report showed. Colby said these shares have not moved much in the past year and are forecast to hold into 2012, barring any shocks to the capital markets, the housing sector or employment.
“Credit unions appear to be at their real estate loan exposure capacity, [and] thus, a viable secondary [or] securitization market is critical for [them] to remain a player in real estate financing,” Colby said.
Mid-year data revisions had little impact on real estate-secured loans, which includes first mortgages, second mortgages and home equity loans, according to the data. As of August, at $317 billion, total real estate loans were down 0.3% over the past year. First mortgages were up 3.0% year-over-year. Still, Colby said these gains were not enough to offset declines in second mortgages because of fewer originations, write-offs and refinance payoffs, and a drop in home equity loans.
As of mid-October, Freddie Mac was reporting 30-year, fixed-rate first mortgage loans at 3.94%, which is the lowest level since they began reporting in 1971, Colby discovered.
“Given our extremely weak economic outlook, we see 30-year fixed rate mortgage interest rates remaining in the 3.9% to 4.3% range for the next few quarters,” Colby said. “This implies the credit union industry will not grow their real estate loan portfolio in 2011 or 2012 as the interest rate risk levels are too high.”
Over the next several quarters, credit unions may have to brace for an economy that is likely to limp along, Colby said. In talking with industry leaders in 19 states during his presentations and discussions, he said 98% of them felt they never exited the previous recession. This percentage has deteriorated since February and is more optimistic than what members believe, he added.
“With all of the global economic uncertainty, the likelihood of an overly dynamic regulatory environment and rising political rhetoric [and] gamesmanship, the only constant for credit unions is helping members with their financial security,” Colby said.