The impact that credit union real estate loan portfolios have on net worth has increased and drawn the attention of examiners, consultant Tracy Ashfield told her CUNA Mutual Group Online Discovery Conference audience Tuesday.
The Ashfield and Associates principal presented a session that aimed to help credit unions prepare for real estate examinations by regulators.
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Despite credit unions selling approximately 50% of all first mortgages to the secondary market, Ashfield said the ratio of real estate loans to net worth has risen to more than 200% this year. And, real estate loans have increased from 39% of total loans to 55% in the past 10 years.
While credit unions may look at real estate loan numbers and feel pride in how the industry has captured more market share, Ashfield said, regulators see increased risk instead.
Ashfield shared a graph she said was given to her from a colleague at the NCUA that shows credit unions have considerably more concentration risk in real estate than their peer bank competitors.
“This is not a matter of credit unions or regulators being wrong, but just recognize they are looking at it differently,” Ashfield said.
Examiners used to focus on loss mitigation, but new trends have them taking a closer look at credit risk, interest rate risk and concentration risk, she said. As such, credit unions should be prepared to answer questions about strategies to deal with rising interest rates and matching low-interest loans against a higher cost of funds.
Credit unions should also maintain solid risk management policies, board policies, concentration risk limits and third-party oversight. And, adequate internal controls that support accurate reporting and ensure appropriate segregations of duties for checks and balances are important to examiners, too, she said.
Ashfield stressed that credit unions have made great strides in real estate lending, and a proactive approach to examinations is a way to prevent jeopardizing that progress.
Credit unions must show that they are doing more than just making real estate loans, she said. They must also show that they can effectively manage those assets on their balance sheets.