WASHINGTON – The record low interest rate environment over the past 16 months was not only good for credit unions' mortgage portfolios, it also lowered their cost of funds and boosted their Return-on-Assets to record highs. "The very thing that caused high volumes of refinancing – record low mortgage rates – and lowered credit unions' yield on assets, also provided relief to credit unions in the cost of funds," explained CUNA's Chief Economist Bill Hampel. As of September 2002, ROA for all credit unions was 1.09% and 1.16% for credit unions with more than $50 million in assets, according to Callahan & Associates. That's almost 15 basis points higher than it was at year end 2001. "The evidence is in the numbers," said Callahan & Associates President Chip Filson. High volumes of refinancings also meant added income for CUs because of origination fees and loan sale opportunities on the secondary market, especially loans that were sold with servicing rights. In addition, the average premium credit unions have gotten from selling their mortgages on the secondary market "have been a little higher than usual," Hampel said. Even credit unions that held on to their first mortgages instead of selling them on the secondary market benefited because they earned origination fee income from refinances. "If anything, refinancings boosted credit unions' bottomline," said Hampel. Data from CUNA Economics & Statistics shows CUs' net income as of the third quarter 2002 was 108. That's not only higher than what their net income was for the first half of the year, it's also more than their net income was for the entire year 2001. This is particularly evident among large credit unions which tend to be more heavily involved with mortgage lending than small CUs. A low interest rate environment usually always benefits credit unions because they tend to do better in the refinance market than in the purchase finance market, offered Callahan's Filson. Credit unions, he explained, typically play a less significant role in the purchase finance market for several reasons, such as limited field-of-membership and limited access to real estate brokers. But CUs tend to be stronger players in the refinance market, he said, because they already have relationships with members. Hampel said anecdotally he's heard that some credit unions are concerned that continuing low interest rates will further compress CUs' rates and deplete the number of members interested in refinancing their mortgages. That in turn will put a squeeze on credit unions' net interest income. Credit unions should see some bottomline pressure in the coming months, he predicted. Even so, Hampel's not too concerned. "Credit unions tend to obsess about ROA," he said, "but that's what makes them so resilient. There are enough levers they can pull that affect ROA, and they pull them at the right time." -

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