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WASHINGTON – Hurricane Katrina may have stormed into the Gulf coast going on a month ago, but the affects will be long felt by the people who live there and businesses. With so many lives disrupted, what are the ramifications for credit unions’ loan portfolios? The good news, says CUNA Chief Economist Bill Hampel, is that prior to Katrina, credit union loan losses and delinquency rates were at an all time low – .64% as of June. In fact, according to CUNA’s Economics & Statistics Department, credit union delinquency rates held steady at .6% from February-June, and in July dipped to .56%. Hampel attributes the record low figure to two factors – credit unions are typically cautious lenders, and CUs’ loan volume has been growing fast. “Whenever you go through a period of loan growth, your charge-off and delinquency rates fall,” he explained. Without Katrina, Hampel expected credit unions’ delinquency rates to level off and possibly even rise “a little” because of a slowdown in loan growth. “They couldn’t go much lower,” he quipped. But then there was Katrina, and Hampel admits, “In the affected areas, I have no clue of the increase in charge-offs we’ll see. To the extent that Katrina causes a larger volume of charge-offs or delinquencies, that will be because of the decrease in credit quality. A borrower’s inability to make their loan payments depends on an interruption in their income, but there may be some mitigating factors.” For example, he explains, some members of credit unions in the Gulf States devastated by Katrina may be employees of businesses based in the Midwest, so they’ll still be receiving paychecks. In addition, says Hampel, many of the members in these areas are retirees whose income depends on Social Security so their source of income won’t be interrupted. “They’re ability to pay their loans doesn’t depend solely on the economy of Louisiana, Mississippi or Alabama,” he says. Hampel emphasizes that, “I’m not saying there won’t be significant affects on the members or credit unions in those areas, but we’re starting from the position of the best overall credit quality credit unions have ever had.” In addition, “To the extent that insurance covers the collateral backing of credit union loans, that will soften the blow on credit unions so the financial affects of the hurricane on credit unions won’t necessarily be disastrous,” says Hampel. NAFCU’s Dr. Tun Wai, director of research and analysis says “any loans in that region are going to need forbearance. Lenders are going to have to find a way to contact borrowers to see if the collateral is there.” That of course could prove to be extremely challenging for lenders considering the number of people from affected areas, especially New Orleans, who have been moved to other states. “We know Katrina has had a tremendous impact on the Gulf region and the immediate concern is getting people up and running. Under these circumstances we’ll find financial institutions willing to bend over backwards to get loans paid off rather than having to charge them off, and that gets into the question of just how long they can do that,” said Wai. “If a credit union has a mortgage loan with a member affected by the storm and who can’t pay their mortgage because they’ve lost their job because of Katrina, if the mortgage is paid off by insurance then that can ameliorate the losses to the credit union,” says Hampel adding that there are still many unknowns at this point. The CUNA economist stresses that despite the widespread destruction in New Orleans, Mississippi and Alabama that will potentially affect the viability of many credit unions in those areas, the situation could possibly also offer opportunities for credit union growth. “There are many people who have left New Orleans saying they’ll never go back. But I expect there will be an economic boom in the city in the next six months as a result of reconstruction and redevelopment. Even if it’s not the same people who left, where will be new people coming in. These are potential credit union members and people who will need credit union services,” says Hampel. Wai agrees, adding that, “The government will be spending a lot of money down there and the same with the private sector. That might encourage people to come back.” As for the future viability of credit unions in the region, Wai notes that most of the credit unions were “pretty healthy” pre-Katrina. But looking ahead, he says “we’ll probably find a lot of mergers occurring as opposed to just liquidations as a way to avoid insurance costs or at least to keep insurance costs lower. In the long run it depends on the local economy and whether it will revive.” On that note, Wai prefers to be optimistic. “I think there’s a lot of resiliency in the way they survive. These credit unions may not be the same kind of institutions they were before Katrina, but they will still be down there,” he says. -

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