SAN DIMAS, Calif. — WesCorp Executive Vice President/Chief Investment Officer Bob Burrell drew cheers from CUES conference-goers on Feb. 7, when he predicted a return to the days of steep yield curves, with spreads as high 200 basis points.
Burrell said he expects the Fed rate to drop to around 2.5% and stay there for most of the year, though he said he wouldn't be surprised to see it drop to 2%. That cheap source of funds, combined with less competition from struggling banks, could mean good news for financial executives.
Burrell and fellow WesCorp executives Dwight Johnston and Tony Kitt provided 2008 forecasts, as well as balance sheet and operational strategies, to about 40 members of the CUES Southern California/Arizona Council at WesCorp's headquarters here.
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"Mortgage loans are now 50 to 100 points wider than they were just a few months ago, and the 15-year spread is very wide," Burrell said, adding that 30-year jumbo loans are also a good deal.
However, Burrell cautioned that qualified borrowers could be hard to find. The WesCorp leader has heard credit unions reporting big increases in refinance applications, but if forecasts of massive home price drops are accurate — 15% to 30% nationwide, and even higher in California — only those with low loan-to-value ratios will be approved.
Dwight Johnston, WesCorp's vice president of economic and market research, agreed that home prices could plunge in 2008, and also offered concerns that lower home values may offset any increased business from new buyers due to increased affordability.
"I have to wonder, who will be refinancing?" Johnston asked. "Not the people who need it–only low-risk borrowers already in good mortgages. So, I can't see that it will be beneficial overall to the market."
Johnston also voiced doubts that Fannie Mae and Freddie Mac's proposal to increase conforming loan maximums will provide much, if any, relief to strapped homeowners.
"Quite frankly, Fannie and Freddie don't have the capacity to add that much; after all, they just now returned to acceptable capital levels," Johnston said.
On the bright side, however, Johnston said drastic home price devaluations like those predicted for 2008 is one of many signs the market is finally bottoming out–watch for bankers to release a backlog of delinquent properties onto the market as foreclosures as another sign, he added.
"We're going to see a blowout of homes, but that's a good thing, because we'll finally have realistic home prices. People will be interested in buying homes again," Johnston said.
Compared to the banking industry, credit unions are well-capitalized and could see a rise in liquidity. This gives credit unions an edge over banks, not just in the retail market, but on the secondary market, too, Burrell said.
"There will be lots of places to sell good quality, originated loans," Burrell said. "It will be a tough year for loans overall, but in some areas, it will improve."
Burrell advised credit unions to update the role risk plays in balance sheet decisions, reviewing FICO score interpretations and closely tracking real estate market price trending.
"You need pay closer attention to individual loans in your portfolio when calculating risk," Burrell said. Credit unions with large mortgage portfolios have driven a current asset-liability management modeling trend to include detailed risk calculations.
"You can't paint risk with a broad brush, just applying numbers across the board," he said.
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