ATLANTA — While credit unions experienced a 4% increase in new mortgage originations in 2008, the industry may have to wonder if rapid growth could be a set-up for falling earnings.
Speaking at the Georgia Central Credit Union Economic Symposium here this morning, CUNA Senior Economist Steve Rick asked if inflation and interest rates head back up will it impact credit union earnings. Probably not, he said, because "controlled reflation" of the economy is expected. Among the reasons for this happening is new financial regulations will lower the velocity of money, which is the rate of money turnover.
"Credit unions are booking 30-year mortgages at 4.8% to 5% and funding them with CDs. What will happen if rates go back up to 6%?" Rick pondered, adding there is some concern that this type of scenario was one of the factors that led to the savings & loan crisis years ago.
Rick said another reason why controlled reflation may occur, which could reveal more clues as to whether CUs could experience falling earnings due to rapid mortgage growth, is the Federal Reserve will counteract inflationary pressures caused by rising private sector demand by withdrawing bank liquidity and raising short-term interest rates. The economy's "slack" or "output gap" is also the largest it's been since the early 1970s, he pointed out.
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