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CUs keep mortgages on books not much loan growth
MADISON, Wis. (10/13/11)--In a time when overall loan growth is weak, credit unions are keeping a lot of mortgages on their books, according to a Credit Union National Association (CUNA) economist. “Interest rates won’t go up any time soon, but at some point they surely will,” Mike Schenk, CUNA vice president of economic and statistics, told News Now, adding that 34% of total credit union assets are in long-term assets, up from 26% in 2007.
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“That shows longer-term assets are growing because credit unions are holding more mortgages on their books and suggests credit unions have more interest-rate risk, so that you get liability sensitivity as liability costs rise faster than asset yields,” he added. “This can very negatively affect earnings, and in some cases, capital.” So, what should credit unions do, given that environment? “Credit unions should be writing loans that are up to secondary market standards, so they can be sold if they need to be sold,” Schenk said. CUNA’s U.S. Credit Union Profile for mid-year 2011 indicates that while credit unions are holding on to about half of their mortgages, the percentage of originations sold has doubled from 2007 to 2010. “That shows that credit unions are actively engaged in measuring, monitoring and controlling interest-rate risk,” Schenk said. What credit unions have seen during the past few years with overall loan growth is that members are focused on paying down debt, so loan growth is very weak, Schenk explained. With current mortgage rates at historic lows, housing affordability is high, and therefore there is a lot of refinance activity and stealing of loans from other lenders. At mid-year 2011, about 62% of mortgage originations were refinancings--down from 70% in 2010, Schenk added, citing figures from the Mortgage Bankers Association. Should credit unions get more aggressive in pursuing mortgage loans? “Credit unions should respond to what their members want,” Schenk advised. “They are doing that. Credit unions should market effectively, and establish relationships with realtors--some have realtors in their CUSOS [credit union service organizations]--to be more effective lenders.” Credit unions are aware of the need to diversify their portfolios, but demand for loans is very low, and consumer credit scores have come down, Schenk said. “The financial position of the average consumer has deteriorated,” he added. “Members are in an extended process of trying to mend their balance sheets.” Last week, it was widely reported in the media that 30-year fixed-rate mortgages dipped below 4% for the first time on record. The economics of the mortgage lending business is such that the secondary market--the government-sponsored enterprises of Fannie Mae and Freddie Mac--can’t afford to let rates go significantly below 4% because then they couldn’t cover their costs, Schenk explained. “So even though the 10-year Treasury rates may go down because of the Federal Reserve’s recent ‘twist’ [of the yield curve by lowering long-term market interest rates], 30-year, fixed-rate mortgages may not follow it down,” Schenk said.


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