The numbers are in. Callahan & Associates reported in its 2005 year-end data that the credit union loan-to-share ratio is almost 80 percent – the highest in ten years. Share growth is only 3.82 percent, and loan growth is a whopping 10.67 percent. These numbers are indisputable evidence that the need for liquidity still is present within the credit union community.
Callahan & Associates also stated in its 2005 recap that mortgage lending and new auto loan sales were the primary drivers of loan growth over the past year. As a result of the loan growth, as well as the contrasting share growth, many credit unions now are faced with a need for supplementary liquidity to fund new loans. One cost-effective way to obtain liquidity is through whole-loan sales. Let’s explore some of the benefits of whole-loan sales.
First, there is no up-front cost with selling mortgage and auto loans on the secondary market, which makes it a very cost-effective method for obtaining liquidity. Plus, the credit union ideally will get a gain-on-sale to offset the opportunity cost of the coupon, as well as the ability to book a servicing asset and realize a servicing yield on the credit union’s portfolio.
In a whole-loan sale, a credit union sells the entire loan to the purchaser and is able to move the asset off of its balance sheet without recourse. And, unlike securitization, whole-loan sales do not have a critical mass requirement. Instead, credit unions have pool-size flexibility – they can sell as little as $2 million to more than $200 million, making whole-loan sales an option for big and small credit unions alike.
Additionally, today’s economy can make selling loans ripe for the picking. The yield curve is inverted, and this could be an especially good time for whole-loan sales since credit unions can still sell their loans without much yield give-up, relative to the cost of sitting in cash to fund the new loan.
Selling loans to a secondary market investor:
- Helps manage interest-rate, credit and liquidity risk
- Creates liquidity for other lending demands
- Helps the credit union withstand increased regulatory scrutiny of ALM practices
- Provides off-balance sheet accounting treatment for the loans
- Makes room for new loans, which could increase market share and revenue opportunity
- Is a smart move for credit unions with successful indirect-lending programs that must keep funding available at competitive rates for their dealer networks
Plus, if the credit union works with a credit union-only secondary market investor, additional benefits may be realized such as the ability to retain both the servicing and the member relationships. In this scenario, while servicing income continues to be earned, additional products and services can be cross-sold.
“The key is to find a secondary market investor that works for a credit union,” said Gregory Wirth from Bethpage Federal Credit Union, located in Bethpage, N.Y. “This way, the investor understands the high priority credit unions place on member relationships, but also has the size and flexibility to obtain better pricing, allowing the credit unions to pass that savings on to their members.”
The NCUA reports credit unions that originate mortgages will experience higher loan and savings growth, while increasing ROA. Not to mention, originators have more opportunities for expanded membership to an affluent market segment. Finding a safe, trusted secondary market investor – ideally within the credit union system – is important, as is finding one that always will be there to buy loans, regardless of the liquidity cycle in the market.
Charlie Mac is a CUSO and secondary market investor committed to helping credit unions minimize the cost of managing liquidity and maintain member relationships. For more information, contact your corporate investment sales representative.