Credit unions continue to need funding sources to finance their 10.7 percent loan growth. Many analysts now expect that the housing market will avoid its forecasted demise. Although new home sales in February 2006 were down 13.4 percent over a 12 month period to 1,080,000 units, sales were still at historically high levels according to National Association of Home Builders. Liquidity remains an issue even though some credit unions have reported slower loan growth in the first few months of 2006.
Available sources of funding include:
- New deposits
- Secondary market sales
Credit unions’ share growth fell to 3.8 percent in 2005 as their pricing strategies have largely not kept pace with the short-end of the yield curve. Analysts predict that the industry will be caught in a similar growth trend over the next few years, especially for those institutions that do not have a business services program in place that can attract large deposits.
Several credit unions issued one-time bonus dividends at the end of the year, but it may not be a sustainable incentive when members can receive higher rates at other financial institutions throughout the year. The question credit unions need to consider is whether it is more expensive to more aggressively price deposits or to borrow the needed funds.
Borrowings increased 28.9 percent to $20.1 billion in 2005, the highest level on record. Borrowings maturing in less than one year increased from 46.8 percent to 51.5 percent in 2005. However, it has become more expensive to borrow on the short-end of yield curve as short-term rates have risen faster than long-term rates, resulting in a narrower spread.
Credit unions could also consider selling mortgages to the secondary market to fund current loan demand and enhance liquidity.
Secondary market sales
First mortgage sales to the secondary market have fluctuated historically based on mortgage demand. Sales increased 2.4 percent to $20.5 billion in 2005. However, both purchase and refinance demand were lower in 2005 than during the height of the refinance boom in 2003 when first mortgage sales reached $37.7 billion.
An interesting note is that first mortgage sales were 35.0 percent of first mortgage originations in 2005 as compared to 40.3 percent in 2003. Even in a period of tighter liquidity, the decline could have resulted from credit unions originating more ARMs and non-conforming loans that they are keeping on the balance sheet.
The secondary market has positioned itself to play a larger role in the credit union industry by accepting more non-traditional products. These include one-close construction loans, 40-year mortgages, jumbo loans and several ARM products.
The secondary market is efficient, priced competitively and a willing buyer. Credit unions can receive a one-time premium for selling mortgages servicing released to the secondary market, sell them at a discount, or receive ongoing revenue if they retain the servicing rights. These options increase credit unions’ non-interest income, make room for new loans, allow them to accept more loans that meet secondary market guidelines and expand their member relationships.
With loan demand forecasted to remain strong over the next few quarters, it is critical for credit unions to not only consider how they will attract new sources of funding but also how they will place emphasis on the above three options.
Learn more about successful strategies for working with the secondary market on the upcoming webinar, Optimizing Performance Using the Secondary Market, sponsored by Charlie Mac and The Callahan Center for Credit Union Leadership.