In the October Senior Loan Officer Opinion Survey conducted by the Federal Reserve, banks indicated they have tightened lending standards across the board. Lending standards on prime, non-traditional, and subprime residential mortgages were tightened at approximately 47% of banks, up from 2% in December 2006. A similar trend is seen in consumer loans.
Impact Beyond Mortgages
Increased delinquency and charge-off rates are driving stricter underwriting at financial institutions. One reason this is occurring is due to the subprime issues plaguing the credit markets. In a recent Wall Street Journal article (December 3, 2007), it was reported that of all subprime loans originated in recent years, approximately 55% of those borrowers could have qualified for a more conventional product. The severity of the current situation could have been lessened if these borrowers knew of the opportunities available to them and were not lured in by low teaser rate offers.
The effects of this are seeping out of the mortgage markets and into other areas. Of the $575 billion in auto loans originated, 4.5% were 30 days or more delinquent annually (Lehman Brothers survey in WSJ – December 6, 2007). This is up from a 2.9% rate the previous month, and is the largest one-month jump in eight years.
Are Credit Unions Performing Better?
Although not immune from rising delinquencies, credit unions still maintain higher asset quality than banks.
In the overall loan portfolio, credit unions posted a 0.82% reportable delinquency rate (loans that are two or more months past due). At 1.08%, banks had a higher rate of loans that were noncurrent (90 days or more past due). This difference is even more pronounced when looking at the real estate portfolio. Credit unions have a 0.57% delinquency rate on all real estate loans, 70 basis points lower than their bank counterparts.
When looking at components of consumer loan delinquency for credit unions, which includes auto loans, a similar trend is occurring. Credit union consumer loan delinquencies (excluding credit cards) stand at 1.06% as of the third quarter, up from 0.94% as of one year ago but remaining well below that of other financial institutions and finance companies.
Another important measure of overall credit quality is the coverage ratio. This measures how prepared a credit union is for future potential losses by comparing the allowance for loan loss to reportable delinquencies. As of the current quarter, the coverage ratio stands at 83.5%, meaning this percentage of the credit union industry's delinquent loans are covered by the allowance for loan loss account. Loan loss provisions grew 28.2% over the year while delinquent loans grew at 39.1%. Credit unions will likely set aside more in their loan loss provisions in the coming quarters to cover their potential losses.
Credit unions have an advantage over other financial institutions due to their strong balance sheets. Continuing to balance prudent risk management with member needs will help them maintain solid loan growth.