This October an estimated $50 billion worth of adjustable rate mortgages are set to be re-priced. Based on the current state of the mortgage market, and the sheer volume of ARMs that are set to be re-priced, many individuals will have a tighter squeeze on their wallet in the coming months. Credit unions, as a $757 billion industry, can be a major player in helping members who have been, or are about to become, trapped in an adjustable rate mortgage.
Although it may seem as though credit unions are stretched just as thin as other mortgage providers, the truth is that credit unions, as balance sheet lenders, have a unique opportunity to respond in a meaningful way. Whereas most institutions must reach outside themselves in order to find the liquidity to increase mortgage originations, credit unions have that liquidity built right into their business model.
Currently, credit unions have a large amount of liquidity that they can use to expand the amount of mortgages they are offering to their members. As of the June 30th, credit unions have $145 billion worth of investments on top of the $63.5 billion held in cash. This additional liquidity would allow credit unions to continue the pace at which 1st mortgages are being originated ($28.9B in the first half of the year) and still be left with almost $100B of liquidity in December.
This continued focus on mortgage originations might post an ALM risk for many other financial institutions. Credit unions however have managed to keep their Real Estate Loan/Share ratio at roughly half of the total loan to share ratio consistently over the past five years. Although many of the mortgages credit unions might originate would not be saleable in the secondary market, credit unions are not currently stressed for liquidity and since real estate loans currently comprise around half of a credit union’s total loans, credit unions do have some flexibility.
Although the current status of the credit union industry will allow for credit unions to come to the aid of their members, many people might be concerned that too much of a focus on mortgage originations might decrease the positive numbers in credit union liquidity and loan flexibility. Although this is possible, the good news is that if credit unions are looking for more liquidity, it is available. Credit union borrowing in the second quarter fell to $15.4B, a drop of over $5.5B from year-end of 2006. This means that credit unions have the flexibility to increase their borrowings if it becomes necessary in order to keep liquidity at a manageable level.
All of these factors have positioned credit unions as a substantial asset to their members as these ARMs begin to re-price. Credit unions clearly have the ability to come to the aid of their members, the only thing that remains to be seen is if they are willing.