Members Undeterred by Higher Loan Rates

Economic theory and common sense tell us that loan demand should slack off as interest rates rise, but first-quarter data shows a different picture.


Economic theory and common sense tell us that loan demand should slack off as interest rates rise, but first-quarter data shows a different picture.

Interest rates have been on the rise, at least at the shorter end of the yield curve, for nearly two years. For the year ending March 31, the most recent date for which credit union data is available, the yield on the one-year Treasury stood at 4.77 percent compared to 3.30 percent a year earlier. The five-year note’s yield was up 0.55 percent to 4.72 percent, while the 10-year Treasury, to which mortgages are historically benchmarked, yielded 4.72 percent up from 4.50 percent a year prior.

In a rising rate environment, conventional wisdom advises that loan demand will soften. The overall economic environment also plays an important role in the demand for loans. Inflation has also grown year over year for the first quarter. Inflation accelerated from 3.15 percent in March 2005 to 3.36 percent in March 2006—above the Fed’s comfort zone. Also adding to the lending environment are factors such as the increase in gasoline and home heating prices.

Through Callahan & Associates’ First Look program, we can see how 725 credit unions representing 40 percent of the industry’s assets fared with their lending programs. Somewhat surprisingly, despite these new claims on consumers’ wallets, credit unions cranked out higher loan growth in the first quarter of 2006 than in 2005. Overall loan growth was 13.9 percent, compared to 13.3percent in the first quarter of 2005.

Loan Growth Composition Changes
The First Look data shows very strong lending performance in the first quarter of 2006, with better-than-expected growth given the economic environment in several categories:

  • First mortgages: on par with last year. First mortgage growth nearly matched last year’s 12.9 percent gain with 12.8 percent in the first quarter of 2006.
  • Other real estate: sharply slower, but still good. Higher rates have erased the incentive to refinance and slowed the pace of home equity loan/line growth from a breakneck 32.8 percent last year to a still above-average 24 percent in 2006.
  • Auto lending: a faster ride than last year! Auto lending growth accelerated to 10.3 percent from 8.0 percent a year earlier.
  • Credit cards: late-cycle strength. Despite the warnings that higher rates would eventually tighten consumers’ purse strings, it hasn’t happened yet. Unsecured loan growth rose from 2.8 percent in the first quarter of 2005 to 5.3 percent this year.
Growth Rates
3/31/2005 3/31/2006
First Mortgage 12.9% 12.8%
Other Real Estate 32.8% 24.0%
Auto Lending 8.0% 10.3%
Unsecured Loans 2.8% 5.3%

Credit Union Delinquencies Fall
There is talk within the financial services industry that this environment of higher short-term-rates has forced an increase in late payments, especially on adjustable rate mortgages (ARMs). According to the Wall Street Journal, mortgage delinquency rates are rising, as borrowers are stretched financially. Credit unions, however, are bucking this trend. As of first quarter 2006, delinquencies stood at 0.42 percent, this compared to the 0.47 percent posted for the first quarter of 2005.

First quarter 2006 data was released too late to have the entire industry statistics included in this article, so we’ve used FirstLook data to present the lending trends. To analyze first quarter trends for your credit union, check out Callahan & Associates’ Peer-to-Peer software.