Potential Asset-Liability Mismatch in Credit Unions' Future

Low-interest rates drove record-breaking years in mortgage originations in 2001 and 2002, and the start of 2003 indicates a continuation of that trend. That volume is the only thing keeping loan balances growing in credit unions, but today's low-rate volume could become tomorrow's asset-liability mismatch.

 
 

Low-interest rates drove record-breaking years in mortgage originations in 2001 and 2002, and the start of 2003 indicates a continuation of that trend. That volume is the only thing keeping loan balances growing in credit unions, but today's low-rate volume could become tomorrow's asset-liability mismatch.

Credit unions over $100 million in assets (they make up over 70% of all credit union assets and drive industry trends) granted $17.4 billion in first mortgage loans in the first quarter of 2003, an increase of 33% over the previous year. But only about $4 billion of that are new loans. Approximately 75% of all mortgages granted during that time period were borrowers refinancing at a favorable rate and then paying off their more expensive loans, essentially leaving the credit union with the same loan balance earning a lower yield.

Credit unions, fearful of holding too many low-yielding long-term loans, have been selling a lot of their loans on the secondary market. Those over $100 million in assets sold $8.2 billion in mortgages in the first quarter. It's indistinguishable whether those sold were newly granted (or refinanced) or were already on the books (although credit unions would be more inclined to sell newer loans generating lower yields). However, it can be seen that even though $17.4 billion were granted, outstanding mortgage balances grew only $3 billion during the same time period.

Strong originations with a small balance increase indicate a short estimated maturity on loans. Based on first quarter data, the estimated maturity for mortgage loans is only 18 months. Estimated maturity is calculated based on total dollar balances and the estimated amount paid down each month, where payoffs due to mortgage sales and refinances are included. An estimated maturity of 18 months does not present a significant asset-liability problem,

 

 

 

July 14, 2003


Comments

 
 
 
  • I don't like blanket comments as you made in the last paragraph. Most credit unions ALM strategies will be fine with mortgage loans even at todays low interest rate. The ones that have issues should be selling more of their loans, not stop originating mortgages. Without mortgage loans, credit unions would have serious trouble from both fee income and more importantly member retention. The mortgage has been shown to be the key driver in a member considering the credit union their PFI, if we encourage them to stop originating loans, we are asking them to let their members go down the street to banks and potentially lose their entire relationship. Simple comments like you made in this article can do damage for several months to come when directors and CEO look at this as advice as to how to run their credit union. I thought you were more responsible than that!
    Anonymous