Safe Driving through a Tight Liquidity Cycle

To remain competitive, credit unions must have reliable sources when liquidity is needed. The secondary market can help.


Lately, it’s been tough for credit union staff to manage liquidity. While liquidity traditionally tightens during the summer months, this past year has been an especially difficult cycle. This is due to the summer explosion of car loans and skyrocketing real estate values nationwide, as well as twelve straight rate hikes by the Federal Reserve. Consider these statistics from Callahan & Associates:

  • Loan-to-share ratios are at their highest since 2000, hitting 79.1 percent in August, 2005.
  • During first quarter 2005, indirect lending comprised 33.5 percent of the average credit union’s lending portfolio. Of credit unions with more than $50 million in assets, more than 50 percent have made indirect loans.
  • First real estate loans grew by 10.6 percent in the twelve months ending June 30, 2005.

Many experts predict that liquidity will remain tight in the foreseeable future, which means now is an opportune time for credit unions to consider selling some assets. In response, many are turning to the secondary market to help manage the interest-rate, credit and liquidity risks associated with holding loans on their balance sheets.

The right direction with whole auto loans

With portfolios nearly on empty due to this year’s car-buying boom, credit unions looking for additional funding sources have an attractive option through whole-loan sales. Selling whole loans provides maximum liquidity and flexibility since credit unions are able to sell as many loans as their balance-sheet strategies require, regardless of the current stage of the liquidity cycle. It also frees up capital to make new loans and provides off-balance sheet accounting treatment for the loans. For credit unions with successful indirect-lending programs that must keep funding available at competitive rates for their dealer networks, selling loans to a secondary market investor is a smart move.

Credit unions that sell auto loans in the secondary market can partner with investors who enable them to retain the servicing. When credit unions retain servicing, they retain the member relationship, their most valuable asset! The servicing income continues to be earned, and additional products and services can be offered.

Street smart with jumbo mortgage loans

In today’s high-dollar real estate market, offering jumbo loans can be beneficial to the financial health and growth of credit unions, especially if a credit union is located in an area where housing prices demand larger loan balances. According to the NCUA, credit unions originating mortgages experience higher savings and loan growth, as well as an increase in their return on assets. But for credit unions in the jumbo loan business, challenges can arise in managing interest-rate risk, maintaining liquidity for other lending demands and, perhaps most importantly, maintaining member relationships.

More and more, credit unions are selling their jumbo loans to the secondary market in order to address these challenges. And, by carefully evaluating an investor’s available servicing options, jumbo loans can be sold without losing member relationships – a frustration frequently mentioned by credit union lending and marketing officers.

To remain competitive, credit unions must have reliable sources when liquidity is needed. By turning to the secondary market for help managing auto loans and jumbo loan portfolios, credit unions can keep both hands on the wheel while maneuvering today’s tight liquidity speed bumps.

Charlie Mac is a CUSO and secondary market investor that is committed to helping credit unions maintain their member relationships. Charlie Mac partners with corporate credit unions to offer this outlet to credit unions. For more information, contact your corporate investment sales representative.



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Nov. 28, 2005



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