Hot August days bring low liquidity and an increase in loan growth on the balance sheet. It’s the typical seasonal liquidity pattern we experience every year. And to stay competitive, credit unions must mold to the changing season and continue to offer attractive loan rates and products to its members.
Credit unions currently are experiencing the highest loan growth in several years – both for real estate and indirect auto lending. Indirect auto lending grew 7.8 percent last year, while real estate loans nearly doubled that number, growing 14.9 percent compared to the year before.
Selling loans to the secondary market makes sense for credit unions, especially during the tighter liquidity season we are weathering now. A secondary market investor can help a credit union clear its balance sheet, making room for new loans. Making more loans could increase market share. Aside from increasing a credit union’s market share, selling loans on the secondary market can help credit unions alleviate the interest-rate, credit and liquidity risk associated with holding loans on their balance sheets.
Two areas not normally talked about regarding secondary market investing include non-conforming jumbo loans and indirect auto loans.
First, jumbo loans. Credit unions can garner good financial health by offering jumbo loans to its members. The NCUA reports that credit unions that originate mortgages will experience higher loan and savings growth, while increasing ROA. Not to mention, more opportunities of expanded membership to an affluent market segment.
When selling jumbo loans to a secondary market investor, credit unions can manage interest-rate risk, maintain liquidity for other lending demands, withstand increased regulatory scrutiny of ALM practices, and most importantly, maintain member relationships.
“The key is to find a secondary market investor that works for a credit union,” said Gregory Wirth from Bethpage Federal Credit Union, located in Bethpage, N.Y. “This way, the investor understands the high priority credit unions put on member relationships, but also has the size and flexibility to obtain better pricing allowing the credit unions to pass that savings on to their members.”
Second, indirect auto lending. Callahan & Associates reports that indirect lending ate up a third (33.5 percent) of the average credit union’s lending portfolio during the first quarter of 2005, compared to the first quarter last year. This naturally dries up liquidity. But like jumbo loans, selling an auto loan to a secondary market investor will free up capital to make new loans, and provide off-balance sheet accounting treatment of the loans.
Scott Olson of Cities Credit Union in Vadnais Heights, Minn. can relate. “Selling a significant portion of our vehicle loans improved our liquidity and also provided us with important servicing income. On top of that we were able to maintain the all important relationships with our dealers and members. Members don’t even know that their loans are ‘sold’ since we maintain the servicing.” Olson sold the credit union’s loans to Charlie Mac using its CARPooL (Corporate Automotive Receivables Program for Liquidity) program, which provides credit unions the ability to retain the servicing relationship.
If there’s room for indirect lending on the balance sheet, a credit union can avoid turning a dealer away, which makes it difficult to re-establish a relationship with a dealer once that happens. Credit unions that have indirect lending programs need to keep their pipelines open with their dealer networks.
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.