The numbers throughout this year’s first three quarters look
good. By most traditional standards credit unions are doing very
well. Just look at savings growth: For the first time since the
1980s, credit unions are looking at back-to-back double-digit deposit
But let's look out beyond the beam of the headlights. It's always
good to be prepared for what might be lurking out there.
Let's look principally at this influx of deposits. The ''trouble''
that comes riding along with all the deposit money, of course, is
the need to do something with it. We are not money market funds
merely passing along what the market presents; we have to add value.
Mainly, this is done by making loans. Although loan growth has picked
up and share growth slowed over the last two quarters, the cash
inflow of shares has exceeded loans by $139.2B. Credit unions need
to find ways to make up the difference.
The normal means of making loans is, of course, making loans to
members. This is done one loan at a time, one evaluation at a time.
Increasingly, however, this is not going to handle our present situation,
especially at the large credit unions. Money has been coming in
wholesale; it is difficult to make it go out retail.
So perhaps we ought to be thinking more about lending wholesale.
At this credit union we have been successful at loan participation.
In addition, I know that some credit unions are looking at buying
HELOCs wholesale. Aside from these two ideas, it would probably
be a good idea to approach the likes of Home Depot and Lowe's and
come to an agreement about home improvement loans. Recently, at
least Home Depot has been announcing over intercoms in their stores
that they are offering $30,000 loans. I doubt they are the lenders
themselves. We should think about becoming indirect lenders for
such merchandisers. We probably also should be approaching the makers
of mobile homes, boats and furniture makers. Perhaps we should approach
Staples and Office Depot, whose customers might want loans for office
furniture and computers.
Real Estate Lending
Another strategy might be in adjusting the loan portfolio. Some
credit unions do not like taking their segment devoted to fixed-rate
first mortgages past 25 percent of all loans. But might it go safely
as high as 50 percent? It's worth considering. What with all the
hedges, swaps and mixture of products available, such a strategy
might do well at certain credit unions.
In addition, the average life of even a fixed-rate 30-year mortgage
is only about five years. That makes the interest rate risk far
less than in the past. Indeed, people do not see fixed-rate mortgages
the way they did a decade ago. They move homes frequently, and even
if they do not move they are quick to refinance when rates drop.
And they are quicker to refinance with less significant drops in
interest rates than in the past because the costs associated with
refinancing is dropping.
Indeed, more of the refinancing work is falling to technology. This
includes titling, appraising, and back office functions. And the
work along these lines is only half done; technology is going to
keep reducing these charges, which means even less expensive refinancings,
which means more refinancings.
Another place to look for loans is in the world of small business.
Everyone knows that this is where the economy has been growing.
Hundreds of new businesses start every day.
Do I hear you say that business lending is risky? You are right.
To succeed in business lending, you really have to know what you
are doing and you have to use your brains. Still, it can work.