Mostly overlooked since the Great Recession, they might pick up the slack for lagging parts of your portfolio.
For many credit unions, 2021 has been a tough year for loan growth.
First, the pressure to make loans has never been higher. As a lender, I’ve lived through three or four recessions (I inaccurately predicted seven of them), so I know that they tend to bring in deposits. Yet we’re not in a recession, and we don’t have money flooding in from a flight to safety. The flood of deposits that banks and credit unions have seen comes from all the stimulus money—so much so, it’s been impossible to lend it fast enough.
Secondly, it’s been an ugly year for auto lending, especially on the indirect side. The manufacturers’ use of 0% financing combined with interruptions to the supply chain for new vehicles due to the chip shortage has left Ent’s indirect portfolio virtually flat in the last 15 months. What a huge change over the previous six to seven years when there were regulatory, management and board concerns over the strong growth in indirect lending portfolios!
Another observation about the lending business, this time from our commercial/member business lending area, is about the level of competition for commercial loans. Admittedly, there is a sense of nervousness in the market over retail and office space. Thus, solid owner-occupied real estate loans, medical and professional loans, and multi-family properties have almost unlimited competition chasing them. Ent has experienced a level of competition we never could have anticipated!
Credit card portfolios are stagnant as well. Lots of stimulus money combined with a wave of consumer sentiment to pay down high-cost debt has led to massive credit card payments. Add to the mix the dramatic decline in personal travel last year, and consumers are carrying less credit card debt than they have in a long time.
Finally, many credit unions are correctly concerned about growing their mortgage portfolios at a time when the typical 30-year fixed rate mortgage starts with a “2.” So, what’s left?
Home Equity Loans Might Be the Answer!
It’s a rare credit union that didn’t have large losses through the Great Recession in its home equity portfolio. As a result, it’s understandable why the Great Recession damaged the psyche of lenders as it pertains to home equity loans at credit unions and especially banks. For most lenders, the underwriting standards used before the Great Recession never returned, which was a good thing; as an industry, we really didn’t need to revert to 100% loan-to-value lending. Yet home equity loans have been slow to return as a top strategic priority in lending, even though it’s unlikely we’ll ever see the set of circumstances that created the risk in home equity over a decade ago.
Make a Push Now!
Assuming mortgage rates will only go up, even if slightly, it’s safe to say that consumers will be unwilling to refinance a fixed-rate first mortgage that’s in the “2’s” to get cash, if they’re going to pay a rate in the “3s.” Consumers will always need cash from their homes, and the last few years of property appreciation have created a lot of equity to borrow against. As a result, a well-structured home equity loan program will act as a hedge in your portfolio as mortgage volume declines.
I think Ent is a good example of what’s possible with the right mindset and focus. While the industry is struggling with declining home equity balances, we’re going to have our strongest year ever for growth in these balances, approaching 25%. Yes, we’ve been clobbered with high payoffs as people have consolidated debts with a first mortgage, but we’ve also set new records in home equity loan volume—as much as four times what we were experiencing in 2017!
The door to success is wide open. Banks have continued to shy away from home equity loans; several large ones temporarily stopped making them to focus on making Paycheck Protection Program loans last year.
A key to success is having the correct process mindset. Ent wants to be really good at making loans really quickly to well-qualified borrowers, and home equity is a perfect example. If your credit union’s mindset is that a home equity loan is a slightly easier process than a mortgage, I’m afraid you’ll come up short in your growth goals.
You need the mindset that home equity loans are a glorified consumer or personal loan. For the best borrowers, you shouldn’t have to verify income like you would on a mortgage. In addition, whenever possible, you need to approve loan amounts based on an automated valuation model and not a full appraisal.
Finally, you need a high sense of urgency to stand out in the market. Tracking the average time to close and obsessing over it should be part of your lending scoreboard.
This Ain’t No hobby!
It’s no secret that one of my passions is golf, and I find many applications for life and work in golf. I have high admiration for those that play the game at the professional level where there are no guaranteed contracts. If golf professionals don’t perform, they don’t get paid.
Several years ago, professional golfer Kevin Kisner was holding an exhibition and performed an amazing shot that wowed the crowd. Asked by an audience member how he executed the shot, Kevin quipped, “This ain’t no hobby.” “This ain’t no hobby” has become my professional mantra since COVID-19. Hobbyists dabble. Professionals fight and claw for every opportunity. 2021 is the year that we need to fight and claw to grow our loan portfolios.
CUES member Bill Vogeney is chief revenue officer and self-professed lending geek at $8.3 billion Ent Credit Union, Colorado Springs.