The end of low, low rates brings big, big changes.
In the coming year, U.S. credit unions will, of course, continue to make home, car, personal and commercial loans to their members. They’ll just have to make them in a different market.
“We’re going through an economic transformation that has been accelerated by COVID,” suggests Bill Handel, chief economist at Raddon Research, a Fiserv company. (Brookfield, Wisconsin-based Fiserv is a CUES Supplier member.) “The long tail of COVID will have more impact than COVID itself. Consumer behavior has changed. It’s a different economy.”
Setting goals and budgets for 2023 lending depends on things like how far interest rates will rise and when they might peak, as well as whether there will be a recession and what kind of recession it might be. This is crystal ball territory, and necessarily speculative.
CU lenders need to approach 2023 with both a short view and a long view, Handel says. Short-term, the Federal Reserve will probably raise rates further and inflation will get worse before it gets better. The consumer price index was up about 9.1% in the past year, he notes. But the producer price index, which measures change in the prices paid to U.S. producers of goods and services, is a better leading indicator. It was up around 11%.
A true recession is more likely in 2023, Handel says, and it should be constructive.
“Adjustments have to happen to put the economy back on an even keel,” he explains. “A recession will help do that. It should be relatively short and more of an adjustment than a decline.”
How will all of this impact the situations in the various lending markets in which credit unions do business? Read on. And what can credit unions do to succeed in this new world? Check out our bonus coverage at cumanagement.com/111422blog and cumanagement.com/112122blog.
Mortgages and Refis Down
The mortgage goose has stopped laying golden eggs, drastically changing the credit union lending outlook for 2023.
“The days of booking mortgage loans in high volume through call centers and online loan applications is over,” observes Jason Sweeney, SVP for the real estate solution group at Allied Solutions, a CUES Supplier member based in Carmel, Indiana. “That big, thriving market has dried up. The only people refinancing now are doing it out of need, not choice, and even purchases are slowing.”
What a difference a year makes, observes CUES member Bill Vogeney, chief revenue officer of $9.3 billion Ent Credit Union, Colorado Springs.
“I can’t think of a time in my 39 years as a lender, 34 of them in credit union senior management, when we’ve seen such drastic change as we have in the first half of 2022,” he says.
2021 was a banner year for mortgage production, Vogeney notes, much of it refinancing. “We were booking record profits on the gain on the sale of mortgages,” he reports. “Like other financial institutions, we hired and trained and spent like mad to keep up with near historic demand. Now that’s gone.”
People won’t want to refinance or purchase homes at these high rates, predicts CUES member Derek Fuzzell, chief financial and strategy officer of $290 million PAHO/WHO Federal Credit Union, Washington, D.C. “They’ll invest in the homes they already have.”
Lenders originated $4 trillion in mortgages 2021, reports Steve Hewins, SVP of CUESolutions provider CU Members Mortgage, Dallas. That will fall to around $2.2 trillion in 2022 and even lower in 2023, according to statistics from the Mortgage Bankers Association.
Still, mortgages should limp along as the equity build-up stalls. Demand will sustain value, but house prices will plateau as high interest rates discourage buyers, predicts economic consultant Bill Conerly of Conerly Consulting LLC, Portland, Oregon. Without soaring equity, lenders will have to underwrite more cautiously.
Adjustable-rate mortgages might grow in 2023. “We haven’t seen the demand for ARMs that you’d expect in 2022 with rising interest rates,” Hewins says, partly due to a flat or slightly inverted yield curve; when it normalizes, interest in ARMs should grow.
But then again, rates are going up. “Some members will consider using ARMs to bet on rates going down, but most will want the security of a fixed rate, knowing they can always refinance if rates fall,” says Robert Parks, CPA, a shareholder in the Troy, Michigan, office of Doeren Mayhew, a CUES Supplier member.
Equity Lending an Option
With bleak prospects for originating a lot of mortgages in 2023, CU lenders will turn to equity financing. They can do this in two ways, Sweeney says: second mortgages on the same property or home equity lines of credit.
He thinks closed-end second mortgages that cannot be prepaid, renegotiated or refinanced without paying breakage costs or other penalties to the lender are less complicated to service than HELOCs. Plus, credit unions already have much of the software and experience required to make second mortgage loans, as they are a lot like first mortgages.
Although credit unions have not done much second mortgage lending in the past, the loans’ simplicity and credit unions’ readiness to make them could make them a good product for 2023. “It’s a way to help members and diversify loan portfolios,” Sweeney says.
Vogeney has seen the positive impact of prioritizing home equity lines of credit. “We saw an opportunity there and geared up for it, investing in digital marketing. We led the market. Our HELOCs doubled from 2020 to 2021 and were up another 50% by July.”
Handel says hybrid HELOCs have good potential and underscores the importance of being creative in product design as the market keeps changing. For example, he thinks members will go for an evergreen lending product that starts with a line of credit that allows them to carve out pieces that can be turned into fixed-rate term loans.
Indirect Used Car Loans a Sweet Spot
Indirect used car loans should continue to be a sweet spot for CU auto lenders in 2023, according to Bob Child, COO of CUES Supplier member Origence, based in Irvine, California.
“CUs make 70% of their car loans for used cars,” he reports, and seller inventory is up 13% in 2022 compared to 2021, with another 10% gain projected for 2023. CUs now have a market share of 27% and rising in used car loans.
The chips and parts shortage will keep new car inventories low by historical standards in 2023 but up a little from 2022, Child expects. With higher rates and short supply, auto manufacturers have been cutting back on incentives, but larger credit unions more than smaller CUs have been picking up the business. Direct auto lending will continue to be a rising opportunity for CUs in 2023, Child speculates, due in part to credit unions directly financing larger numbers of electric vehicles.
The short supply of automobiles that created a sellers’ market in 2021 and 2022 will shift in 2023 as supply catches up and dealers trim prices to encourage sales, Conerly says. The high gas prices and product improvements will feed a steady increase in demand for electric cars and hybrids, he adds.
Higher interest rates are handing CUs an opportunity, Vogeney says, because they have ended auto manufacturers’ 0% financing offers. Zero percent is now more expensive, he explains, and it doesn’t make sense for manufacturers to pay for it when they don’t have enough cars to satisfy demand and sales are certain.
While Vogeney expects to pick up some market share with the death of 0% loans, he also says there may be a ceiling on auto loan growth for another year or two due to the chip shortage. Delays in new car production will last for at least three model years, he says.
Commercial, Cards and BNPL
Commercial lending in 2023 will depend on whether there’s a recession and where the economy grows or shrinks, Vogeney says.
“Multifamily housing loans have been looking good,” he notes. Small business startups have been strong, and there is some pent-up demand and entrepreneurial enthusiasm.
Conerly is not so sure. He says commercial lending could be dicey until later in 2023 because the tight labor market may discourage startups until then. “Bad times are often good times to start a business,” he observes. “It’s easier to get space and employees then.”
On the payments front, PAHO/WHO FCU has seen low demand for new cards or line increases but increased use of existing lines, Fuzzell reports, a trend that he thinks will carry over into 2023.
Inflation will increase demand for buy now, pay later programs, Handel warns, as consumers don’t want to save and wait to buy a product whose price keeps going up. Interest-free BNPL offers will be very attractive, especially to younger consumers, he reasons, and that could cut into CU consumer lending volume and credit card interchange.
However, rising rates also put pressure on BNPL providers as their cost to offer interest-free financing escalates, Handel points out.
In all, the lending outlook for 2023 is cloudy with a chance of everything. “I have never been so uncertain about what to expect in a coming year,” Vogeney says. “The range of potential outcomes is much broader than usual.”
Canadian CUs: Worry About Rates, Not Recession
Credit unions in Canada should anticipate higher interest rates in 2023, but they don’t need to worry excessively about a recession, says Bryan Yu, chief economist at Central 1, a wholesale CU based in Vancouver, British Columbia. Aggressive rate increases by the Bank of Canada align with those of the U.S. Federal Reserve Board. Long-term rates should peak and start to ease in 2023. “We expect to hear more chatter of rates back below 3%,” he says.
Yu thinks a Canadian recession is unlikely. “We’re more commodity-oriented than the U.S.,” he notes, and demand for commodities is solid. “We’ve become a more important global player. We’ll have high population growth due to immigration.” cues icon
Richard H. Gamble writes from Grand Junction, Colorado.