By Bill Vogeney
Writing is one of my favorite activities when I want to unwind. And I do need to unwind. Over the last four to six months, I've felt like a 7-year old with ADD instead of a 47-year-old credit union vice president of lending. The cause of this workplace ADD is the state of the economy and the financial markets. My "worry list" has changed about every 30 days, except that nothing is really falling off the list. The list just keeps getting bigger:
- rising delinquency;
- members who are making very bad, short-sighted decisions to walk away from their cars and homes even though they can make the payments, just because they're "upside down";
- $147 a barrel oil (well, one thing off my list, thank goodness);
- slowing consumer loan volume;
- ALM issues with a growing mortgage portfolio;
- the economic impact of trillions of dollars of wealth wiped out in the real estate and stock markets and
- an impending NCUA exam.
Recently, I added the concern over how we'll be able to handle mortgage volume that will make the refinance boom of 2003 look like a slow year. Not to mention how we'll re-invest the funds from the sale of sub 5 percent coupon loans, because there is no way we're holding them in the portfolio. We'll unload our interest rate risk, along with a lot of future earnings, if rates hold for any measureable length of time.
These are indeed some turbulent times—the most challenging economy this country has faced since the early 1980s. What credit unions need is calm leadership if we want calm waters. For example, one of my biggest complaints with the lending industry over the last 20 years is that credit standards have fluctuated like a boat in rough waters. When times are good, lenders chase all the business they can, and standards go overboard (I was going to say "out the window," but I want to avoid mixing metaphors). When times are tough, these same lenders tend to over-react and pull back on lending because they don't have a strong comfort level as to how their portfolios will perform.
I've always believed in being a steady Eddie kind of lender. I like making small and manageable adjustments to credit policy. I have the good fortune of working in Colorado, so we didn't have the 20-30 percent yearly price appreciation that California and Florida experienced. We've also avoided the 20-30 percent price declines. But I can tell you that 5-10 percent declines per year are still pretty painful to our members.
Because of our area, we're still making 90 percent loan-to-value home equity loans. However, I've heard many stories about banks and credit unions lending 70 percent LTV in economically troubled areas. It's the ultimate double whammy. Homes are worth 30 percent less, so you won't make as many equity loans. Then, you only wind up making a loan equal to 70 percent of the value. Institutions in these areas might as well close their lending area and fire the employees.
Still, if you're in this situation, and you're confident of your appraiser's ability to value the homes, you should be able to make 80 to 90 percent LTV loans without undue losses—if you find the right borrowers.
Without a fresh supply of good loans coming into your portfolio, dealing with the large number of problem loans will be even more difficult. Do yourself a favor and see if you can find your loan policies from five years ago. What was your maximum LTV? What kind of FICO distribution were you willing to accept? How much did you bend your policy since then? If you stayed stable, you should not have to make drastic changes to your policy now.
I will admit, for some of you, it may be hard to look your CEO and board chair in the eye and talk about the need to keep lending, to stay calm, and to not over-react to this buffet of bad news served up almost every day. But making good, new loans really is crucial to getting out of this mess we're in.
Bill Vogeney is SVP/chief lending officer for $2.5 billion Ent, Colorado Springs, Colo.
Read Vogeney on indirect lending and credit scores.
