By Bill Vogeney
For those who question my blood alcohol level, I can assure you I am just high on life. I actually thought about this while watching my son play on Wii Fit a few weeks ago with some visitors to our home. Matthew was doing this tightrope exercise on the Wii, designed to help you with your balance (that's him in the photo). I suddenly had this realization that the Wii game was a lot like trying to manage lending in 2009. It's all a game of balancing competing ideas and interests. Consider these balancing acts now in progress:
Most credit unions are doing their best to make as many loans as they can that make sense. There has been a lot of talk in the media about banks not lending, and credit unions staying the course, so to speak. However, there are a few people in our industry who want credit unions to get more aggressive in lending, seeing a golden opportunity to gain market share. While there is certainly a golden opportunity for credit unions, I believe there's still a lot of risk in even conservative lending. People are still losing jobs, many real estate markets are just starting to reach bottom, and who knows when we'll get an economic recovery and how long it will last?
I'm trying to stick to sound fundamentals in underwriting. I'm trying not to take the perspective that any member could lose their job tomorrow--that's a defeatist attitude. However, I've warned our staff to be aware of what our strengths and weaknesses are. We're starting to see a lot of loan requests that look fairly complicated and unusual. Figure out where your strengths are in terms of loan requests, loan structure and overall risk. If the local Mercedes and Lexus dealers approach you and want to do business, if you don't have experience in that type of auto lending, beware!
"Market share" vs. "Interest rate risk"
On the mortgage side of the loan portfolio, credit unions (including my credit union, Ent) are gaining market share like crazy. The "2 to 10" initiative that called for credit unions to increase their mortgage market share from 2 percent to 10 percent in a decade is probably half way to being a reality. Just so long as your credit union isn’t taking on all of that interest rate risk. Look, I’m just an amateur economist. If economists were handicapped like golfers (I’m a golfer, guilty as charged), I'd be a 10 handicap. But I have to believe that all of our government spending and debt, combined with reduced consumer demand for foreign-made products, will lead to higher long-term interest rates. If you’re booking sub-5.25 percent, 30-year fixed-rate mortgages to chase some earnings, you're taking on way too much interest-rate risk.
"Take your losses now" vs. "Hope for the future"
Let me illustrate with a loan modification request I looked at yesterday. The borrower was in his early 60s and had a rather large auto loan with us, along with other debts to various lenders. The borrower has been unable to work since early in the year. His only income is a military retirement check--not enough to pay his current bills. We gave him a two-month extension earlier in the year when his medical problems grew more serious. The member now wants a six-month reduction in payment until he can get out from under his medical bills. By the member's own admission, he probably will never work again.
There is no way this member is going to be able to pay. Even if he files for bankruptcy, his house and car loan are more than his income. Any extension is just postponing the inevitable, in my mind. We all want to help our members, and we sure want to avoid any additional loan losses. However, at times, you have to be realistic: Will the member's situation get any better? If the answer is no, you can't drag things out.
"Bright future" vs. "The glass is half empty"
Ultimately, much like the decision to lend your way out or play it close to the vest, we have to decide just how bad the future looks. Personally, I'm planning for the worst, in the sense that if the economy for the next few years looks like the U.S. economy did from 1974 to 1984, we'll survive.
However, I have to be able to envision a brighter future, one where we can continue to build a healthy loan portfolio. Just from the perspective of my mental health, it is draining to spend so much time on risk management. It helps to think about future business development. My view of a brighter future entails continued development of our existing sales model, improving our manual underwriting process, and leveraging the "flight to quality" we're experiencing with our first mortgage business.
Let's face it, consumer and mortgage loans were really becoming commodities over the last decade. It didn't matter who you borrowed from. From the consumer's perspective, it was all about speed and rate. I can see a future where superior product knowledge, sound financial advice, and the willingness and ability to help borrowers in need could help a community-based financial institution compete with the big banks.
Let's hope I'm right!
CUES member Bill Vogeney is SVP/chief lending officer/amateur economist for $2.5 billion Ent, Colorado Springs, Colo.
Read more from Bill on indirect lending and credit scores. And check out Bill's blog post about the value of calm leadership. Also check out his "Loan Zone" column in the August issue of Credit Union Management.
