The Risk of Waiting for Normal Times That Will Never Return
If mortgage refinancing is the vaccine for the economic crisis, are credit unions prepared to benefit?
– By Kirk Kordeleski
In the current economic environment, credit unions are facing a future that is extraordinarily difficult to predict. Regardless of size or geographic location, they are all wrestling with a range of unanswered questions, including:
Will there be a significant resurgence of COVID?
Will the reopening of schools succeed or fail?
Will the economy spiral down or quickly rebound?
Will the presidential election create additional challenges?
Will commercial and retail loan forbearance turn from temporary non-payments to delinquencies and charge-offs?
Without a doubt, these are the most extraordinary, and perhaps most frightening times the financial service industry has ever experienced. However, that doesn’t mean there aren’t viable strategic options for those institutions that are willing to evaluate conditions, identify a reasonable course of action and seize the day.
Here are four key considerations for credit unions seeking to take a proactive approach in determining their own future:
1. The FED believes we are in for a long slog.
As expected, on July 29, the Federal Reserve left the target range for its federal funds rate unchanged at 0-0.25%. The Fed believes the coronavirus pandemic poses considerable risks to the economic outlook over the medium term, and appears committed to using its full range of tools to support the U.S. economy during that period. The federal funds rate will remain near zero until the economy is on track to achieve its maximum employment and price stability goals.
Over the long haul, interest rates and loan demand – the drivers of financial performance for credit unions – both appear to be headed in the wrong direction.
2. In some ways, these are the best of times.
Throughout the industry there’s growing evidence of historic growth in application volume, fee income and new member acquisition. In fact, as the chart below depicts, the most recent quarterly data on credit union mortgage business is off the charts.
Large gains are being made on mortgages sold to the secondary market, which is substantially boosting income and ROA. Business is never better then when volumes of applications are flying in and credit unions can sell them at historically high margins to the secondary market. That’s why the mortgage business appears to be the single best option for credit unions right now, because it creates primary member relationships, improves brand and builds income.
3. Unprecedented opportunity also makes these the worst of times.
For starters, large financial competitors understand the current opportunity, are moving quickly to ride the current market momentum and are reporting significant gains in mortgage banking income. The second quarter of 2020 generated the strongest production volume and margins that the banking industry has seen in many years.
But the more significant challenge may not be with large competitors, but with credit unions themselves. Reports from the field identify several problems, including extraordinary long turnaround times, frustrated members due to poor service, and even credit unions that are raising rates as a means to slow application flow and relieve overworked staff.
The sad truth is that many credit unions have already reached or exceeded their capacity to properly service mortgage loans. In response, many of them are pulling back in order to manage the historic volumes, but this is a strategic error, as they should be grabbing as much volume as possible during this window of opportunity, regardless of current capacity.
4. This window of opportunity will be short-lived, but have lasting impact.
Like all economic cycles, the current mortgage related demand will not last forever. Rates will increase, as they always do, and refinance demand will hit its limits. At any given time, there are only so many people eligible to refinance, and there won’t be interest rates beyond the current lows that will spark the next boom.
In fact, we may have already hit the top of the cycle. According to NerdWallet’s Holden Lewis, who has reported on mortgages since 2001, the refinancing wave may have crested in Spring, and the people who were most motivated to refinance have already done so. Lewis believes that refinancing will continue to ebb, even if rates fall a little more, because the pool of potential refinancers has been drying up. They won’t have much incentive to refinance again if rates fall just a small amount.
Here’s the Current Market Reality
The hard reality of the existing market dynamics is that those credit unions that are not willing to push their organizations beyond their current capabilities and capacity will see their franchise erode. If they don’t meet current market demand, their members are likely to be lost to big banks and online banks forever.
There still remains, however, a path forward for credit unions that are willing to aggressively take advantage of the current mortgage environment to gain a once in a decade opportunity to expand and grow by winning market share, building their brand, and creating a distinction between themselves and their competitors.
These organizations will do everything in their power to build income right now, to lay the groundwork for income, balance sheet growth and brand creation over the next two years. And their pathway is all about loans.
Three options are available to financial institutions – mortgages, autos and PPP loans, and in my opinion and experience, mortgages are still currently the most viable option. I know this because the credit union I had the privilege of working for – Bethpage Federal Credit Union – faced similar circumstances after 9/11, Superstorm Sandy and the Great Recession. In all three case, interest rates dropped to historic lows, and the best option for sustained growth and financial performance was grabbing on to the refinance mortgage boom and ensuring that we processed every loan possible.
Because we understood that these were not unlimited opportunities, each time we pushed to get every loan, every day. Each time, we built our brand reputation based on price and service. This led Bethpage to growth of more than 20%, with millions of dollars in additional income during those systemic disruptions. That same model can work during the current systemic disruption as well.
Carpe Diem … or Be Prepared to Watch Your Franchise Erode
The single thing each credit union can do to substantially increase income today, to offset the economic recession, increase membership, build its brand and most importantly create an opportunity to beat its competitors, is to fund every mortgage available during this refinance and mortgage boom.
Here’s a quick recipe for success:
Fire up your marketing engine like you’ve never done before. Offer and heavily advertise the lowest rates in the market.
Get the technology you need – whether that includes data analytics, service bots or RPA – that will enable your organization to immediately improve processing efficiencies by 30-50%.
Engage the necessary manpower and back-office operational support through qualified outsourcing providers to meet underwriting demands as well as client servicing requirements.
Do not turn away one single application during this period
The most important ingredient, as always, is the courage and commitment to take decisive action while others are waiting on the sidelines, or simply treading water, waiting for times to return to “normal.” This time, however, given the depth and extent to which the pandemic has reshaped our economy and national outlook, there may never be a “normal” for credit unions to return to.
The time to act is right now.
Kirk Kordeleski formerly served as Chief Executive Officer of Bethpage Federal Credit Union in Long Island, New York. He currently is an Executive Benefit Consultant for OM Financial Group, and he serves as a Strategic Advisor for Quinte Financial Technologies Inc.
All workflows and tools should have a “look and feel” that is consistent with the operating models currently in place in the institution. In turn, this reduces training costs and learning time, both for internal and outsourced staff.
The ability of banks and credit unions to expand their franchise, and to be seen in a positive light by customers and regulators (and shareholders) during peak demand periods, always depends on their nimbleness, creativity, and adaptability. The upcoming PPP loan forgiveness process will be a major test, as well as an opportunity, for financial institutions to meet the challenge and to demonstrate those institutional strengths.
Source: This article was originally published in “Credit Union Times Magazine” on August 17, 2020