Lending

Time to Rethink Mortgages

CUs originated, and sold, record volumes of first mortgages in 2009.

August 02, 2010
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Credit union earnings have been pummeled during the past two years by high loan losses, low yields on investments, share insurance premiums, and write-downs of capital deposits in corporate credit unions.

The one potential bright spot is that the yield curve—the difference between shorter- and longer-term interest rates—is unusually steep. As a result, the spread between what credit unions charge on loans and pay on savings should also be high, boosting net income.

With a weak economy, however, savings growth is strong while loan demand is almost nonexistent. All that cheap money languishes in even cheaper investments, rather than contributing to the bottom line through higher-yielding loans.

Despite the weak economy, credit unions originated a record volume of first mortgages in 2009: $94 billion. It’s a shame they couldn’t hold more of these loans. Instead, credit unions sold $51 billion, also a record. Credit unions could have taken a big step to even the imbalance between loan and savings growth last year by holding more mortgages in portfolio.

The reason for the increased loan sales was, of course, good asset-liability management (ALM). With very low interest rates, adding substantial amounts of fixed-rate mortgages to a balance sheet is financial suicide. And, with interest rates low, consumers are unwilling to take on the substantial risk of adjustable-rate mortgages (ARMs)—that is, most versions of ARMs currently available.

Today’s standard mortgage products weren’t designed with the needs of depository institutions in mind. Instead, they were tailored to the investors who buy mortgage-backed securities. Thirty-year, fixed-rate mortgages are attractive to borrowers and some investors. But credit unions, relying on mostly short-term funding from members, can hold them only in moderation. ARMs are great from an ALM point of view, but can be very scary to borrowers.

What if credit unions created their own first mortgages, specifically designed to be both member- and ALM-friendly, so that they could be safely held in portfolio? State Employees’ Credit Union, Raleigh, N.C., has a successful product that fits this description. It’s a two-year ARM with a 1% cap. It takes six years for the loan rate to increase by 3%, and then only if interest rates increase that much and stay up.

Another approach: Create a “partially adjustable-rate mortgage” or PARM. The loan could be originated with an initial fixed-rate period of one to three years, and then adjusted only at a fraction of any change in the index.

Many credit unions’ average cost of funds adjusts at about 40% of changes in the one-year Treasury rate. So why not create a loan with a rate that changes by 40% of the change in the index? If the index rises 1%, the rate rises 40 basis points. At a 40% adjustment, it takes a 2.5% increase in the Treasury rate to generate a 1% increase in the loan rate, thus controlling payment shock.

The problem with standard ARMs is they put all the risk on borrowers, while providing more interest-rate protection than credit unions really need. Not surprisingly, they’re not very attractive to borrowers unless interest rates are very high.

A PARM would split the risk between the borrowing member and the credit union. As long as the initial rate is sufficiently below the 30-year fixed rate, a PARM could be quite attractive to the borrower while safe for the lender.

If loans don’t have to be sold for ALM reasons, the remaining issue would be liquidity. Adjusting rates would give significant control over volume. Adding PARMs to a product mix could give both members and credit unions a useful new tool.

BILL HAMPEL is senior vice president of research and policy analysis/chief economist for the Credit Union National Association. Contact him at 202-508-6760.

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Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

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