Lending Blahs

crumpled dollar bill
Contributing Writer
member of Bellco Credit Union

12 minutes

Conditions don’t look promising for loan growth in the year ahead.

The lending outlook for 2024, frankly, is not exciting. Tight liquidity, slow home sales, little refinancing, cut-rate auto loans, growing delinquencies and the specter of a recession add up, at best, to modest, selective growth. 

Bill Conerly, head of Conerly Consulting LLC, Lake Oswego, Oregon, is one economist predicting a significant enough recession next year that it could impact lending.  

One credit union is watching for loan losses.

“In 2021 to mid-2022, we hit a low point in loan losses,” observes CUES member Bill Vogeney, chief revenue officer of $9.8 billion Ent CU, Colorado Springs. He thinks that losses can only go up in the near term. 

Weak loan demand may go hand in hand with a weak supply of lendable funds. CU lending in 2024 will depend on three factors, Vogeney says: “Liquidity, liquidity and liquidity.” Ent CU has a loan-to-deposit ratio of almost 110%. 

“Many credit union loan-to-share ratios have reached their limits,” reports Jerry Reed, president/CEO of Members First Mortgage, a credit union service organization based in Grand Rapids, Michigan, “meaning many CUs don’t have funds to spare and must sell any mortgages they originate on the secondary market, which currently is not paying much.”

Not all CUs are squeezed. $293 million PAHO/WHO Federal Credit Union, Washington, D.C., which serves the global health and development communities, has plenty of liquidity. Its $161 million loan portfolio was down a bit in 2023, as paydowns exceeded originations. Its $100 million investment portfolio, mostly short-term floaters and share certificates, provides plenty of room for growth, but CUES member Derek Fuzzell, chief financial and strategy officer, is not expecting much in 2024.

Modest, selective growth is what’s expected at $2.8 billion Vantage West Credit Union, Tucson, Arizona. Through summer 2023, that CU was experiencing 9% growth in consumer lending, 19% growth in business lending and forecasting that growth would slow down in 2024, according to CUES member Mark Papoccia, chief member experience officer. 

“We’re cautiously optimistic” for three reasons, he says.

The CU’s leaders are cautious because Papoccia expects the Fed to continue raising rates. It’s also cautious because liquidity is tightening. 

“We have liquidity we can tap,” he notes, “but it’s at a premium, so we’re already being selective in where we use it.” 

The CU also is cautious because credit quality is starting to slip. “Consumer delinquencies are creeping up,” Papoccia adds. “We’re watching and preparing for more.”

Mortage Lending

Opportunities in mortgage lending will be limited, Vogeney predicts. CUs thrive on refinancings, and there are “virtually none expected” as long as rates remain high, he says. Many buyers are still paying cash.

It’s a low-churn market, Vogeney summarizes, with a weak secondary market, and likely to remain so in 2024 unless rates come down substantially. “Lenders are chasing scarce business, and big players are cutting margins to the bone just to keep the doors open,” he describes. “The gain on the sale of mortgages is the lowest I’ve ever seen,” he adds, in more than three decades as a CU executive.

Mortgage lending in 2024 will depend a lot on inflation and what the Fed does with interest rates, Reed observes. The thinking at press time, he says, was that the Fed will apply another hike or two, but he, unlike Conerly, doesn’t think there will be a significant recession. So high rates are likely to continue or edge up in 2024. 

That means the continuation of a sluggish home mortgage origination market. “People are staying put,” Reed points out, “except for event-driven sales like responses to a divorce, job change, marriage, death or retirement.” Some 90% of homeowners already have refinanced, he points out. 

“Nobody wants to let go of a 3% mortgage and trade it for 7%,” Conerly observes. 

Bill Vogeney
SVP/Chief Revenue Officer
Ent Credit Union
asset size — $9.8 billion
Lenders are chasing scarce business, and big players are cutting margins to the bone just to keep the doors open.

Innovations will be modest. Vantage West CU has rolled out and will be promoting a 40-year mortgage. It’s the CU’s standard 30-year mortgage with amortization spread over 40 years to lower payments, Papoccia explains.

What’s not sluggish is home building. With such low inventory, Reed observes, builders are building and finding buyers, even when it’s hard for many would-be buyers to qualify. “That’s where the action is,” he points out.

And CUs are missing most of that action because they typically aren’t plugged into the real estate community, Reed notes. “They don’t necessarily know the builders and Realtors.” 

The outlook for 2024 is part of a bigger picture, Reed suggests. Migration is changing the U.S. economy and affecting mortgage lending, he says. Once people were leaving rural America and heading for urban corridors. Now there is an exodus from coastal areas into the South and Midwest because of lower costs, taxes and cultural issues in those regions, he reports. “Homeowners have ridden this wave, tempered by limited employment opportunities.”

Generational changes will affect home values and mortgages in 2024 and beyond, a key shift most have been slow to recognize. 

“Young people don’t expect or want the houses they grew up in,” Reed observes. “They can’t afford it, and they’re okay with that,” he explains. “They want convenience more than space. They want one open space for activities that is practical and accommodating. They don’t want formal living rooms and dining rooms.”

And that means they will value a prospective home differently than most appraisers and CU mortgage lenders have realized. “They care about accepting deliveries,” Reed explains. “They want smart houses, sometimes completely smart houses where the faucets, curtains and doorknobs can be controlled remotely or programmed.”

Bill Conerly
Conerly Consulting LLC
Nobody wants to let go of a 3% mortgage and trade it for 7%.

Low originations have left home equity lending (a star performer in 2023) as the best hope for growth in 2024. People with low fixed-rate mortgages do not want to sell or refinance, Vogeney notes. Those who might move up to bigger homes are upgrading their current homes. People who would normally move to get better jobs are trying to work remotely and stay in their current homes, he says.

Homeowners whose equity may have doubled recently are ready to monetize some of the equity. That means strength in home equity lines of credit and second mortgages in 2024 as members remodel, take trips, buy fun vehicles or help family members, Reed says.

The bright spot for PAHO/WHO FCU, not surprisingly, is HELOCs, which were growing in 2023 and showing no delinquencies, Fuzzell reports. Overall, mortgages were the CU’s least profitable asset in 2023, yielding 3.98%, compared to 4.6% on investments.  

Auto Lending

Brace for “interesting times” in auto lending in 2024, warns Bob Child, chief operating officer of Origence, a CUES Supplier member based in Irvine, California. CUs’ share of new car financings has been plummeting, from 22% to 14.5% in just the second quarter of 2023. That market share is likely to keep falling and remain low for much of 2024, he reports.

The reason: Manufacturers and dealers are eager to “move metal,” and instead of cutting prices or offering rebates, they’re cutting the interest rate on financing to levels CUs can’t profitably match. They’re not offering 0% interest now, Child reports, but they’re offering 2.5%, and, with a cost of funds around 4%, CUs, banks and finance companies can’t compete. 

This situation should continue into at least the first quarter of 2024, he predicts, given the rising inventory levels of new cars.

In the used car market, certified preowned vehicles (newer used cars) are suffering from low inventory, Child notes, as owners hang onto those vehicles and their low-rate loans.

But there is a bright spot for CUs, Child says, in the market for used vehicles under $40,000. “That’s where CUs typically do well, and they’re crushing it now, with good prospects in 2024,” he reports. “I think we’ll see more CUs move into that space in 2024.”

Bob Child
Chief Operating Officerr
The high prices in 2021 and early 2022 meant that we could repossess a car and sell it for closer to the loan balance than we had ever experienced. That’s unlikely in 2024.

Credit quality could become a 2024 issue. The post-COVID appetite for used cars that pushed prices up to as much as 30% above the historical book value line has been sated, and prices are almost back to normal, Vogeney notes.

Lower used car prices means that the gap between what the consumer owes and what their car is worth may be higher than ever at a time when delinquencies and repossessions are rising, Vogeney points out. “The high prices in 2021 and early 2022 meant that we could repossess a car and sell it for closer to the loan balance than we had ever experienced,” he recalls. “That’s unlikely in 2024.”

Loan-to-share ratios will stay in the 80s, Child predicts, which will constrain auto lending and affect large CUs more than small ones. Big CUs did a lot of lending and investing in 2023. Smaller credit unions were less driven to compete and will have more headroom in 2024. 

“CUs between $700 million and $1.5 billion will have a good chance to pick up market share” in the older used car space, he says.

Business Lending

Heading into 2024, Vantage West CU is not forecasting the same level of 2023 loan growth in either commercial or consumer lending, primarily due to economic factors, including overall higher interest rates, Papoccia says.  

CRE loans could become a problem if they reprice in 2024, warns James Devine, chair/CEO of Hipereon, a financial training firm headquartered in Kirkland, Washington, and a faculty member for CUES School of Business Lending. CRE loans currently represent more than 75% of the total commercial loan portfolios held by CUs nationwide, he reports. In some cases, the concentration is above 90%. Devine is not worried about concentration, however, because CUs have so much consumer credit. His worry is more about the lack of attention to other business lending, a missed opportunity. 

Many of these loans were originated between 2017 and 2019, Devine points out, based on 20- or 30-year amortization schedules with a five-year balloon payment. Many of these loans will hit repricing dates in 2024 and 2025. If lenders reprice these loans at current market rates, they become more profitable. Technically.  

However, that large increase in debt service could put the loan out of compliance with commercial loan underwriting guidelines, Devine points out. If the net operating income of the borrower is unchanged but debt payments double, there could be liquidity issues and a possibly sudden drop in the creditworthiness of the loan, as well as pressure to renegotiate.

Concentration risk is also an opportunity to diversify, Devine says. CUs have a real opportunity to expand into commercial and industrial loans—along with fee-based cash management and employee benefit and owner wealth management services—to create a rewarding package of small-business services that include business operating lines of credit backed by accounts receivable or inventory, he suggests.

Mark Papoccia
Chief Member Experience Officer
Vantage West Credit Union
asset size — $2.8 billion
Small businesses need a deposit suite.

Structural issues will become more important in 2024, Devine predicts. Small businesses typically need three types of credit, he explains: lines of credit for seasonal liquidity; term loans for CRE facilities; and permanent working capital financing for receivables and inventory.

Most small business credit arrangements are not structured well, Devine says. The businesses get an all-purpose line of credit. As they grow, accounts receivable and inventory expand and eat up more of the available credit until the lines are bumping up against ceilings. 

“The businesses are using short-term credit for long-term financing,” he points out. “Most small business lenders are not business process experts.”

That should change. “You need seasoned commercial lenders,” Devine insists. 

Vantage West CU does offer business lines of credit secured with receivables and inventory, but these remain a small part of its portfolio, Papoccia reports. “These lines help businesses smooth over cash flow highs and lows, but we’re basically a CRE shop for business loans.”

With loan demand softening, Vantage West CU will be pushing business depository services. “Small businesses need a deposit suite,” Papoccia points out—things like online capabilities, automated clearinghouse, payment services, merchant services and fraud-fighting tools. “We expect to lead with those solutions and maybe pick up loans in the process,” he explains.

To that end, Vantage West has signed up with Numerated to provide a digitized, self-service experience for business borrowers. “It provides what many business owners want,” Papoccia notes, “with streamlined loan documentation and quicker underwriting decisions. It lets us serve those members digitally without hiring additional business bankers.”

Credit Cards and Student Loans

Credit card lending could be considered dicey as consumers radically increase their card use, but that’s a bit misleading, Vogeney thinks. “It’s true that balances have been growing by over 30% annualized in month-to-month comparisons,” he says, “but a big chunk of that usage is from cardholders racking up balances and then paying them off every cycle to get rewards points. That’s reassuring, going into 2024.”

PAHO/WHO FCU plans two pushes in 2024, Fuzzell says. One is its rewards credit cards, with an interest rate on unpaid balances of 15.25% and a ceiling of 18%. Big issuers have raised rates so “we have a chance to take away some of their cardholders,” Fuzzell notes. The other push is HELOCs. 

Jim Holt
Chief Development Officer
Student Choice
"Students are exactly the kind of members CUs need to attract."

Federal student loans were a political football in 2023, but private student loans made by CUs were stable and rewarding, according to Mike Weber, chief marketing officer of Credit Union Student Choice, a student loan CUSO based in San Antonio, Texas. “Students or their families continued making scheduled loan payments,” he says. He expects 2024 to be more of the same.

Theoretically, when students didn’t have to make payments on their federal loans because of COVID-​19, they had more money for private loan payments. And, theoretically, when required payments resumed in late 2023, they had less money to make private loan payments. (Here’s October 2023 guidance from the National Credit Union Administration on the resumption of student loan payments.)

However, the politically debated 2023 SAVE plan from the federal government “greatly reduces the risk of payments shock,” notes Jim Holt, Student Choice’s chief development officer. It effectively exempts low-income borrowers and eases higher-income borrowers back into payments, he explains.

“Students are exactly the kind of members CUs need to attract,” Holt adds. “The loans are sticky, and the borrower is a great prospect for future mortgages and car loans.”

Financing Vacation Rentals 

With the surge in vacation spending after COVID-19, the vacation rental business has boomed—the “vacation rental by owner” phenomenon. Some credit union members have cashed in by buying a second home, financing it with a mortgage, and renting it out part of the year, reports Vogeney. If that’s profitable, they may want to buy a second or third rental property in their market.

Making mortgage loans to what are essentially small businesses that rely on rental income to cover loan payments is an underwriting challenge, Vogeney cautions, given supply-and-demand uncertainty and the hard-to-predict economy. 

Exchanges like VRBO have attracted both individual and corporate investors, reports Reed. However, demand for financing in most tourist destinations had tapered off going into 2024, he notes, except in Florida, which remains hot.

Skyrocketing home values have attracted flippers, who are small-business borrowers that don’t usually turn to CUs for financing, Reed reports. “CUs offer standard portfolio products,” he explains. “Flippers are looking for something more flexible and usually turn to banks or independent mortgage companies.”

Credit 2024

2024 could be a lending challenge. With loan demand soft, CU leaders will be tempted to relax credit standards a bit. “2024,” Conerly insists, “would be the wrong time to dial down credit standards. It will be a time to be cautious.”

And above all, be flexible. “Don’t hang your strategy on an economic forecast,” he cautions. “Whether or not you’re planning for a recession, have a contingency plan. Be prepared for things to turn out better than you expected or worse.” cues icon 

Richard H. Gamble writes from Grand Junction, Colorado.

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