MONTEREY, Calif. - The economic forecast for 2006 means further tightening of the belt for credit unions, but a bleak rate environment doesn't necessarily mean an impending recession, said Chief CUNA Economist Bill Hampel, as he spoke at the California Credit Union League's Big Valley Educational Conference. Overall, Hampel predicted a slowing of the economy in 2006, as a fizzling housing market and higher interest rates slow consumer spending. "The consumer has been living on borrowed income as a result of increased housing values. That's why U.S. savings rates have been negative, because for most Americans, their net worth increased more than expected due to housing value increases. As housing values hold steady, or even decrease a little bit, consumers will start saving again," Hampel said. Hampel discussed how an expected rise in Fed funds and a decreasing 10-year Treasury rate have the potential to create an inverted yield curve, which has traditionally signaled the beginning of a recession. However, due to an influx of foreign investment, Hampel said he doesn't think a recession will happen this time around. The economist predicted credit union savings will grow by 6% in 2006, and 9% in 2007. Conversely, loan growth will cool off, with an anticipated loan growth of 8% in 2006, and only 6% in 2007. Charge-offs are expected in increase to 0.55% in 2006 and 0.60% in 2007. However, Hampel cautioned those figures don't necessarily reflect decreasing loan quality. "During periods of strong loan growth, the denominator of the ratio increases, which lowers delinquency and charge off ratios; and, the opposite is true during times of slow growth," Hampel said. As for the burning question of when the housing bubble will burst, Hampel said there are some ominous signs housing values will fall, although the deflation will more likely be a fizzle, rather than a burst. "We are facing the possibility that people won't be able to make their payments not because they've lost their job, but because we've had to do creative things with mortgages to qualify people for loans," Hampel said, referring to the out-of-reach California housing market, and adding, "when median income families can't afford a median priced home, we're cruisin' for a bruisin'." However, Hampel cautioned that he's been predicting a housing bubble burst for three years, but it has yet to happen. The inverted yield curve and less income as a result of fewer mortgage originations will mean fewer earnings for credit unions in 2006, Hampel said. He predicted return on average assets will fall to 0.85% in 2006 and 0.80% in 2007. Net capital ratios will hold steady in the 11% range, with little change expected: 11.4% in 2006, and 11.2% in 2007. Hampel, who is a credit union board member in addition to being an economist, feels 11% is entirely too high. "Personally, I think 8 to 9% is the `sweet spot.' You don't need any more than nine. Credit unions should be thinking about growing into that capital ratio. Ask yourself if you can provide more services with your capital," Hampel said. Of course, Hampel joked that he's no regulator, and recognized credit unions have to meet regulatory demands that require high capital ratios. Like most speakers at Big Valley, Hampel said regulators need to change how credit union capital ratios are figured, taking risk into consideration. Catering to his audience, Hampel reminded the crowd that his figures are based on national credit union averages. However, California credit unions have historically performed better than the national average, as he showed in several graphs, so the picture for Golden State credit unions is slightly better. -

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