CUNA Mutual: Risks Rising for Economic Deterioration

A CUNA Mutual Group economist said he expects credit unions and banks to tighten credit standards next year as the labor market deteriorates following another steep rise in COVID-19 infections.

The U.S. Bureau of Economic Analysis on Thursday reported real GDP rose 7.4% from the second quarter to the third quarter, following a drop of 9% from the first quarter to the second quarter.

In CUNA Mutual’s Credit Union Trends Report released Friday, chief economist Steven Rick said he and economists at CUNA, both based in Madison, Wis., forecast a 5% GDP gain in the fourth quarter. But Rick said gains are imperiled by the pandemic’s path.

“The probability of a double-dip recession this winter is rising as the number of daily new COVID-19 cases rises,” Rick said.

“Expect credit growth to remain slow,” he said. “In recent years, lenders have been quick to tighten lending standards at the first sign of deterioration in credit quality. If the unemployment rate remains elevated or even rises due to a third COVID-19 wave, then expect loan delinquencies and charge-offs to rise also.”

Savings balances grew at a 25% seasonally-adjusted, annualized growth rate in August, due to low consumer spending on services, lower spending on gasoline, volatile equity markets and cash-out mortgage refinances being deposited into savings accounts.

“We expect savings balances to grow 18.6% in 2020 and 8% in 2021, above the long run average of 7%, due to high levels of economic uncertainty,” he wrote.

With credit union cost of funds only falling 14 basis points during the last year to 0.73%, net interest margins narrowed by 35 basis points in the second quarter to 2.86%, down from 3.21% a year earlier. Rick said he expects net interest margins to fall to 2.7% next year, the lowest in credit union history.

During August, the sixth full month of the COVID-19 pandemic, credit union loan growth was slightly better than a year earlier. Total loans grew 6.6% to $1.18 trillion as of Aug. 31. From August 2018 to August 2019, loans rose 6.4%.

First-mortgage balances continued their double-digit growth that started in March, while business lending also grew at a faster pace. Loan balances fell for new cars, credit cards and home equity lines of credit.

First-lien mortgages grew 12.3% to $509.2 billion as of Aug. 31, with 76% of the balance in fixed-rate notes. From August 2018 to August 2019, first mortgages rose 7.8%. Second-lien mortgages fell 4% to $89.1 billion. A year earlier, they rose 5.3%.

According to CUNA’s Monthly Credit Union Estimates report, fixed-rate first mortgages rose 16.2% to $385.6 billion as of Aug. 31, compared with annual growth of 9.7% as of August 2019. Adjustable-rate first mortgages rose 1.7% to $123.8 billion.

Adjustable-rate first mortgages rose 1.7% to $123.8 billion as of Aug. 31, down from a 3.6% gain a year earlier, according to CUNA.

The Trends Report found credit unions sold off 40% of their first mortgage originations to the secondary market in the first half of the year, up from 35% one year earlier.

Balances of second-lien mortgages have been dropping since April. Rick said home equity lines of credit and second mortgage balances fell $3.7 billion during the last year as credit union members paid off outstanding balances with funds obtained from a cash-out mortgage refinance.

“With home prices expected to rise another 5-7% during the next year, we expect home equity loan balances to begin growing soon after the end of the refinance boom next summer,” Rick said.

“We expect the 30-year mortgage interest rate to remain below 3.25% during the next year, due to long-term interest rates remaining low worldwide,” Rick said. “We expect the low interest rates to have a positive impact on new and existing housing demand during the next year.”

Meanwhile, car lending has nearly stalled.

New car loans fell 4% to $143.2 billion as of Aug. 31, compared with a 3% gain for the 12 months ending August 2019. Used car loans grew 4.7% to $240.6 billion, slightly better than its 4.4% growth a year earlier.

“The weak credit union new auto loan growth rates are due to high economic uncertainty, low consumer confidence and cash-out refinances paying off new auto loan balances,” Rick said.

Nationally, dealers sold new cars and trucks at a seasonally adjusted annual rate of 14.9 million vehicles in August, down from 15 million in July and below the 17 million sales pace set in August 2019.

“Labor market insecurity is likely holding some buyers back,” Rick said. “Car sales will continue to rise for the next few months as people who are no longer flying, taking the train or ride sharing are in the market for a new vehicle.”

The report also showed:

• Unsecured consumer term loans grew 12.1% to $51.8 billion, an improvement from its 8.7% gain in the 12 months ending August 2019.
• Credit card balances fell 5% to $61.2 billion, compared with a 7.3% gain in the 12 months ending August 2019.
• Member business loans grew 14.7% to $89.5 billion, compared with a 2.4% drop a year earlier.