Harper: NCUA Sees Reasons to Worry — Maybe

NCUA Chairman Todd Harper said Thursday the agency is stepping in to advise more credit unions how to overcome liquidity constraints as some signs show households under financial stress and loan quality deteriorating.

Average household savings have fallen by about $300 in the past year, which “suggests credit union household budgets are experiencing stress,” Harper said in a call with journalists.

First-quarter data released by NCUA Thursday shows loan quality clearly deteriorating, but Harper said he can’t tell from the numbers yet whether loan quality is returning to levels of a typical economy or a “sign of economic difficulties ahead.”

An NCUA data summary showed the value of loans that were at least 60 days late represented 0.53% of the total balance. The delinquency rate was up sharply from 0.42% a year earlier, but well below the pre-pandemic levels of 0.66% rate in March 2018 and 0.57% in March 2019.

Kelly Lay, director of NCUA’s Office of Examination & Insurance, said delinquency rates reaching 1% is “where we would start having more concern.”

Another troubling sign is that net charge offs in the first quarter were $7.9 billion, more than double the $3.6 billion of a year earlier. The net charge off rate was 0.52%, up from the unusually low 0.28% a year earlier, but lower than the first-quarter rates of 0.60% in 2018 and 0.57% in 2019.

Some of the rise in charge offs might indicate credit unions are clearing their books as they brace for an economic downturn, or a byproduct of implementing tighter CECL standards.

Harper said NCUA is “closely monitoring” commercial real estate loans held by credit unions. However, he said credit unions neither have many of them and those they hold tend to be backed by multi-family properties, which have suffered less than retail and office loans. So far, Harper said, NCUA “has not seen significant changes to cause concern.”

Harper said the NCUA is working with more credit unions with liquidity issues. Many of them had pursued originate-to-sell models. As interest rates rose last year, they had to hold onto loans longer or take losses on sales. “Some continued originate-to-sell models, and they multiplied their problems,” he said.

Harper also said the current liquidity problems underscore NCUA’s plea to Congress to restore the pandemic-era enhancements to NCUA’s Central Liquidity Facility to allow credit unions easier access to the federal backstop.