Looking Ahead at Specific Sectors “In the automobile sector, people are waiting for the new car supply to recover but automakers are still behind on their production schedules as a result of parts supply shortages,” Long said. “This has meant a strong market for used cars, a segment in which credit unions have always performed well.” In the fourth quarter of 2022, credit unions reported a 20% increase year-over-year for both new and used auto loans.2 “Credit unions should be cautious when making car loans,” warned Eisenberg. “As more new cars come into the market, the residual value of the used cars will come down. Don’t be too generous with used car loans and know that the value will drop as supply increases.” Mortgage rates are higher than they have been in the past decade, but pent-up demand means that credit unions are seeing an upward trend in homebuyers seeking mortgages, said Long. “In the fourth quarter of 2022, credit unions reported a 16.6% growth over the previous year in first-lien mortgages for non-commercial property and a 39.3% increase year-over-year for second mortgages.”3 While new home construction starts have slowed, the mortgage market should offer opportunities for credit unions, he added. Headlines announcing the failure of multiple regional banks may have consumers concerned about the financial industry, but Long pointed out that credit unions are not as susceptible to the situations that led to those failures. “The vast majority of credit union deposits are from individuals or small businesses, with balances under the federal deposit insurance cap of $250,000,” he said. “Only around one-half of bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC). Meanwhile, about 90% of credit union deposits are insured by the National Credit Union Administration (NCUA), which means that the type of runs we saw on some of the failed banks that we saw are unlikely to happen at a credit union.” “Credit unions also have several advantages over banks,” said Eisenberg. In addition to deposits that are mostly covered by the National Credit Union Share Insurance Fund, credit unions have a loyal base of members. Credit unions have built relationships—often over several generations—which results in the likelihood that the credit union is the first choice for loans and other products and services. “However, credit unions shouldn’t count on the relationship alone, because all consumers are likely to go elsewhere if rates are not competitive,” he added. Opportunities for the Future “In the second half of 2023, credit union lending opportunities will increase as banks seek greater liquidity and back off on small business lending,” said Long. The same holds true for mortgages and auto loans, he said. “There was a 20% increase References: 1. Adams C, Alldredge K, Pitakos A. A monthly update on the state of the US consumer: April 2023. McKinsey & Company. April 25, 2023. www. mckinsey.com/industries/consumer-packaged-goods/our-insights/a-monthly-update-on-the-state-of-the-us-consumer-april-2023. 2. Financial Trends in Federally Insured Credit Unions. National Credit Union Administration. December 2022. 3. Ibid. in auto lending for credit unions over the past year. However, for those credit unions that grew more modestly last year, there are plenty of opportunities to grow loans this year,” he said. “This is a good time to look for opportunities and create a strategy to continue lending as banks pull back.” While evaluating opportunities, credit union leaders should be investing in the tools needed to beef up underwriting to provide additional insight as second mortgages, equity lines, small signature loans or other products are offered, recommended Eisenberg. “Investing now positions the organization to offer products when they are needed and minimize the risk to the institution.” “Credit unions also have the opportunity to help staff and members better understand what some of the issues mean to them to avoid overreactions,” said Eisenberg. “It is human nature to expect the very best or the very worst and to go from euphoria to dismay, but the reality is that life is generally not always an extreme. The recession won’t be the worst we’ve seen, and the recovery will not be the greatest in history.” Offering information and education that puts economic issues in the appropriate frame of reference based on past experience, not headlines, will allow people to plan and make decisions, he added. Whichever new services—lending, savings or educational—are offered, Eisenberg suggested that credit unions play to their strengths: “Stick to your knitting.” “ Recession is part of the process, and the U.S. economy is in recession about 15% of the time. Fortunately, this will not be one of the recessions that will be remembered years from now. ” ELLIOT F. EISENBERG‚ PH.D., PRESIDENT & CHIEF ECONOMIST, GRAPHSANDLAUGHS 18 THE NAFCU JOURNAL July–August 2023
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