By Ray Birch
LOMARD, Ill.—Believing a recession is inevitable, one economist says if credit union lending begins to soften, home equity loans may be able to bolster a lot of portfolios, especially if those loans are structured correctly, according to one person.
Bill Handel, SVP of research at Raddon, shared his forecast for what credit unions can expect from the economy and further shared steps he said credit unions can take to effectively respond to more difficult economic times, even though lending in 2022 to date has been setting records for growth across the movement.
“The typical definition of recession is two consecutive quarters of GDP decline, which we have had in both first and the second quarter,” said Handel. “But then you get into all the political arguments. It will be really interesting to see what the third quarter looks like from a growth perspective, whether we actually see growth or negative growth.”
Unique Scenario, Unique Challenge
Handel said it is difficult to predict what the rest of the year will bring when diving down into the data.
“When you look at some of the underlying data elements, they would suggest that we're not in a recession,” said Handel. “One of the things we look at is retail sales, which continue to be strong. Even investment in productive capacity in the most recent periods continues to be strong. We're also not seeing gains of any significance in first-time claims for unemployment.”
For economists, the unique scenario facing those trying to determine when or if a recession will happen and even getting a handle on the current state of the economy has created some challenges.
“But the major factor in this is the Fed and its actions, and the fact that they raised interest rates 75 basis points last time,” said Handel, adding his voice to those who believe the central bank will again boost rates by at least a similar amount or more by year’s end as it seeks to tame inflation.
“That's going to move us into a (rate) territory we haven't seen since 14 years ago, prior to the Great Recession,” said Handel.
Big Reduction Coming
Handel said it is inevitable the country will slide into a recession, if it isn’t already there. He emphasized the refinance boom that sustained the industry in recent years is over due to rising rates.
“In 2022 we'll see a two-thirds to three-fourths reduction in the total volume of refinance activity in the United States. That's huge,” Handel said.
While lending portfolios have been flush at credit unions, Handel cautions that refinancing volume is going to slow for all lenders.
“This is a big challenge for credit unions to have to replace that (refi) lending volume,” Handel explained, emphasizing that home equity lending business should sharply increase as consumers avoid cash-out refinances due to rising rates, choosing instead to tap the equity that has markedly grown in their homes in recent years. “No one is going to touch their current home loan with the low rates they have. They are going to borrow against their home in a different way, though equity lending.”
What to Give Attention
“The thing to pay attention to here is the largest banks have almost abandoned the home equity lending space,” Handel continued. “At this point they have reduced the amount of equity lending that they're doing in a really dramatic fashion. The bank space in general has not been engaged in equity lending ever since the Great Recession. Even as this lending opportunity came back five to six years ago, they focused on other things. So, there's a good market opportunity here for credit unions.”
Bill Handel
Handel stressed that as more credit unions emphasize equity lending, it is critical they take the correct approach.
“The key thing for the industry to focus on is to make sure that they have the right tools,” he said. “We think the key tool is that combination of a line of credit and a loan. You start with a line of credit, but you can simply carve out a portion of that and it into a term loan. That's a key opportunity for credit unions.”
One More Thing to Think About
ARMs, too, are quickly becoming a much more important part of the loan portfolio, said Handel.
“This is something credit unions should think more about,” recommended Handel. “You've got the Millennial generation really trying to get into home ownership, even with rising rates. To the extent they can afford a home, they're trying to get in. So, ARMs are potentially the way for them to successfully do that.”