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Will Recent Real Estate History Repeat Itself?

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The director of the Federal Housing Finance Agency recently announced that Fannie Mae and Freddie Mac were planning to bring back some of the same types of lending criteria credited with contributing to the last crisis in housing (such as lower down payments, etc.). The intended objective is to further stimulate the housing market, which has recovered some, but is still well below highs seen in 2006 (see graph below).

Historical Performance graph

The question for decision-makers is not whether the FHA is making the right decision, but, how could changes like this impact credit unions? Consider the impact not just today, but 4 or 5 years into the future:

  • Will this create “artificial” demand for housing, potentially leading to another real estate bubble?
  • How could this impact second mortgages? Both current loans and future demand for second mortgages?
  • How did your credit union fare through the last mortgage cycle? What changes would you make if a similar scenario played out again?
  • If the more lax lending standards became prevalent again, how could this impact the balance sheet choices your credit union is making? Would current asset allocation (concentrations) need to be re-evaluated?
  • How many other market participants will also choose to follow the lead of the agencies and lower their standards?
  • How does this impact the mortgage volumes for those credit unions that continue to adhere to stricter lending standards?
Given the impact underwriting changes could have, it may be a good time for credit unions to evaluate their mortgage programs and their appetite for risk, making sure that decision-makers are on the same page before any major issues materialize.
Sources:  Low Down Payments Are Coming Back
Is Congress setting the stage for another mortgage crisis?
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We Are Outside of Our A/LM Risk Limits. Should We Change Them?

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There is tremendous pressure on earnings from increasing costs due to regulations, compliance, technology and delivery channels to name a few. Margins are also tighter than in the past. To help compensate for reduced profitability, credit unions often take on more risk, such as interest rate risk and credit risk, to protect current earnings. However, this can lead to the credit union being outside of the risk limits they have outlined in policy. When this happens, the question, “Should we change our A/LM risk limits?” frequently gets asked.

Before you decide to change your risk limits and simply accept more risk, it is important to have a healthy debate and discussion focused on what the true line in the sand should be and to make sure that stakeholders fully understand the consequences. Many credit unions have found it valuable to place themselves in a scenario where rates have increased to their risk limit scenario to understand, ahead of time, the viable options they may have to unwind their risk. For some, this exercise has been very comforting – in other words, they have many viable options. Others have discovered that the options they thought they had were not enough to mitigate the additional risk in a timely fashion. Those credit unions may choose not to increase risk and address earnings issues from a different angle.

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Is a Fight for Deposits Heating Up?

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We are seeing some financial institutions in pockets of the country raise money market and CD rates.  If you have not done so already, now may be a good time to proactively test the financial, liquidity and strategic impact of a fight for deposits, assuming rates don’t change.

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Make “Silo” Thinking a Thing of the Past: A/LM Education and Decision Filters

One of the challenges of running a successful credit union, and any business for that matter, is “silo” thinking in which talent is focused solely on individual areas and has lost sight of the bigger picture. Making decisions in isolation can be detrimental to the overall success of an institution. However, effective A/LM education and strategic decision filters can help make “silo” thinking a thing of the past.

Consider that asset/liability management covers the entire scope of the credit union business model—from lending to investing to deposit relationships, fee strategies, operational expenses and efficiencies. In other words: everything that affects the credit union’s bottom line. Understanding the relationship and synergies between each of these areas can help your talent make better, more well-rounded decisions that benefit the entire organization—not just their own “silo.” Providing a fundamental understanding of A/LM concepts can be the key to growing your talent base and, in the end, your organization.

Sharing the credit union’s strategic plan can also help get all management and staff moving together in the right direction. Furthermore, we strongly encourage credit unions to create “decision filters” based on strategic direction. These filters can be used by management (and in some cases, even staff) to help ensure that decisions are strategically aligned with the credit union’s vision—giving decision makers a strategic tool to allow them to consistently look beyond their “silo” under management.

For more on silo risk management, please read our c. notes article, titled Silo Risk Management Needs To Stop.

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The Strategic Plan is Only the Beginning

This is the time of year when many credit unions are putting a bow on strategic and financial plans while breathing a big sigh of relief. Do we have a realistic strategic plan that leads to desired financial performance? Check! Is the budget aligned with the strategic plan? Check! Now the fun begins.

“Plans are only good intentions unless they immediately degenerate into hard work.” —Peter F. Drucker

One of the biggest enemies to well-executed strategic initiatives is normal day-to-day activities. For management this can mean daily firefighting, handling immediate and pressing issues before working on longer-term commitments. For board it often takes the form of spending precious board meeting time reviewing financials and operational issues, leaving little time to address strategy.

To combat this, consider including the following elements in execution plans:

  • Invest the time in making detailed execution plans that include timelines, responsible parties and work estimates.
  • Make a realistic assessment of whether the people responsible for executing strategic initiatives have the necessary time and resources. Reprioritize and reassign duties as required.
  • Build regular check-ins into the plans. This should include reporting on progress as well as budget to actual comparisons for both dollars and hours. For the board, the check-ins might be quarterly with high level progress and budget updates. For management, the check-ins should be more detailed.

Strategic initiatives represent the organization’s highest priorities. Appropriate tracking and follow-up are key to their effective execution and, ultimately, moving the credit union toward its strategic goals.