Do Credit Unions Belong in MBL?
It would be easy to say that the answer to this question really depends on who you ask. Certainly bankers would say "no.” But for credit unions, the answer requires a much bigger and broader consideration than just turf or charter warfare.
Over the next several months we will present our best analysis of the many factors worthy of consideration and we ask you to hold your opinion, or re-consider your existing bias, until you have looked at this question from a number of perspectives. In this first of four articles we will explore what the Great Recession has taught us, go into considerations of credit union lending limits, types of products offered, etc. In the end we will provide a summary conclusion.
What Has the "Great Recession" Taught Us?
That the real test of your MBL loan program is the extent to which you would do it again, after it has been subjected to the prolonged, worst economic times since the Great Depression.
Okay, bottom-line measurements:
- Did we help our members by making an MBL loan to them, or enable them into making a huge mistake?
- Did we contribute to the financial welfare of all our members through a profitable MBL program?
- Did we create a regulator relationship challenge as a result of getting into MBL?
It is doubtful that saying "yes" to an MBL loan request is going to prompt our members to blame us for their loss; any more than they would credit us with their gain. So that first question is more philosophical than real.
Profitable operations however, are a big deal and very real. If you had a business plan for the rollout of your MBL program, presumably you projected a break-even and profit point. If you are like the rest of us mortals, you did not budget for the Great Recession. What happened to MBL ("commercial" loans to banks)? Well, not much that was good:
- Commercial lending follows residential lending.
- Residential lending and consumer financial health tumbled.
- Unemployment went sky-high, first in the sand states and then nationwide.
- Individuals lost jobs and those that didn't stopped consuming, choosing to pay down debt.
- Social conscious took a time out and decided "strategic foreclosures" were morally viable, compounding the residential real estate foreclosure impact and duration.
- Businesses went out-of-business because consumers stopped spending.
- Commercial real estate (CRE) values tanked as businesses failed and vacancy rates climbed.
- Whether businesses were barely hanging on, or doing relatively well, they saw the opportunity to re-negotiate leases down dramatically, compounding the commercial property value declines, rents and economic conditions.
- Lenders were faced with serious capital concerns and tried to eliminate credit risk, minimize losses, cut expenses and look for any new source of income.
- Loan-to-share ratios began to drop as loans were paid down without the benefit of new loan production, further lowering earnings.
- Banks were commercial (MBL) lending heavy and loan losses were deeper, harder and bigger.
- Credit unions enjoyed a progressive loan portfolio pathway as losses traveled through the consumer loan portfolio to residential real estate (especially HELOC and HE), on to residential homes and then MBL.
- Banks and credit unions began the process of forced mergers, sales and liquidations on an estimated average of 1 credit union to every 14 banks. Unfortunately the credit union failure data was not available to us; however FDIC provided the following bank information:
Banks Estimated credit unions
2012 - 39 (as of 7/27/12) 3
2011 - 92 7
2010 - 157 11
2009 - 140 10
2008 - 30 2
- Non-commercial real estate loans, called commercial and industrial (C&I) loans suffered the least. These are lines of credit, and short-to-medium term loans. They tend to be unsecured loans in smaller amounts or secured by accounts receivable, inventory, equipment, rolling stock, etc. They are generally smaller in dollar amount than CRE, tend to be expensive to process, and provide the greatest challenge to making MBL profitable.
- Commercial real estate loans represented the heaviest losses; of these, land loans suffered the most, with the lender sometimes realizing an 80% drop in value.
- Whether a bank or credit union, loans were modified to lower rates (reducing earnings), extended terms and just about any other plan possible to keep the borrower in the property and paying something.
- Commercial loan participations purchased or sold became a major regulatory exam issue and source of genuine challenges by lead lenders in servicing, tracking, reporting, and loan loss mitigation negotiating with not only the borrower, but the participating lenders as well.
- Regulators were scrambling to find qualified examiners.
- Both experienced and newbie examiners were looking at MBL portfolios in various stages of challenge and trying to figure out what (if anything) could be done and whether the credit union was qualified and experienced enough to manage it.
- Otherwise well-managed and strong credit unions received unprecedented scrutiny as a result of a minor or major MBL exposure.
- All of this was going on in the midst of major political efforts to introduce new legislation to increase the MBL cap for credit unions; bankers were screaming "unfair" and CUNA was touting job creation.
So what did the Great Recession teach us?
- Credit unions generally faired better than banks.
- There are a number of credit unions involved in MBL who shouldn't be—they have neither the knowledge, experience, nor respect for this specialized lending program.
- There are a number of credit unions with exemplary MBL programs; they were bent but not broken.
- Regulators are better prepared today to understand, examine, and evaluate MBL portfolios rationally.
- Regulators have every right to be seriously concerned about the MBL lending in credit unions based on some of the horror stories told and left untold.
- MBL participations present some real questions for the future as to market acceptance, whether new underwriting standards will be required, pricing for credit risk, the qualifications of the lead lender to service, track, monitor, report, and negotiate, and the qualifications of the buyer to track, monitor, report, and negotiate.
There is no question that MBL in credit unions, and commercial lending in banks, have taken a serious hit through the Great Recession. Remember though that so did consumer and residential—the jury is still out. Part 2 of this series will appear in about one month.
Chuck Anderson is senior vice president of business services for Solutions in Finance, which specializes in consumer lending, indirect lending, residential mortgage lending, and member business lending (www.solutionsinfinance.com). He served on the CUNA Lending Council Executive Committee from 2009-2011. Contact him at email@example.com.