End of refi boom could put squeeze on credit unions in 2021 Posted by AVCU on 12:29 PM

 Credit unions should prepare for the mortgage refinancing boom to slow next year.

Consumers rushed to refinance mortgages and purchase homes this year as interest rates fell below 3%. That has driven a significant portion of credit union loan growth this year.

However, the pace of refinance activity is expected to decline next year so credit unions need to prepare for ways to make up for that lost income. The purchase market should remain healthy, and pent- up demand for other types of credit could help soften the blow, experts said.

Declining refinancing "will eat into the profitability of credit unions but I’m hoping what may not be available in terms of refinancing, we will see a return to purchase applications,” said Brian Turner, president and chief economist at Meridian Economics. “But that’s dependent on how successful the distribution of the coronavirus vaccine is and how quickly members will respond with their purchasing behavior.”

Credit union lending has increased this year, though some categories of loans have fared better than others. Total loans outstanding increased by more than 6%, to $1.2 trillion, in the third quarter from a year earlier, according to data from the National Credit Union Administration.

Mortgages were a considerable portion of that increase. These loans increased by 9%, to $508.8 billion, year over year, according to the NCUA data. That accounts for about 61% of the overall growth in total loans outstanding.

In addition to that, mortgage lending has skewed toward refinancing this year, thanks to historically low rates. Overall, the number of originations in 2020 was expected to be up about 44% compared with last year, with refinancing of one -to four-family loans making up 56% of this activity, according to Mortgage Bankers Association data. In 2019, refinances were 44% of originations.

The demand from consumers to refinance existing mortgages has, at times, “stretched most lenders,” including credit unions, in terms of staffing and resources, said Tracy Ashfield, president of the American Credit Union Mortgage Association.

“It has been an outstanding year largely fueled by refinance loans,” Ashfield added. “But there was also a healthy purchase market in many parts of the country.”

But refinance activity is also almost entirely dependent on interest rates. Because of that, any uptick in rates could cause demand for these loans to cool. If COVID-19 vaccines are successful and the economy improves, rates could begin to rise, said Eric Schornhorst, strategic adviser at CU Solutions Group. The MBA predicts interest rates for a 30-year fixed mortgage will rise to 3.3% in 2021.

Additionally, eventually the pool of homeowners who can benefit from low rates and are willing to take the time to refinance will dwindle. That will also slow refinance activity, Schornhorst added.

“Refinancing has driven volume, and that can’t continue to go on forever,” Schornhorst said. “Those who can take advantage of the low rates will have done it and then the refi boom runs out.”

However, demand for loans to purchase a home is expected to be better in 2021, said Joel Kan, associate vice president of economic and industry forecasting at the MBA. The trade group is predicting the number of purchase originations will reach almost 5.4 million in 2021, up about 9% from this year.

That would equal roughly $1.6 trillion for purchase originations, which would be the highest total since the MBA started tracking the data, Kan said.

Even before the pandemic, a jump in originations was expected thanks to a variety of factors, including demographics. More millennials are looking to purchase a home and that will help drive demand, Kan said.

Credit unions could also hope to offset any decline in mortgage refinance activity with an increase in demand for other types of loans, Turner said. Consumers may have put off other types of purchases this year, such as a new car, given the uncertain economic environment.

Turner said loan growth could be 3% to 5% on an annualized basis for the first half of the year, which could then jump to 6% to 8% for the last six months of 2021. “I am not as pessimistic about next year on mortgage or consumer lending because we will see some pent-up demand,” Turner added. “When that happens, I don’t know. I am hoping we will see the beginnings of it some time in the summer.”

Elevations Credit Union in Boulder, Colo., “by far had our best year ever” for mortgage lending in 2020, said Chief Operating Officer Ray Lindley. The $2.6 billion-asset institution was on track to do $2.9 billion in mortgages, more than twice what it lent for mortgages in 2019, Lindley said. Because of significant volumes, the credit union was able to charge borrowers higher interest rates, which helped with pressure on the margin.

Because of the coronavirus, the credit union has needed to consider new risks, Lindley said. For instance, it’s been more difficult to document borrowers’ income given the higher unemployment rate and business shutdowns.

Even as requests for refinancing fall next year, management expects purchases to be strong again, driven in part by increasing home values and consumers’ desire for more space, Lindley said. Markets in Colorado fit well with this trend, though higher pricing has driven some buyers to do their house hunting farther outside the city to find what they're looking for. “In 2019, living in a 1,100-square-foot condo was fine,” Lindley said. “But now people are looking for bigger homes. We have a strong economy and a strong market that we expect to continue on to next year.”