By Ray Birch
IRVINE, Calif.—It’s time credit unions pay extremely close attention to margins and get in line to deliver their share of the massive Small Business Administration loan dollars available under the CARES Act, says one economist, who admits to being nervous over the financial recovery from the pandemic.
“Mind your margins,” said Elliot Eisenberg, chief economist for economic consultancy GraphsandLaughs, during Origence’s Q1 Economic & Lending Trends webinar. “Net interest margins will be weak. There is no question about that. The central bank has cut interest rates substantially, so you lower your lending rates. But you can’t lower your deposit rates below zero. So net interest margins, a major source of revenue, will go away.”
What credit unions can control, emphasized Eisenberg, is participating in the massive SBA loan program the government launches Friday to keep small entrepreneurs afloat during the pandemic. Details can be found here.
“SBA loans will be out there, so I want you to attack these hard. This is critically important,” Eisenberg said, predicting, too, interest rates will remain low for some time—best-case scenario they rise 100 BPs within two years, he said.
The popular economist also noted credit union ROA will suffer.
“Return on assets won’t be so great either, it just can’t happen in an recession,” said Eisenberg. “But this will be a short recession, it won’t last 18 months like the last one.”
‘Don’t Let it Perturb You’
The uncertainty around what will happen to the health of Americans, the performance of businesses and their ability to weather this event and come back, and the duration of the virus and ensuing lockdowns across the country, is most concerning to Eisenberg, who does not see inflation resulting from the crisis.
“We will have a mildly bad first quarter, a whoppingly bad Q2—probably the worst quarter in the history of the nation and worse than any quarter during the depression. But don’t let that perturb you. We will get out of this by Q3,” he said.
While delinquencies will rise, Eisenberg said Washington is working hard to prevent the numbers from spiking dramatically.
“The government is doing all it can to prevent this,” said Eisenberg, pointing to efforts to increase unemployment compensation during the health crisis and legislation to allow for mortgage payment and rent forbearance. “The government is doing everything possible so that when economy gets out of this coma, we are ready to go. People will have employers who are holding their jobs for them, and the SBA loans will be going like gangbusters Friday.”
Eisenberg pointed to growing delinquency numbers in credit cards and especially auto loans prior to the pandemic, saying he is not as concerned credit card delinquencies will markedly rise this year, but is less optimistic about auto loans.
The Biggest Issue
What Eisenberg contends are the biggest issues within auto lending are the increasingly longer terms and resulting significant amount of negative equity that has built up in vehicle loans over the last few years—a topic CUToday.info has extensively covered.
“Thirty-three percent of loans now exceed 72 months,” he said. “The longer you go out on loans…the more problems are caused. And one-third of people who trade in their car today are really upside down.”
Eisenberg forecast auto loans will take a big hit this year, with new unit sales falling from 16.5-17 million units in 2019 to possibly 13.5 million by the close of this year. CUToday.info recently reported one analyst predicts new unit sales will fall to 12.5 million in 2020.
Elliot Eisenberg
“If people can’t go out, they can’t buy cars,” said Eisenberg, adding he does not envision online car buying services picking up much of the sales slack during the pandemic.
Existing home sales will decline as well, much for the same reasons, emphasized Eisenberg.
“People are just not going to let others inside their homes now,” said Eisenberg, further predicting the jump in refinance business FIs have enjoyed since rates plummeted will soon slow.
‘Throwing Everything at This’
What the country is facing now is a health crisis, but Eisenberg hopes it does not become a financial disaster.
“The healthcare disaster can metastasize into a financial disaster, but the government is doing all it can to stop that,” said Eisenberg said. “They are throwing everything at this crisis and they will do more.”
The economist acknowledged he is concerned what might happen to the economy from the pandemic.
“Yes, I am nervous. Why? Because we really don’t know how long coronavirus will be with us,” he said.
What is encouraging, though, said Eisenberg, is the country has seen COVID-19’s impact on other countries and the virus “comes on like a freight train and then goes away fast.”