By Ray Birch
MILWAUKEE, Wis.—With the Federal Reserve cutting rates another 25 BPs at its November meeting, the declining-rate environment is presenting significant opportunities for credit unions via HELOCs and, to a lesser extent, auto loan refis, Raddon, a Fiserv company, says.
“What's very much in the picture for everybody is interest rates,” said Raddon SVP of Research Bill Handel. “In addition to the Fed’s latest 25 BP rate cut, we think another 25 BPs will be cut in December. And I think we're going to see further rate reductions next year.”
With rates falling, Handel said Raddon is paying attention to two key things.
“There is an opportunity to recapture auto loan business,” Handel said. “If your members financed their vehicle over the last several years, there might be an opportunity for them to refinance back with you.”
As the Fed has dropped rates, the long rates haven't come down.
“Which is what you would expect. The 10-year really hasn't budged much. But the two-year is moving, at least modestly, and this is exactly what you would expect. Two-year Treasury rates today are about 40 basis points lower than they were three years ago” Handel said.
As the two-year comes down, then auto loan pricing will come down, Handel noted.
Recapture Programs
“Credit unions could be looking at a refinancing opportunity and targeting their members who financed with somebody else over the course of the last two years. Do a recapture program,” he said.
Bill Handel
Handel warned, though, about vehicles coming over to the CU with negative equity.
“Probably one-fourth of those loans will be underwater,” he said. “That's the big problem with this. So, you've got to be much better about your underwriting standards and make sure you're really comfortable with taking that risk on.”
Handel reminded that when consumers buy a new car they're underwater the next day, adding that inflated values due to supply issues have made matters worse.
“It is more of a concern now because the new prices and used prices are overinflated,” he said. “Our auto prices are much higher than they were 10-15 years ago relative to just regular living standards. We've just seen prices go up and up.”
Handel said it’s time to make sure the credit union is paying attention to lending “basics.”
“In addition to scrutinizing collateral, it’s paying close attention to the quality of the borrower to make sure you get repaid. I think it is really important now for the industry to pay attention to this,” he said.
The other lending opportunity, Handel said, is with home equity lines.
“There are so many individuals who are house locked—their mortgage rates are so extraordinarily low. Those who refinanced back in ’21 and ’22, now they've got a mortgage at 2.5% to 3.5%, something in that range,” Handel noted. “They cannot afford to leave the house and they couldn't sell their house and buy another and get the same mortgage rate. They can’t afford the new mortgage.”
Talk About Falling Rates
Credit unions should begin targeting members with home equity line offers, Handel advised.
“Look for people who want to do things like renovations, or people who need to finance in some form or fashion,” Handel said. “Start talking about rates coming down. People are increasingly aware of what the Fed is doing in terms of interest rates. And you can do a little education with that.”
Handel said credit unions have been asking Raddon about mortgage refinance opportunities.
“That's where we don't think there's as much opportunity—yet. We still think that's potentially in the future. Rates have to come down more. In contrast to the decline in two year Treasury rates, 10-year Treasury rates are higher today by about 15 basis points than they were three years ago, a reflection of the steepening of the yield curve,” Handel said.