State of the Economy from Credit Union Perspective

MADISON, Wis. (4/9/09) - The U.S. economy will remain in the "Great Recession" for the remainder of 2009, but the credit union cooperative model will provide strength in dealing with the credit and housing crisis, says Credit Union National Association senior economist Steve Rick.

Rick discussed the U.S. Economic Outlook and its Impact on Credit Unions Wednesday with CUNA staff in Madison, Wis.

Credit unions' business model has a number of strengths: They have excess capital with a net worth of 11.4% of assets, strong funding growth at 84% of assets, lots of liquidity, and lots of investments, and are originating loans to hold, not to sell. They're lending while banks are tightening standards. They have limited credit risk exposure, and no short-term stockholder pressure.

"Credit unions are running counter to the economic cycle. We are helping the economy," Rick said.

However, the big question is how far will home prices fall. Two vicious cycles of the mortgage crisis will continue to loop in a downward spiral. The government is trying to break these cycles by infusing funds into the economy, said Rick.

The first loop consists of falling home prices, leading to negative equity where homes are worth less that the mortgages, leading to foreclosures, which lead to an increased supply of homes, which again lowers the price of homes.

The other loop begins at foreclosures, which lead to a decline in mortgage payments, which means the value of mortgage-backed securities declines, and banks and credit unions incur losses such as those at U.S. Central and WesCorp, which leads to a decline in bank capital or loanable funds. That, in turn, leads to restrictions on lending, which slows economic activity, which increases unemployment, which leads to more foreclosures.

"This is the U.S. economy," Rick said. "Both loops are touching foreclosures and will continue looping around again and again. They won't self-correct, so the federal government has to stop it." He said home prices will continue falling through 2009.

Normally consumers save during the good times for a rainy day, such as a recession. But consumers instead increased their debt burden too far and the economy is forcing them to hunker down and reduce the burden to get through the recession. "The good news is that Americans have rediscovered saving," he said.

What does this mean for credit unions? Steve predicts credit unions' saving growth will rise to 12% this year, while loan growth will fall to 6%. Credit quality will deteriorate this year, and credit unions' return on assets will increase marginally to 0.40% during the year. Capital-to-assets ratios will decline to 9.9% as capital contributions lose pace against asset growth.