Friday, October 31, 2014
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Your Credit Union: Different by Design



No doubt the economy is on your mind. And you may be wondering how credit unions—different from banks in so many ways— are being and will be affected. We sat down with Mike Schenk, an economist with the Credit Union National Association in Madison, Wis., to ask a few questions.

Home & Family Finance Resource Center: How are credit unions doing in this troubled economy?

Schenk: Despite the challenges today, credit unions remain well-capitalized, with average capital ratios that are roughly double the minimum required by regulators. What that means is that credit unions have a lot of wiggle room to absorb mistakes or bad behavior on the part of people who have made agreements with them.

For instance, if a number of borrowers don't pay back their loans, a credit union loses money. But the capital buffer stands between the credit union and insolvency. And that buffer is at nearly an all-time high. So credit unions are in excellent shape financially.

H&FFRC: Why are credit unions thriving when other types of financial institutions are struggling, even failing?

Schenk: Unlike other financial institutions, most credit unions didn't participate in the activities that caused the problems we're currently suffering through.

Credit unions are well positioned to do what they do best: help people in times of need.

Unlike credit unions, the for-profit financial institutions are keenly focused on trying to generate huge amounts of income. In recent years, they did that by originating large volumes of mortgage loans. Lenders earn fee income on each mortgage they issue. In many cases, they gave mortgages to people who shouldn't have gotten them, and often the mortgages had terms that were questionable, to say the least.

The folks in the secondary market—the people who buy and sell mortgage loans—assisted in creating the problem. They relaxed their guidelines, such as down-payment requirements, on the mortgages they purchased. The practice of making mortgage loans in excess of 100% of a property's value became prevalent, if not pervasive.

All of this allowed the for-profit lenders to make a lot of mortgages and generate a lot of profit for themselves. But in many cases, it was at the expense of incautious consumers, many of whom shouldn't have been given those loans in the first place.

H&FFRC: Why didn't credit unions jump into the fray, too?

Schenk: For two main reasons. First, credit unions are not-for-profit cooperatives. I know we always say that. But this is a practical example of why that matters. Members are owners. So credit unions try to avoid doing anything that might harm their members.

Credit unions are in excellent shape financially.

Most credit unions didn't make these kinds of mortgages—what we sometimes call toxic mortgages—because they knew ultimately it would not be in their members' best interests. The for-profit sector's primary concern isn't consumers' best interests—it is focused on generating income.

The second reason credit unions avoided making these mortgages is that, by and large, they're portfolio lenders. That means they hold in their portfolios most of the loans they originate instead of selling them to investors. In the past several years, credit unions have held roughly 70% of the mortgages they originated. So they care about the financial performance of those loans.

H&FFRC: Can credit unions stay strong if the economy worsens?

Schenk: Some credit union members have obtained mortgages outside the credit union movement. Sometimes those mortgages have come back to haunt those members, and they're suffering financially as a consequence. They may not be able to pay back other loans they have at the credit union or put money into savings.

Credit union deposits have federal insurance, just like bank deposits do.

That's having some side effects on credit unions. They're not earning quite as much money as they have in the past, and their asset quality has deteriorated a bit. But that's the beauty of the credit union model. Credit unions can live with those conditions without suffering dire consequences.

In the for-profit sector, it's more difficult. They have stockholders who constantly demand high rates of return. They don't like to see earnings go down. Credit unions, on the other hand, can continue to serve their members even if they'll make a little less money in the process.

H&FFRC: So should I worry about the money I have in my credit union?

Schenk: There's no need to worry. Savings in every federally insured credit union are backed by the NCUA (National Credit Union Administration), just as savings in banks are backed by the FDIC (Federal Deposit Insurance Corporation). Federal insurance guarantees that the "full faith and credit" of the U.S. government stands behind credit union deposits.

Congress increased the usual insured deposit limit from $100,000 to $250,000. The NCUA made the $250,000 account fund guarantee permanent in 2010. Members need to be aware of what the limits are and how those work. You can ask someone at your credit union for details.

Credit unions try to avoid doing anything that might harm their members.

H&FFRC: If my total deposits at my credit union exceed the insurance limit, should I move out some of my money?

Schenk: You might consider doing that, but your accounts might be structured in such a way that it isn't even necessary. Otherwise, shop around to compare other institutions where you might put those extra funds. You'll usually find that the best deal is another credit union.

H&FFRC: Sounds as though credit unions are looking good.

Schenk: One interesting factor is that in normal times, the difference between credit unions and other players in the financial marketplace isn't quite as obvious to a lot of people, even though credit unions have clear benefits. In the current economy, credit unions are able to better differentiate themselves in the marketplace—not only to consumers, but also to policymakers.

The credit union difference is more visible now, to everybody. And credit unions are well positioned to do what they do best: help people in times of need.

Mike Schenk is vice president of economics & statistics, Credit Union National Association, Madison, Wis.



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