Fed Tightening Leads Members to Lock In Rates

Real estate loans outstanding rose 13.7 percent over the past 12 months according to first quarter data. The data also shows that rising rates are leading to a shift in member preference toward fixed rate real estate loans, particularly in home equity borrowings.


Lending momentum remains strong in credit unions, with loans outstanding rising 10.5 percent over the past twelve months to $473.3 billion. Real estate and auto loans account for the bulk of the growth, rising 13.7 percent and 8.8 percent, respectively, versus March 2005 results. Loan originations totaled $58.1 billion in the first three months of the year, up 6 percent versus the same period a year ago.

Real estate loans comprise the largest portion of the credit union loan portfolio as of March 31 st at 48.5 percent. First quarter data shows that rising rates are leading to a shift in member preference toward fixed rate real estate loans. Originations of fixed rate real estate loans, both first mortgages and home equity loans, have increased versus first quarter last year while adjustable rate originations in both categories have declined.

Total first mortgage originations in the first three months of 2006 rose only slightly versus first quarter a year ago. Fixed rate first mortgages accounted for the increase, capturing 61.5 percent of the volume versus 60.8 percent in first quarter 2005.

Other real estate loan originations posted strong growth however, rising 19 percent in the first quarter. The shift in member preference is most evident in this category, with fixed rate originations rising 55 percent while variable rate originations declined 4.6 percent versus first quarter 2005. Virtually all of the increase is due to a rise in closed-end fixed rate loan originations. For the first time in five years, fixed rate originations in this category exceeded variable rate originations.

The rise in fixed rate second mortgages indicates that many members are converting variable rate home equity lines of credit into fixed rate loans. Freddie Mac reported that cash-out refinancing activity reached its highest level since 1990 in the first quarter despite rates on new mortgages being higher in more than half of the refinance loans for the first time in five years. In other words, consumers are not refinancing for a better rate but rather to convert adjustable rate firsts and/or home equity lines into fixed rate loans.

Real estate loans are a cornerstone of member relationships. Ensuring that these loans are meeting members’ changing needs is critical to success. Credit unions can solidify member relationships by proactively responding to this most recent shift in both product offerings and marketing messages.

For complete information on first quarter credit union trends, check out the First Quarter Research & Data Report.