Credit unions should beware mortgage lending is a risky business

The Credit Union Development Association (CUDA) held its AGM last weekend at the Breaffy House Resort in Co Mayo.

With 12 full members, CUDA is the smaller of the two representative bodies for the sector, the other being the Irish League of Credit Unions.

Among the speakers was Elaine Byrne, the deputy registrar for credit unions at the Central Bank of Ireland, who delivered a 5,380-word speech covering pretty much every topic that is live in the sector.

Among them was the much-talked about issue of mortgage lending. Credit unions have been agitating for some time to be allowed to expand their lending for home loans. At present, some 10 per cent of a credit union’s lending can be for 10 years or more, rising to 15 per cent in some cases.

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The latest data shows that mortgage lending by credit unions amounted to just 2.7 per cent of their total lending last year. New home loans advanced by credit unions in 2016 amounted to just €37.1 million out of a total of €6.7 billion.

It’s a narrative that plays well in the political arena at a time when competition in banking is constrained, and mortgage interest rates here are almost twice the euro-zone average.

Surplus funds

Who better than credit unions, which are embedded in local communities and are well respected by members, to provide competition to the banks?

For sure, credit unions have surplus funds to invest, although not the €5 billion that gets bandied about. Putting some of this money into mortgages would clearly offer a better return in the current ultra-low interest rate environment.

In a paper published last June, the Central Bank noted that there had been some criticism that it was holding back the development of credit unions into new business areas, or that its regulation was too restrictive.

“However, to date, we have not seen enough from credit unions by way of well-structured, viable and sustainable plans for development, which are rooted in the current realities and challenges that have to be dealt with to move forward successfully.

“Many of the proposals we assess are not aligned to current business strategy, business fundamentals and capabilities. They often lack relevant cost and viability analysis, and – importantly – fail to demonstrate how the proposed new service or product will contribute to the development of profitability and sustainability.”

Just five months after this report was published, Rush Credit Union was placed into liquidation by the Central Bank and the High Court following the emergence of a €4.7 million hole in its reserves, and allegations of financial mismanagement emerged.

Collapse

While far from the scale of collapse in either

Anglo Irish Bank

or Irish Nationwide Building Society [taxpayers gave them a €31 billion bailout], it was a reminder of how things can go badly wrong in a sector where limited financial skillsets and weak management structures remain a feature, while weaknesses in credit underwriting practices are “often apparent”, according to the Central Bank.

Nonetheless, Byrne told CUDA delegates that the regulator would undertake a themed-review on mortgage lending, to include a review of lending policies, underwriting and asset/liability management.

She said credit unions would need to consider the impact of longer-term lending on interest margins, return on assets and on balance-sheet structure “as the issue of funding longer-term lending with short-term funding” was a challenge for the credit union business model.

Byrne also made it clear that some form of “sectoral collaboration” through shared services vehicles would be important to persuade the regulator to lift the existing limits on such lending.

CUDA’s proposal via the “Solutions Centre” has been flagged in other media, with the potential to lend €400 million in home loans.

ILCU confirmed to The Irish Times on Tuesday that it was also working on a proposal to “develop a full-service mortgage solution that will provide credit unions with the structures and supports needed to offer mortgages to members”.

“This solution aims to ensure that credit unions can not only meet the current legal and regulatory requirements for the provision of mortgages but also be positioned to meet any future regulatory developments in this area.

“ILCU believes that it is vital that the long-term lending limits imposed on credit unions are amended to give credit unions the opportunity to offer mortgages in a significant way. ILCU will continue to engage with the regulatory authorities to effect change in this area.”

Central pot

Financial adviser

Brendan Burgess

has suggested a mutually-owned credit union building society, where lending would be centralised with individual credit unions providing funding for a central pot.

Mortgage lending is a risky business, as evidenced by the Irish banks following the crash in 2008. No matter how tight the credit processes employed by credit unions, there is bound to be some level of default and arrears, leading to repossessions.

In Ireland, repossessions are difficult to effect on owner-occupied homes, in spite of what many people think. It’s not in our culture and there are lots of protections now in place for homeowners to prevent them from being turfed out by a bank, particularly if they are co-operating with the lender on their arrears.

It’s one thing for a bank to enforce a security on a family home, given that most people dislike them. It’s altogether another for a community-based lender such as a credit union to repossess a house in a small country town or tightknit city suburb. You could imagine the backlash locally.

Credit unions should be careful what they wish for when it comes to mortgage lending.

Twitter: @CiaranHancock1