Lending challenges and opportunities in 2023

Ray Lindley has seen a lot in his professional career. However, the Elevations Credit Union chief operating officer believes the current economic landscape might be the most unique he’s experienced.

“The financial crisis of 2008 was a tough time. The early 1980s were tough because of inflation and interest rates,” says Lindley, who chairs the CUNA Lending Council. “But now, we were starting to feel like, ‘OK, we're getting back to whatever the new normal is,’ and then inflation and everything hit. The pandemic combined with what’s going on economically, it’s probably the most unique time I've experienced.”

Responsible for the member-facing areas at the $3.4 billion asset credit union in Boulder, Colo., Lindley sees all the impacts of the economic situation. What makes the current climate so unique?

“We have seen probably the sharpest rise in interest rates in at least 30 to 40 years,” Lindley says. “Most credit unions started this year with a lot of liquidity—excess deposits and mortgage refinancing were big in 2021. Then, with inflation and everything that happened, we had an amazingly sharp rise in interest rates.”

That impacted credit unions in several ways, Lindley says. First, it changed the type of loans they were doing. Mortgage and refinance volume dried up and credit unions started doing a lot of home equity lending. At the same time, credit unions captured a larger share of the auto lending market.

The second thing credit unions saw was that rates rapidly increased. Many credit unions did not raise their rates fast enough, causing them to put many loans on their books at a lower interest rate. At the same time, the funding costs, or rates paid on deposits, were rising so much that credit unions were having a hard time matching.

“Now we have credit unions that are close to 100 percent loan-to-share,” Lindley says. “Costs of deposits are rising, but we're stuck with loans that originated earlier in the year at a lower interest rate. That's probably the number one pain point we're seeing hit credit unions.”

The year ahead

Lindley stresses that the future is difficult to predict, as the macroeconomic environment has changed frequently in recent years. However, he sees a high likelihood of a recession. He’s also seen very early indications that inflation might be coming down a little.

“We expect the Federal Reserve to continue to raise rates early in 2023,” Lindley says. “We expect rates to be at, or a little bit higher than, where they are today. It'll put a damper on mortgage lending and could impact things like employment, credit performance, and people's ability to pay their loans.

“The other thing is a continual affordability challenge with housing in most of our markets,” he continues. “Homes have gone up in value tremendously over the last five years. You couple in the inflation effect and higher interest rates, and it’s a triple whammy to affordability.”

On the other hand, Lindley sees continued opportunity in home equity lending and auto lending, as well as renewed interest in small business lending amid normalized economic activity after the pandemic.

He believes a successful 2023 at Elevations would include continuing their auto and home equity lending, as well as navigating the rate environment and making sure they can match deposits and funding with the loan demand.

The new year also offers an opportunity for credit unions to prove their mission.

“Our biggest success in 2023 is to prove to society that we’re here in tough times,” Lindley says. “That's our responsibility and our privilege, being there for people when they struggle. Lending is easy in good times—when rates are low, the economy is great, and employment is awesome. But this is when we're going to get a lot of experience. This is where the credit union industry can prove what we’ve been saying all these years. This is ‘proof in the pudding’ time, education time.”