Download California in 2009 - CU SoCal Partners, LLC

Credit Union Industry Update:
Where Are We and What’s Next?
By Daniel Penrod
California and Nevada Credit Union Leagues
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So, What is Going On?
• A fall to remember
– Heard on the street “What’s the difference between a pigeon and
a mortgage banker? A pigeon can still make a deposit on a
Ferrari.”
– Recession was already fully underway even if many economists
and politicians remained in deep denial
• NBER Announced in Dec of ’08 the recession started in Dec of ‘07
• What went wrong?
–
–
–
–
The big three imbalances: housing, finance, and the consumer
The good news: The big imbalances are settling out
The bad news: we still have healing to do
The better news: California is going to come out of this downturn
in good shape
The Economy
Recession!
Depression?
Definitions
Recession
A widespread decline
in the GDP and
employment and
trade lasting from six
months to a year
Depression
A long-term economic
state characterized by
unemployment and
low prices and low
levels of trade and
investment
What’s the Difference?
A recession is when your neighbor loses
their job…a depression is when YOU lose
your job.
U.S. Economic Growth
On a downward trend
Source: Federal Reserve Bank of St. Louis, *Forecast
Changes in Household Net Worth
(in 2008 dollars)
Source: BLS, Federal Reserve Flow of Funds
Retail Sales Plummet
Downshifting since mid-2006
10.00%
5.00%
-10.00%
Consumers = 70% of Economic Activity!
-15.00%
Source: Federal Reserve Bank of St. Louis
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
-5.00%
Jan-93
0.00%
-2%
-4%
Jan-07
Jan-04
Jan-01
Jan-98
Jan-95
Jan-92
Jan-89
Jan-86
Jan-83
Jan-80
Jan-77
Jan-74
Jan-71
Jan-68
Jan-65
Jan-62
Jan-59
Personal Savings Rate
16%
14%
12%
10%
8%
6%
4%
2%
0%
Unemployment
Types of Unemployment
• Cyclical unemployment
– rises during economic downturns and falls when the economy
improves
• Frictional unemployment
– involves people in the midst of transiting between jobs,
searching for new ones
• Structural unemployment
– involves a mismatch between the sufficiently skilled workers
looking for jobs and the vacancies available
Unemployment – California
California
U.S.
12%
11.0%
10%
8.9%
8%
6%
4%
2%
0%
1980
1984
1988
1992
1996
2000
2004
2008
California Fun Facts
• Over the first half of 2008, the state lost an average of
23,000 jobs a month compared to 54,000 jobs a month over
the later half.
• The number of unemployed Californians increased by an
average 44,000 persons a month in 2008; 2009 has
averaged 172,000 per month.
• 58% of California’s existing home sales in February had
been foreclosed on. A year ago it was 33%.
• But, housing is less of a drag – now it is the consumer.
• The state’s spending, tax, and loan package to close the
anticipated $41 billion budget gap is expected to fall short by
$8 billon.
Unemployment - Nevada
Nevada
U.S.
12%
10.6%
10%
8.9%
8%
6%
4%
2%
0%
1980
1984
1988
1992
1996
2000
2004
2008
Housing Market
Falling interest rates allowed housing to
skip the 2001 – 2002 recession, and they
will temper the 2008 recession.
Rates 2000 - Current
30 yr FRM
1/1 ARM
Fed Funds Rate
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
9.00%
8.50%
8.00%
7.50%
7.00%
6.50%
6.00%
5.50%
5.00%
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Case Schiller Index
(Seasonally Adjusted)
300
250
Composite-10
Composite-20
CA-Los Angeles
CA-San Diego
CA-San Francisco
200
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Are Homeowners Keeping Up?
Percentage of California home mortgages that are past due.
Difficulties are Mounting
Percentage of California home mortgages that are in foreclosure.
Source: Mortgage Bankers Association
Are Modifications the Answer?
“44% of borrowers who obtained traditional loan modifications in Q4 07 defaulted
within 8 months” - American Banker, 11/24/08
California’s Housing Market
at a Glance
Current Period
Year Ago
Unsold Inventory Index
(months)
6.7
16.6
Median Time on Market
(days)
49.9
70.8
First-Time Buyer Housing
Affordability Index
59%
33%
Source: California Association of Realtors
Credit Union Financials
Regulatory Update
Corporate Stabilization Program
A recap of what’s taken place as of May 2009:
• January: NCUA gave $1 billion capital note to U.S. Central and
guarantee uninsured shares at participating corporate credit unions.
– The costs: 51% of NCUSIF Deposit and 30bp premium of insured
shares.
• March 29th: NCUA placed U.S. Central and WesCorp into
conservatorship believing estimated losses were greater than their
total capital.
– Result: 51% impairment revised to 69%, bringing the total assessment
to 99% of insured shares.
• Late May: Due to NCUA’s estimate of credit losses and OTTI
charges, NCUA exhausted U.S. Central’s paid-in capital and 23% of
their membership capital. Credit union PIC and MCA in WesCorp
were both exhausted due to the expected losses.
Helping Families Save Their
Homes Act (S. 896)
• Corporate Credit Union Stabilization Fund
– Spread out 69% impairment over 7-year period (10-15bp per
year)
• Extends payment period for the 0.30 percent premium to
8 years.
 Extended share insurance increase ($250,000) to
December 31, 2013.
 Increased borrowing limit of NCUSIF to $6 billion, with
temporary increases permitted of up to $30 billion until
December 31, 2010.
Federal Legislation
• S. 896, the Helping Families Save Their Homes Act
– No “cramdown” provision…yet!
• H.R. 627, the Credit Cardholders’ Bill of Rights
– Restrictions ability to change terms or increase rates on credit
cards with existing balances.
– requires enhanced consumer disclosures.
– places limits on marketing and issuing credit cards to consumers
under age 21.
• Interchange fees (H.R. 627)
– Did not include provisions affecting changes to regulations on
interchange fees (big win for CUs)
• Consolidation of regulators
– Obama intends to recommend Congress create a single
regulator to oversee the entire banking sector. (Not NCUA…yet).
Banks’ Stress Test
Going Forward
Where does this leave us?
•
•
•
•
•
•
•
Housing will struggle, particularly the upper end.
Mortgage relief programs have proven ineffective.
Investment spending will continue to be cautious.
Consumers are in retreat.
This is a global recession, which is hurting CA trade.
But, it is encouraging a return to saving.
All of the above inhibit job creation! As fewer jobs are
created, spending power dries up.
• Employers are further trimming payrolls.
How do we get out of this?
• The housing market must stabilize.
• Big Problem: a lack of confidence and trust.
• Lenders will have to be willing to finance
purchases.
• Fiscal policy to boost spending in the interim will
help.
• Growth coming out of the recession will be
shallow…no big bounce.
• It will take time.
Economic Outlook for 2009
• Economy should remain anemic–no quick
rebound insight.
• No sector is positioned to provide a boost.
• The deeper the job cuts, the worse the outlook.
• Consumer spending down as saving has become
a priority…for now.
• Housing should stabilize in late 2009, but the
recession and foreclosures will hamper growth.
• Tempered economic recovery possible in 2010.
California in 2009
• Government employment slowdown is coming.
• Unemployment may reach 13%+ and remain
elevated throughout 2010.
• Income and consumer spending will continue to
slow, and take longer to recover.
• Home price declines will persist through 2009.
• 2010 should be better, though it might not “feel”
like it.
What are credit unions to do?
• Rising delinquency and loan losses do not
require adjusting lending policies; normal
practices will probably result in more rejections.
• Members are taxed financially so let the capital
do its job, within reason.
• Continually communicate to your members your
commitment to them and your financial strength.
• Huge opportunity to gain market share; but low
earnings and capital could make growth difficult.
Questions?