As Prepared for Delivery on October 4, 2023
Good morning, everyone. And, thank you, Peter, for the kind introduction as well as to the American Credit Union Mortgage Association for inviting me.
All of us here understand that owning a home is a fundamental component of the American Dream. Home ownership builds intergenerational wealth and contributes to strong and vibrant communities. In just a few decades, we have seen the credit union system’s presence in the mortgage market grow significantly.
Today, credit unions hold about 5 percent of all outstanding mortgage debt in the U.S., including a large and growing percentage of second mortgages. While this market share is small when compared to that of banks and non-bank lenders, credit unions play an important role in fostering home ownership in communities nationwide, especially in rural or underserved areas and communities often overlooked by traditional financial institutions.
Nevertheless, today we continue to see several hurdles affecting the American consumer’s ability to purchase a home, maintain a balanced household budget and gain fair and equal access to credit. These challenges and how they impact credit union performance, and the regulatory environment are the focus of my remarks today.
A Complicated Housing Market
If you’re at this conference, you already know that today’s housing market is complicated. The good news is that, despite inflation and higher interest rates, mortgage performance has stayed relatively solid. Mortgage delinquency rates, although rising, additionally remain at relatively low levels. Compared to prior business cycles, especially the 2008 financial crisis, home equity levels also remain quite high, in large part because home values have remained resilient. The NCUA estimates that between 90 and 95 percent of credit union mortgage borrowers have 20 percent or more equity in their homes. That’s positive news, and it provides protection for mortgage lenders like you should market economics shift in the short term.
Simultaneously, higher mortgage rates are sharply impacting both the supply and demand sides of the housing market. On the demand side, home affordability has fallen dramatically during the last few years, with many potential borrowers remaining on the sidelines because they simply can’t afford to buy property. And, the inventory of homes available for sale remains very low, as many potential sellers choose not to sell because that could mean much larger mortgage payments for them in the future in moving to a larger, more costly home.
Still, over the last few years, credit unions have actively originated first and second liens, including home equity lines of credit. Notably, outstanding junior liens in the credit union industry grew about 34 percent over the last four quarters. This increase in home equity loans and junior liens is both good and bad.
While credit unions are meeting their members’ needs which is positive, I’m concerned what it means on the borrower’s side, and whether the higher volume in HELOCs and junior liens is indicative of increased levels of household financial stress.
Second Quarter 2023 Data Shows the Need for Caution
The answer, so far, is potentially. Overall, the performance metrics indicate the credit union system remains well positioned. For example, the industry’s aggregate net worth ratio grew to 10.63 percent, and we recorded a 12.6 percent year-over-year increase in the number of credit union loans.
However, during the last few quarters, the NCUA has seen growing signs of significant financial strain in household budgets, such as rising delinquency rates for various consumer loans, including auto loans and credit cards. The delinquency rate at federally insured credit unions was 63 basis points in the second quarter of 2023, up 15 basis points compared with the second quarter of 2022. Also in the second quarter of 2023, the delinquency rate for credit cards rose to 154 basis points from 107 basis points one year earlier, and the auto loan delinquency rate increased 22 basis points over the year to 67 basis points.
To compound those concerns, we are seeing an increase in net charge-off ratios and declining annualized returns on average assets for credit unions. The net charge-off ratio for all federally insured credit unions was 53 basis points in the second quarter of 2023, up 24 basis points compared with the second quarter of 2022.
The reinstatement of federal student loan repayments and rising costs for property and casualty insurance will presumably have an impact on these already strained household finances, and it seems more likely than not that credit union delinquency and charge offs will continue to rise. Ultimately, all of this economic churn signals that credit unions must carefully manage their credit risks going forward and consider early intervention to prevent a delinquency from becoming a charge-off or foreclosure.
For our part, the NCUA will continue to monitor credit union performance through the examination process, offsite monitoring, and tailored supervision. And, when appropriate we will take action to protect credit union members and their deposits. Credit union executives, supervisors, and boards of directors, therefore, must remain diligent in managing the potential risks on their balance sheets and monitoring economic conditions, household finances, and the interest rate environment.
Disparities in Mortgage Lending
Persistent disparities in mortgage lending are another area of concern for the NCUA. Research by regulators and academics alike provides evidence of the struggles of certain demographic groups to obtain access to safe, fair, and affordable financial services. For example, the Federal Deposit Insurance Corporation’s Center for Financial Research published a working paper stating that, after controlling for several credit risks and other factors, minority borrowers in 2020 faced higher mortgage loan denial rates, and Black and Hispanic borrowers paid higher interest rates than White borrowers.
After the release of the FDIC’s working paper, the NCUA’s Office of the Chief Economist worked closely with the FDIC and the paper’s author to apply the same analysis to credit union loans, specifically. Ultimately, the office’s statistical analysis using HMDA data for both 2020 and 2021 produced broadly similar results for credit unions. In fact, credit union members in some demographic groups who sought to get a mortgage in 2020 and 2021 were up to two times more likely to be denied. Among credit union members able to obtain purchase-money mortgages from HMDA-filing credit unions and credit union service organizations in 2020, Hispanic and Black borrowers were estimated to have paid interest rates that were about 10 basis points higher than White borrowers. The analysis of the 2021 HMDA data produced similar findings, with an average excess interest rate for Hispanic and Black credit union members ranging between 8 and 13 basis points, respectively.
This disparity in lending rates to certain populations is both unacceptable and incompatible with the credit union mission. It should be everyone’s priority — both industry and regulators — to fix this problem. That’s why the NCUA has increased the resources committed to fair lending supervision in recent years. And, it’s why credit unions need to review their own practices, policies, and procedures to ensure more equitable access to credit going forward.
Appraisal Bias
The bias we see in credit union lending to people of color is also present in the determination of the home values for minority families. Appraisal bias, especially when compounded with higher mortgage denial rates and higher interest rates on approved mortgages for Blacks and Hispanics, decreases the ability of families to build intergenerational wealth.
To address this problem, the NCUA joined the Property Appraisal and Valuation Equity, or PAVE, Task Force, an interagency initiative to study and reverse the undervaluing of properties due to racial or ethnic bias. The NCUA has also worked in recent months with other agencies on proposed joint rules to establish quality control standards for automated valuation models.
And, as a member of the Federal Financial Institutions Examination Council, the NCUA is working with other financial regulators to develop examination principles that consider how appraisal bias impacts safety and soundness and consumer financial protection. Additionally, through its seat on the Appraisal Subcommittee, which oversees state appraiser and appraisal management company regulatory programs, the NCUA is supporting efforts to diversify the appraisal industry. Along with the lending inequities I outlined earlier, appraisal bias further underscores that people of color continue to face uniquely challenging barriers to homeownership.
Importance of Consumer Financial Protection
Disparities in mortgage lending and appraisal bias illustrate the value of the NCUA’s consumer financial protection program. Many of you have heard me say before that: All consumers — regardless of their financial services provider of choice — should have the same level of consumer financial protection.
Safety and soundness and compliance with consumer financial protection laws do not compete with one another. It’s not a zero-sum game. The two — safety and soundness and consumer financial protection — go together hand in glove. In fact, the NCUA’s vision statement — adopted by the NCUA Board just last year — is a clear confirmation of that relationship to quote, “Strengthen communities and protect consumers by ensuring equitable financial inclusion through a robust, safe, sound, and evolving credit union system.”
Many of you in this room today are responsible for consumer compliance at your respective financial institutions. I want to thank you for your work! Your role is critical to the credit union system’s statutory mission of meeting the credit and savings needs of consumers, especially those of modest means.
Adhering to that mission is why we should strengthen the consumer financial protection examination program at the NCUA, especially for large and more complex credit unions driving much of the industry’s mortgage growth. Such a program is in the best interest of the system, credit union members, the Share Insurance Fund, all the credit unions that pay into the fund, and the taxpayers who guarantee the fund. It will ensure that as the industry grows and evolves, it remains true to its mission and its commitment to serve members of all backgrounds.
That concludes my formal remarks. Thank you again for the kind invitation. Peter, I look forward to our conversation.