Fed pulls out all stops, CUs brace for refinancings

MADISON, Wis. (3/19/09)--"The Fed has pulled out all the stops in its attempt to revive a contracting economy," said Steve Rick, Credit Union National Association (CUNA) senior economist. And that will impact credit unions' net margins and may boost bottom lines.

The Federal Reserve announced Wednesday that it will purchase up to $300 billion in longer-term Treasuries over the next six months, and it will purchase an additional $750 million in mortgage-backed securities, in a move designed to lower mortgage rates (The Wall Street Journal Online March 18).

The additional mortgage-backed securities purchases will boost mortgage-related facilities to as much as $1.25 trillion.

As expected, Fed policymakers took no action on interest rates, holding the target for the fed funds rate at a range of zero to 0.25%. The discount rate was unchanged at 0.5%.

" The purchase of up to $300 billion in long-term government bonds over the next six months is tantamount to monetizing part of the record $1.75 trillion 2009 federal budget deficit," Rick told News Now, adding, "Shortly after the announcement, the 10-year Treasury yield dropped nearly one-half a percentage point to 2.533%.

"That action, along with the Fed's announcement that it would purchase an additional $750 billion of government-sponsored enterprise (GSE) guaranteed mortgage-backed securities, will flatten the yield curve and lower the yield on credit union assets going forward. This will reduce credit unions' net interest margins," Rick said.

"Offsetting this 'rate effect' will be a 'mix effect' as credit union assets shift from low-yielding investments to higher-yielding mortgage loans as lower interest rates stimulate home demand and refinancings," he said.

"Moreover, if these actions are able slow the decline in house prices and reverse the upward trend in home foreclosures, credit unions will experience fewer loan losses than would otherwise have occurred, boosting their bottom lines. For the near term, credit unions should brace themselves for a surge in mortgage refinancing activity," Rick said.

In a statement following Wednesday's meeting, the Fed explained its move. "Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment."

The Fed also noted that U.S. exports have declined as the nation's trading partners have fallen into recession. "Although the near-term economic outlook is weak, the committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth."

The central bank said inflation is tame. "Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and prices stability in the longer term."

courtesy of cuna.org