Here’s What Latest Fed Beige Book Data Shows for Economic Activity Around Country

 WASHINGTON— Economic activity has been unchanged on balance since early July, with five Federal Reserve districts reporting slight to modest growth in activity and five others reporting slight to modest softening, according to its latest Beige Book data.

Most districts reported steady consumer spending as households continued to trade down and to shift spending away from discretionary goods and toward food and other essential items. Auto sales remained muted across most Districts, reflecting limited inventories and elevated prices, the Fed stated.

“Hospitality and tourism contacts highlighted overall solid leisure travel activity with some reporting an uptick in business and group travel,” according to the Fed.
“Manufacturing activity grew in several Districts, although there were some reports of declining output as supply chain disruptions and labor shortages continued to hamper production.”

Despite some reports of strong leasing activity, the Beige Book reports residential real estate conditions weakened noticeably as home sales fell in all 12 Districts and residential construction remained constrained by input shortages.

CRE Activity

“Commercial real estate activity softened, particularly demand for office space,” the analysis states. “Loan demand was mixed; while financial institutions reported generally strong demand for credit cards and commercial and industrial loans, residential loan demand was weak amid elevated mortgage interest rates.”

Nonfinancial services firms experienced stable to slightly higher demand. Demand for transportation services was mixed and reports on agriculture conditions across reporting districts varied, according to the Fed.

“While demand for energy products was robust, production remained constrained by supply chain bottlenecks for critical components. The outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months,” the Fed said.

Employment Growth

Meanwhile, employment rose at a modest to moderate pace in most Districts. Overall labor market conditions remained tight, although nearly all districts highlighted some improvement in labor availability, particularly among manufacturing, construction, and financial services contacts, according to the Beige Book.

“Moreover, employers noted improved worker retention, on balance. Wages grew across all districts, although reports of a slower pace of increase and moderating salary expectations were widespread,” the Fed explained. “Employers in several districts reported giving midyear and off-cycle raises to offset higher living costs, and many noted that offering bonuses, flexible work arrangements, and comprehensive benefits were deemed necessary to attract and retain workers. Looking ahead, employers planned to provide end-of-year pay raises to their workers, but expectations for the pace of wage growth varied across industries and districts.”

Elevated Prices

The Federal Reserve said price levels remained highly elevated, but nine Districts reported some degree of moderation in their rate of increase. Substantial price increases were reported across all Districts, particularly for food, rent, utilities, and hospitality services.

“While manufacturing and construction input costs remained elevated, lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates. Several districts reported some tapering in prices for steel, lumber, and copper. Most contacts expected price pressures to persist at least through the end of the year,” the Fed explained.

Recession Coming in Spring of 2023 Will Be Similar to That of 1990, According to New Fitch Ratings Forecast

NEW YORK–The combination of ongoing inflation and the Federal Reserve’s pledge to keep raising rates until it is able to bring inflation under control will drive the American economy into a 1990-style mild recession starting in the Spring of early 2023, according to Fitch Ratings.

In a new report obtained by CNN, Fitch has cut its U.S. growth forecasts for this year and next, citing the Fed increases as the primary reason. The report notes U.S. GDP is now expected to grow by just 0.5% next year, down from 1.5% in the firm’s June forecast.

High inflation will “prove too much of a drain” on household income next year, Fitch said, according to the CNN report, which forecasts shrinking consumer spending to the point that it causes a downturn during the second quarter of 2023.

A Silver Lining

The silver lining, however, is that the next recession may not be nearly as destructive as the last two major ones, said CNN in its analysis.

“The U.S. recession we expect is quite mild,” economists at Fitch Ratings said. 

The credit ratings firm argued that the United States enters this difficult period from a position of strength — especially because consumers are not saddled with quite as much debt as in the past, CNN explained.

“U.S. household finances are much stronger now than in 2008, the banking system is healthier and there is little evidence of overbuilding in the housing market,” Fitch Ratings economists wrote.

Fitch Ratings is predicting the unemployment rate will rise to 5.2% from 3.5% in 2024. That translates to the loss of millions of jobs, but not nearly as many as those lost during the prior two recessions.

Similar to 1990 Recession

In addition, Fitch says the next recession will likely be “broadly similar” to the one that started in July 1990 and ended in March 1991.

“There are intriguing similarities between today and the early 1990s,” CNN stated. “Much like today, the 1990 recession occurred after the Fed scrambled to fight inflation by rapidly raising interest rates. Likewise, that downturn was preceded by a war-fueled oil shock. Back then, it was Iraq’s invasion of Kuwait that drove up gasoline and energy prices for Americans. 

Today’s period of high energy prices is linked in large part to Russia’s invasion of Ukraine, a conflict that has also raised food prices.”

Federal Reserve Officials Worried About Not Doing Enough to Curb Inflation

The Federal Reserve has unleashed the most aggressive tightening campaign since the 1980s.

By Craig Torres and Steve Matthews | October 17, 2022, Credit Union Times

Marriner S. Eccles Federal Reserve Board Building is situated in Washington D.C., USA

Federal Reserve officials are committed to raising interest rates to a restrictive level in the near term and holding them there to curb inflation, though several said it would be important to calibrate hikes to mitigate risks.

“Several participants noted that, particularly in the current highly uncertain global economic and financial environment, it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook,” according to minutes from their Sept. 20-21 gathering released Wednesday in Washington.

During the meeting, U.S. central bankers agreed to boost the benchmark lending rate 75 basis points for the third straight time, lifting it to a target range of 3% to 3.25% as they combat stubborn inflation pressures.

“Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action,” the minutes show.

U.S. stocks fluctuated following the release, while Treasury yields remained lower and the dollar was little changed. Traders maintained bets that the Fed will raise rates again next month by 75 basis points.

The minutes show a committee united on returning inflation back to the Fed’s 2% target, while several policymakers urged caution as interest rates reached into restrictive territory.

“They set the bar pretty high for downshifting in November” to something less than 75 basis points, says Julia Coronado, the founder of MacroPolicy Perspectives LLC. “They haven’t seen enough in the data to make that call.”

But starting with the December meeting and beyond, she says, the policy is likely to give more weight to signs of market stress or signs of deterioration in the domestic economy.

The minutes suggested that Vice Chair Lael Brainard, who called for “moving forward deliberately and in a data-dependent manner,” has other allies among Fed officials who still want to account for lags in policy and see if inflation can be lowered without inflicting a recession or additional market stress.

“She is not alone,” Coronado says.

Slammed by critics for being slow to respond to mounting price pressures, the Fed has unleashed the most aggressive tightening campaign since the 1980s. Starting with rates nearly zero in March, it’s hiked by 300 basis points and signaled more to come.

“The Fed remains purposefully driven to tighten monetary policy further into restrictive territory given the rather gradual cooling of economic activity and slow inflation response,” says Gregory Daco, chief economist at Ernst & Young.

But “the balance of risks is rapidly shifting,” he says. “Elevated global economic and financial market uncertainty will make it essential for the Fed to calibrate its policy response, especially in the context of a globally synchronized, but uncoordinated, monetary policy tightening cycle.”

Fed officials expect to raise rates to 4.4% by the end of the year, according to their median estimate released last month, and 4.6% in 2023.

That comes at an economic cost: Higher borrowing costs are forecast to slow growth to 1.2% next year and raise the unemployment rate to 4.4%. It was 3.5% in September.

“Several participants observed that as policy moved into restrictive territory, risks would become more two-sided, reflecting the emergence of the downside risk that the cumulative restraint in aggregate demand would exceed what was required to bring inflation back to 2%,” the minutes show.

Inflation, as measured by the Fed’s preferred gauge, has been running above the central bank’s 2% target for more than a year, testing public faith that officials can bring it back down.

“They agreed that, by moving its policy purposefully toward an appropriately restrictive stance, the committee would help ensure that elevated inflation did not become entrenched and that inflation expectations did not become unanchored,” the minutes say.

Rapidly rising borrowing costs have slowed housing activity, but other parts of the economy show resilient demand.

Employers added 263,000 jobs in September, and a consumer inflation report showed prices rose by 8.3% in the 12 months through August.

Economy Will Tip Into ‘Modest Recession’ in Q1 2023, New Fannie Mae Forecast Predicts

WASHINGTON—The combination of high inflation, monetary policy tightening, and a slowing housing market is still projected to tip the economy into a modest recession in the first quarter of 2023, according to the October 2022 commentary from Fannie Mae’s Economic and Strategic Research (ESR) Group.

The ESR Group is forecasting real gross domestic product (GDP) to grow 2.3% annualized in the third quarter of 2022 due to strong net export and inventory investment activity, before contracting 0.7% annualized in the fourth quarter as the effects of that activity wane.

Headline GDP growth is expected to remain negative through the third quarter of 2023 as the economy enters a modest recession,” Fannie Mae said in releasing the analysis. “The ESR Group forecasts negative 0.1% real GDP growth on a full-year basis for 2022, a slight downward revision from its prior month prediction of 0.0%, and it maintained its expectation for a 0.5% contraction in real GDP in 2023.”

Source: Fannie Mae

The forecast notes core inflation remains considerably higher than the Federal Reserve’s stated target (see related story), and despite the historic decline in August job openings, the continued strength in labor has futures markets expecting the Federal Open Market Committee (FOMC) to raise the federal funds rate by an additional 75 basis points at its November meeting.

Lowered Forecast for Housing

“Due largely to the higher mortgage rate environment, the ESR Group lowered its forecast for total single-family home sales in 2022 and 2023 to 5.64 million and 4.47 million, respectively, which would represent annual declines of 18.1% and 20.8%,” Fannie Mae said. “While multifamily construction remains strong, the ESR Group also revised downward its multifamily starts forecast for 2023 to 390,000 units. Further, the ESR Group significantly revised its outlook for national home price growth and now expects year-over-year home price growth to turn negative in Q2 2023. From a full-year perspective, the ESR Group expects Q4/Q4 national home price growth in 2022 to be 9.0%, down from last month’s prediction of 16.0%.”

The ESR Group expects home price declines of 1.5% in 2023, down from its previous prediction of home price growth of 4.4% in 2023.

‘Reluctantly’ Resolved

“Over the last few weeks, markets have increasingly – and perhaps reluctantly – reflected the resolve of the Fed to lower inflation via rapid tightening of monetary policy,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “At times, the market has reacted to incoming economic data suggesting the Fed is making progress in its fight with inflation by anticipating a potential policy ‘pivot’ toward a less restrictive regimen, prompting the Fed to restate its resolve. Of course, the slowing effect on the housing market of the higher mortgage rate environment has been largely predictable, and home prices appear to have already begun trending downward.

“Looking ahead to the full year 2023, on a national basis, we expect an average home price decline of 1.5%,” Duncan continued. “Given the ongoing tension between potential homebuyers and home-sellers at the moment, we believe the pace of sales is likely to slow even further, too.”

‘Price Increases Not Slowing Down’: CU Economists Say Fed Will Have No Choice But to Cause ‘Pain’ For Many Consumers

WASHINGTON–The Consumer Price Index rose 8.2% in the year through September, showing it remains stubbornly high even as the Fed has been aggressively raising rates.

Dawit Kebede

Primary factors driving the high inflation numbers, according to the Labor Department, have been increases in food prices and rent, while values on used cars have not declined at the rate many analysts had been predicting.

“Price increases are not slowing down. The September Consumer Price Index rose by 0.4% on a monthly basis, a higher rate than in July and August. Housing, food, and medical care prices were major drivers,” said CUNA Senior Economist Dawit Kebede. “A persistent increase in housing, food, and energy prices -- which constitute over 50% of spending for the average consumer -- is straining household budgets. Low- and middle-income households are spending most of their income on these basic necessities despite recent increases in nominal wages. 

“The Federal Reserve is expected to raise interest rates by 75 basis points for the fourth time when they meet in November,” Kebede continued. “Members of the Federal Open Market Committee believe that a softening labor market and low economic growth will reduce the pressure on inflation. This would cause more pain for low- and middle-income households as they are among the first to be affected by rising unemployment.”

125 Point Increase By End of Year

Curt Long

Meanwhile, NAFCU Chief Economist and VP of Research Curt Long added, “According to data released by the Bureau of Labor Statistics (BLS), the overall consumer price level climbed by 0.4% in the month of September. This was higher than expected and keeps the FOMC on target for another large rate increase next month. Gas prices declined for the fourth consecutive month in September, but that may not last as OPEC announced production cuts of two million barrels a day. The cost of shelter in September reached the highest monthly growth rate in over 30 years. Rental prices are falling, but since the shelter index operates on a lag, it will likely not reflect current trends until early 2023. Used car prices fell for the third consecutive month, but the declines have been more modest than private data aggregators are reporting, and new car prices continue to rise. Inflationary pressures have broadened, and it is not the case that a small number of isolated areas of the economy are driving price growth.

“That fact is likely to be as important as the overall inflation figure for the FOMC. NAFCU’s expectation of a 75-basis point hike in November remains the median market view, and December will bring at least a 50-basis point increase,” Long continued.

Fastest Pace Since 1982

According to the Labor Department, prices increased 6.6% after stripping out fuel and food — which tend to be volatile and are often removed from inflation readings to allow for a better sense of underlying trends — a notable re-acceleration in the so-called core index.

That was a fresh peak for the index this year, and was the fastest pace of annual increase since 1982, according to an analysis by the New York Times.

“While the annual numbers reflect what has happened cumulatively over the past 12 months, the monthly data give a clearer snapshot of how prices are evolving in real time,” the Times added. “And those monthly numbers offered even more pronounced reasons to worry. Overall inflation climbed 0.4% in September, much more than last month’s 0.1% reading. The core index climbed 0.6%, matching a big gain in the prior month. That pace is far too fast for the Fed.”

Cox Lowers Auto Sales Forecast as Rates Rise, 'Outlook Worsening'

Economist says auto loan rates will rise to a 21-year high by year’s end.

Interest rates for cars are likely to hit 21-year records by the end of the year, further raising monthly payments and driving down sales as many buyers hold on to aging vehicles a little longer, Cox Automotive analysts said Wednesday.

During Cox Automotive’s forecast call, the analysts announced lower forecasts on both new and used vehicles for 2022, compared with its previous quarterly forecast in June.

New car sales that in June had been expected to fall 3.4% to 14.4 million this year are now expected to fall 8.1% to 13.7 million.

Used car sales that in June had been expected to fall 8.6% to 37.1 million are now expected to fall 10.6% to 36.3 million.

The forecast for new car sales was reduced for the third time this year not only because supply shortages haven’t improved as much as expected, but also because higher rates are driving up monthly payments.

Cox Automotive Chief Economist Jonathan Smoke said interest rates had risen 2 percentage points in the past year before the Fed’s Sept. 21 rate hike. Typical rates are 7% for new cars and 11% for used cars. By year’s end, he said he expects rates will be 9% for new cars and 13% for used, “which will put rates at the highest level since 2001.”

Jonathan Smoke

Charlie Chesbrough, senior economist at Cox Automotive, said expectations earlier this year presumed dealers building inventory quickly as supply shortages eased, and the economic effects of COVID-19 and the Ukraine war subsided.

“With the economic outlook worsening quickly over recent months, it now seems likely that much of the pent up demand from limited supply is quickly disappearing as high interest rates eat away at vehicle buyers’ ability and willingness to purchase,” Chesbrough said.

Charlie Chesbrough

Reaching the new 13.7 million forecast depends on sales staying at the current slow pace through the fourth quarter. “Even this volume may be difficult if recent rate hikes hit harder than expected,” Chesbrough said.

For used cars, forecasts were lowered because sales, which started the year at a slow pace, have failed to gain the momentum that had been expected earlier this year. Now they will be constrained because higher interest rates are driving up monthly payments.

“It’s more likely that those with affordability challenges will be more likely to hold onto a current vehicle than to buy a newer one,” Chris Frey, senior manager for economic and industry insights, said.

Chris Frey

Smoke said economic conditions that had been seeming to brighten have turned darker since the Fed announced its plans Sept. 21 for sustained high interest rates to tame inflation. Consumer sentiment has soured, the stock market plunged and even gasoline prices inched up after 98 days of declines.

“The consumer has been remarkably resilient this year in the face of numerous challenges, but supported by a strong labor market,” Smoke said.

“Now part of the pain that the Fed wants to ensure we see involves necessary job losses,” he said. “I fear what October could do as we start the month with Hurricane Ian bearing down on Florida and we enter the final month for the mid-term elections with an unsure outcome that ensures we will get its maximum negativity over the airwaves and on social media.”

“The worry is of course that consumers will reach their breaking point and pull back and thus give the Fed what they want,” he said.

Smoke said the damage is already being seen in the interest-rate-sensitive housing and auto sectors, which he said together impact almost a quarter of the U.S. economy. “The lethal combination of high prices from limited supply combined now with the highest interest rates in 15 years means that affordability is eliminating lower income and lower credit quality buyers.”

Cox Automotive estimated that the average rate is 14.31% and the monthly payment is $551 for a near-prime buyer paying 10% down and taking out a loan with a 70-month term on a used car with the average list price of $28,980.

By December, Cox said it expects those buyers’ average rate to be 16.31% and average payment to be $567 even though the price will fall slightly to $28,400.

In September 2019, those near-prime buyers would have had a rate of 12.57% and monthly payment of $387 on a $21,272 used car.

Jim DuPlessis

For the first time in two years, more Americans expect home prices to decline rather than rise.

CUToday

WASHINGTON—For the first time in two years, more Americans expect home prices to decline rather than rise, according to the Fannie Mae Home Purchase Sentiment Index (HPSI), which decreased 1.2 points in September to 60.8. That marks the seventh consecutive monthly decline amid growing affordability constraints.

According to Fannie Mae, surveyed consumers reported expectations that mortgage rates will move higher over the next 12 months, and, for the first time since May 2020, more respondents than not expect home prices to decline. In September, only 19% of consumers indicated that it’s a good time to buy a home – down from 22% the prior month – while 59% indicated that it’s a good time to sell. Year over year, the full index is down 13.7 points.

“The HPSI declined this month to its lowest level since October 2011,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “Consumers’ expectation that home prices will decrease matched a survey high, with a higher percentage of consumers believing home prices will decrease rather than increase over the next year – a shift in survey sentiment that had previously only happened in 2011 and at the start of the pandemic in 2020. Moreover, 75% of consumers still think it’s a bad time to buy a home, with most citing high home prices and unfavorable economic and mortgage rate conditions as primary reasons. As long as supply is limited and affordability pressures continue to constrain potential homebuyers via elevated home prices and mortgage rates, we expect home sales will remain sluggish.”

The Highlights

According to Fannie Mae, highlights from the most recent index include:

• Good/Bad Time to Sell: The percentage of respondents who say it is a good time to sell a home remained unchanged at 59%, while the percentage who say it’s a bad time to sell decreased from 35% to 33%. As a result, the net share of those who say it is a good time to sell increased two percentage points month over month.
• Home Price Expectations: The percentage of respondents who say home prices will go up in the next 12 months decreased from 33% to 32%, while the percentage who say home prices will go down increased from 33% to 35%. The share who think home prices will stay the same remained unchanged at 28%. As a result, the net share of Americans who say home prices will go up decreased three percentage points month over month.
• Mortgage Rate Expectations: The percentage of respondents who say mortgage rates will go down in the next 12 months decreased to 9% from 11%, while the percentage who expect mortgage rates to go up increased to 64% from 61%. The share who think mortgage rates will stay the same decreased to 20% from 25%. As a result, the net share of Americans who say mortgage rates will go down over the next 12 months decreased five percentage points month over month.
• Job Loss Concern: The percentage of respondents who say they are not concerned about losing their job in the next 12 months decreased from 79% to 78%, while the percentage who say they are concerned remained unchanged at 21%. As a result, the net share of Americans who say they are not concerned about losing their job decreased one percentage point month over month.
• Household Income: The percentage of respondents who say their household income is significantly higher than it was 12 months ago increased from 25% to 26%, while the percentage who say their household income is significantly lower decreased from 15% to 11%. The percentage who say their household income is about the same increased from 59% to 61%. As a result, the net share of those who say their household income is significantly higher than it was 12 months ago increased five percentage points month over month, Fannie Mae said.

Rebound And Reboot: Why Credit Unions Are Set For A Surge In Private Student Lending

Attrition in the space will drive demand to traditional deposit-backed institutions. In turn, colleges and universities will seek stable, community-focused institutions that can support families.

Inflation. Student loan forgiveness. Midterm elections. Today’s headlines are full of topics affecting credit unions and their members, especially those managing the high costs of higher education. But among all the unknowns, there are also clear signs that private student lending is set for a surge.

Private Student Loan Rebound

As pandemic concerns slowly subsided in 2022, millions of joyous college students streamed onto college campuses this fall. With students back in full force, application activity and disbursement volume for private student loans jumped significantly from the covid-impacted years of 2020 and 2021.

During this year’s busy summer lending season of June through September, when the majority of annual private student loan activity occurs, application and disbursement volume for Student Choice partner credit unions for new loans jumped nearly 30% year over year.

Costs Going Up, And Credit Unions Well-Positioned To Help

Many colleges froze tuition increases during the past two years due to the pandemic’s economic impact, but tuition and fees are back on the rise. For the 2022-23 academic year, these costs at ranked public schools increased 0.8% for in-state students and 1% for out-of-state students, and 4% at ranked private schools. But that’s just part of it. Inflationary pressures are impacting both families and colleges, increasing the cost of everything from housing to food. At the same time, 529 plans and 401(k)s are taking a beating, causing many to reconsider how they are going to pay for college.

It’s clear that fair-value private student loans from credit unions will continue to play an important role in helping families fill college funding gaps. Credit unions have a growing cost-of-funds advantage over many fintech lenders that have entered the private student loan marketplace in the past 10 years. Likely attrition in the space will help drive demand to traditional deposit-backed institutions, such as credit unions. In turn, colleges and universities will seek stable, community-focused institutions that can support families in need of additional funding.

Rebooting Student Loan Refinance

As we all know by now, payments and interest on most federal student loans have been paused since early 2020, when the Trump Administration introduced the policy in response to the emerging pandemic. The pause has been extended multiple times over the past 2.5 years, but on August 24th the Biden Administration announced a “final” extension to Dec. 31, 2022, at which point payments will resume.

In addition, during this announcement the Administration also rolled out several key measures to help those with federal student loan debt, including:

• Federal student loan cancellation (up to $10,000 for non-Pell Grant recipients and $20,000 for Pell Grant recipients, depending on income).
• Important changes to broaden the income-driven repayment plan that is available to federal student loan borrowers and reduce monthly payments.

Although these announced measures are strictly tied to federal student loans, and have no impact on private student loans, they have brought much-needed clarity to a cloudy situation. Although recently filed lawsuits have called into question whether loan cancellation will proceed exactly as planned, these announcements end years of speculation and are likely to spur activity in student loan refinance. With federal repayments starting in just a few months, many borrowers will be looking to leverage attractive rates to refinance debt that isn’t eligible for federal cancellation.

The Rebounding Relevance of Adjustable-Rate Mortgages = By Kevin Hearden & Steve Rick

 

This traditional mortgage lending product could help CUs attract high-contributing members and boost much-needed interest income.

By Kevin Hearden & Steve Rick | August 19, 2022 at 03:33 PM

Today, nearly three-quarters (72%) of credit unions’ total revenues come from interest income. So, when interest earnings as a percent of assets dropped almost 30% in April of this year, more than one alarm bell sounded within the movement.

Credit union leaders across the country are rightly concerned about the sustainability of mortgage lending within what is already a highly competitive environment. In fact, lending executives participating in a May 2022 MGIC survey ranked the expected difficulty of 2022 at an eight out of 10. And while shiny startup strategies for boosting interest income make the headlines, it may be the resurgence of a traditional mortgage lending product that makes the difference.

Borrowers Give ARMs a Fresh Look

We’re talking, of course, about the adjustable-rate mortgage. Although the product took a reputational hit during the housing crisis of 2008, a new segment of borrowers views ARMs as both affordable and relevant to their lifestyles and financial goals. In June, the Mortgage Bankers Association reported that the ARM share of applications had jumped to over 10%.

Here are a few reasons why we suspect ARMs are resonating with today’s homebuyer.

Homes are expensive: The low-down-payment financing of ARMs make homeownership possible sooner for many borrowers, especially now during a period of accelerating annual home price appreciation. During the last 12 months, home prices rose 20.9%, the fastest pace on record.

Costs of borrowing money is increasing: Rising interest rates impact a homebuyer’s monthly mortgage payment, making the lower-rate ARM products much more attractive, especially as inflation puts added pressure on individual and family budgets. Mortgage interest rates have recently risen to over 6%, as the Federal Reserve ended its purchases of mortgage-backed securities. In July 2022, the contract interest rates on a 30-year fixed-rate conventional home mortgage rose to 5.3%, up from 4.2% in March and much higher than the 3.3% reported in July 2021. 5/1-Year ARMs, however, had fallen to 4.19% by July 2022.

Equity grows faster: In addition to lower monthly payments, the lower interest rate means that initially more of the payment is going to principal, accelerating home equity and wealth creation for ARM holders.

Product structures are flexible: Much more flexible ARM products, such as those that offer initial fixed periods of five, seven or 10 years, appeal to a broader segment of the marketplace – especially borrowers of a younger generation, who expect to live in their homes for fewer years than older generations.

Transparency is increasing: ARMs are typically underwritten much more strictly today than during the last housing boom. Fully documented ARMs, the standard among today’s credit-union underwriters, have added greater transparency and confidence to the product segment overall.

Lenders Join Borrowers in Reconsidering ARMs

Participants in the May 2022 MGIC survey ranked the importance of ARMs to the housing market at a seven out of 10. Credit unions, too, are rethinking ARMs as an essential piece of the mortgage lending product pie.

Particularly in light of new entrants to the marketplace, ARMs represent a significant competitive differentiator. Non-depositories and other independent lenders must consider the ultimate marketability of their loans. Credit unions, on the other hand, have the flexibility to design loan products that make sense for members after the American dream, rather than shareholders after investment-level returns.

Today’s ARMs are also accompanied by proven risk-mitigation practices. Private mortgage insurance (PMI), for example, has paid claims through more than six decades of financial cycles. Partnering with a mortgage insurance provider provides both an expert independent view of mortgage risk and easy-to-implement product guidelines to meet today’s borrower needs.

The fact of the matter is today’s borrowers have an incredible set of options for home mortgages. Increasingly, they are placing their trust in non-traditional financial providers to move them along the path to wealth faster. As credit unions find new ways to remain relevant with younger consumers who expect greater flexibility, speedy achievement of goals and personalized service, an ARM may be just the thing to pull them in. Capable of attracting a high-contributing segment of new members, the product may also boost much-needed interest income along the way.

Kevin Hearden

Kevin Hearden is Director, Product Development for MGIC in Milwaukee, Wis.

Steve Rick

Steve Rick is Chief Economist for CUNA Mutual Group in Madison, Wis

Fed Says Debit Issuers Must Enable At Least 2 Payment Networks; Retailers Hail Decision

10/03/2022 08:32 pm CUToday

WASHINGTON–The Federal Reserve has finalized updates to its rule concerning debit card transactions, specifying that debit card issuers should enable at least two payment card networks to process all debit card transactions.

That includes "card-not-present" transactions, such as online payments. The final rule, which is substantially similar to the proposal issued in 2021, was hailed by a retailers’ trade group, which said networks will now have to compete online, not just in-store.

The Fed noted that by law it is required to make rules ensuring that debit card issuers give merchants the opportunity to choose between at least two unaffiliated networks when routing debit card transactions. 

“When the board initially issued the rule in July 2011, the market had not developed solutions to broadly support multiple networks for card-not-present debit card transactions,” the Fed said. “Since that time, technology has evolved to address these barriers. However, some debit card issuers have not yet enabled at least two unaffiliated networks for merchants to choose between when routing such transactions. This issue has become increasingly pronounced because of continued growth in online payments.”

According to the Federal Reserve, the final rule underscores that debit card issuers should enable at least two unaffiliated networks to process debit card transactions. 

Many ‘Already Compliant’

“Importantly, input received in connection with the proposal suggests that many debit card issuers, and especially most community bank issuers, are already compliant with the final rule,” the Fed said. “In response to public comments, the final rule also includes certain changes that make it easier for debit card issuers to determine whether they are in compliance with the final rule. The final rule will encourage competition between networks and incentivize them to improve their fraud-prevention capabilities.”

The final rule does not modify requirements concerning interchange fees, which the Fed said it will continue to review in light of the most recent debit card industry cost data it has collected. It added it may propose to modify these requirements in the future.

The final rule will be effective July 1, 2023.

Retailers Respond

In response, the National Retail Federation said it “welcomed” the clarification by the Fed.
“The Federal Reserve has declared once and for all that a debit transaction is a debit transaction no matter where it takes place and that merchants have the right to choose the network that offers the best service, strongest security and most reasonable fees,” said Leon Buck, VP-government relations, banking and financial services with the National Retail Federation. “Congress ended Visa and Mastercard’s virtual monopoly over debit transactions a decade ago, and this decision makes clear that the law applies the same for in-store and online transactions – the result that Congress mandated in the first place. It’s welcome news that will benefit small businesses and their customers across the nation.”

The trade group noted retailers were given the right to choose which payment networks process debit card transactions in 2010, when Congress passed the Durbin Amendment in an attempt to end Visa and Mastercard’s virtual monopoly over the debit processing market. Under that law, banks that issue debit cards must enable them to be processed over at least two unaffiliated networks. 

That typically means Visa or Mastercard plus one of a dozen independent networks like Star, Shazam or NYCE that offer equal or better security and other benefits but lower fees, the NRF said.

“The requirement has been widely implemented for in-store transactions, where a PIN can be entered to access the independent networks, and has helped save retailers and their customers an estimated $9 billion a year,” the NRF stated. “But a combination of Visa/Mastercard rules and financial incentives have pressured banks to not enable the ‘PINless’ capability required for the cards to be processed over independent networks online, where a PIN cannot be entered… As a result, all but about 6% of online debit transactions are processed over Visa and Mastercard, according to the Fed.”

‘More Than $100 Billion’
The retailers’ group said debit and credit card “swipe” fees that banks and card networks charge to process transactions totaled $137.8 billion in 2021, according to the Nilson Report. The fees are among most merchants’ highest operating costs and drive up prices paid by consumers by about $900 a year for the average family. Debit card fees alone totaled $32.6 billion last year, with payments processed over Visa and Mastercard accounting for $28.1 billion of the total.