Catalyst News

Strong Loan Participation Sales May Be Key to Balancing Amid Uncertainty

by Mark DeBree | Jun 17, 2020

As parts of the nation loosen COVID-19 restrictions, the overall U.S. economy is beginning to pick up. Recent data shows an uptick in mortgage lending activity, as well as in airline and hotel bookings, and auto lending is expected to make a comeback soon. 

One thing we know in periods of uncertainty is that ensuring a strong liquidity position is always prudent. Whether by design or default, credit unions across the country have seen their overall liquidity positions increase over the past few months. Growth in deposit balances and a slowdown in lending activity played a role, but in many cases, sound credit union management also played a part. Credit unions allowed short-term liquid asset positions to increase, despite the drag on earnings, and resisted calls to push a substantial portion of these funds into long-term less-liquid investments.

As the economy rebounds, lending is anticipated to gain steam with the potential for strong activity.  However, just because businesses are reopening and consumers are heading back out does not mean the nation has fully-weathered the COVID storm. The possibility of a virus resurgence is real, so credit unions should continue to diligently manage their liquidity positions, while meeting their members’ lending needs.

Finding balance between maintaining strong liquidity positions and increasing lending efforts can be a challenging dynamic. To accomplish this, an increasing number of credit unions have turned to the loan participation markets. As shown in the chart below, overall loan participation has steadily grown over the past four years. A notable observation is that even in the face of the COVID shutdown, the credit union industry is still engaged in loan participations. 

Credit Union Outstanding Loan Participations

At Catalyst Corporate, our analysts are seeing the same trend. Even as liquidity has risen in the industry, credit unions are still reaching out to price and sell loan pools. With market rates falling during the Great Lockdown, overall average loan rates have remained relatively stable.

Credit unions and colleagues have asked me, “Why would a credit union want to sell loans in this market? Wouldn’t they want to keep every loan on their books?” The answer to these questions is rather straightforward. To manage loan portfolio growth, credit unions need: multiple sources of liquidity, ways to balance loan concentrations, and (maybe even more importantly in these times) the means to distribute credit risk. Loan participations can be an important part of balance sheet and liquidity management for credit unions.

Some credit unions are selling to book gains ahead of potential future losses. Perhaps your credit union’s loans could be priced at a premium. Take a quick look at current market loan rates to get a rough idea, but remember to consider servicing and credit quality adjustments. If you need assistance pricing your credit union’s loan pool, email us and we will gladly assist. 

At Catalyst Corporate, we expect the loan participation market to continue to expand over the course of 2020 and well into the future. Catalyst Corporate has been deeply involved in the loan participation space for almost a decade and will continue to support credit unions through the sales process. To better serve credit unions, Catalyst Corporate recently launched a new transactional platform, the Loan Participation Exchange, or LPX, to provide a safe, secure and transparent method for facilitating loan participations. 

As a premier credit union-owned service, LPX offers a focused and transparent solution. Whether your credit union is looking to explore or is ready to execute loan participations, LPX can connect you with a nationwide network of buyers. Contact us to discuss your needs and goals, and we will be happy to provide a demo of the Loan Participation Exchange.