Category: Local Effect

The changes set in motion by Trump’s presidential transition are putting credit union’s public reputation to the fore. The administration’s  executive appointments promise reviews of previous assumptions about many areas of public policy.

All interest groups are  jockeying for influence to either protect the status quo or gain a new advantage.

Credit unions lobbyists and ICBA are already fighting over whether credit union’s federal tax exemption should be examined.  The exemption is an important issue. But how is that topic framed for public understanding and the credit union story told?

Should the credit union legislative strategy be to defend the status quo or to propose an agenda to expand the singular mission of credit unions?

A Wonderful Life Story

During the holiday season the film It’s a Wonderful Life is replayed over and over.  It captures the spirit of a community when asked to support their local thrift.  As summarized in a Marketplace article, the movie’s setup is straight forward and familiar to anyone in 1947 who lived through the 1930’s depression era’s banking crises:

George and Mary Bailey are about to leave Bedford Falls for their honeymoon when the unthinkable happens. Their taxi driver points out an apparent “bank run” at the Bailey Bros. Building & Loan Association. Trouble is, the building and loan isn’t a bank. To keep it afloat, George has to convince his friends and neighbors to withdraw only what they need to get by — then pays them out of his own pocket. So much for that honeymoon. 

The rest of this Marketplace article is a succinct history of the S&L industry, how it differed from banks, and its demise as a separate financial segment in the 1980’s.

The article then asks what institutions today are filling the role of the Bailey Bothers for their  communities.  I expected to find a credit union example or two in this follow on “encore.”  Instead Marketplace host David Branchicco  reprints a podcast interview introduced as follows:

While buildings and loans are all but gone nowadays, the concept of community-driven finance is not. In New York City, one such institution is Carver Federal Savings Bank, which is designated as a Community Development Financial Institution and a Minority Depository Institution by the federal government. The bank, formed in the 1940s by members of some of the city’s predominantly Black neighborhoods, is headquartered in Harlem and says it seeks to help develop traditionally underserved communities. 

The interview with Carver Federal Savings Bank CEO Michael Pugh discusses his focus.  He states  80 cents of every deposit dollar is reinvested in the community.   Other points Pugh makes in the interview include:

I think the unique proposition for us is that because we are for-profit, but we have this mission component, it allows us to continue thinking on both sides of our brain, being mentally ambidextrous, if you will, and considering the fact of mission and margin in every decision that we make.

Because we’re hyperlocal, our colleagues live in the communities that we serve. We believe that those personal relationships and the access to us really helps to significantly reduce the risks. 

Customers within our core market that choose to bank with us really understand the mission and what we’re trying to do. . . 

Where are the Credit Union Examples? 

This Marketplace interview  positions this for-profit CDFI designated bank as today’s successor of the  community spirited leadership portrayed in the Wonderful Life movie.

Yet there is nothing Carver FSB  is doing that hundreds if not thousands of credit unions do as well or better.  Yet that was not the example profiled.

Credit unions will define their public reputation or let others do it for them.   Coops are in a moment when major credit unions advertise during national TV sporting events, rename stadiums with their brands and invest members’ capital to buy out bank shareholders. These business initiatives are helping propel the issue of whether credit union’s regulatory advantages should appear on Congress’ agenda.

It is not sufficient to just oppose and defend the status quo, letting opponents framie the topic. Rather the response must be a compelling message about the  uniquely valuable contribution credit unions make for their members day in and out.

When credit unions present their public personas like most other financial providers, the mission component is omitted.  Without this message, the member-owned model can be presented as just another consumer option.

It is the mission that warranted the tax exemption from day one.  Isn’t that the reason to sustain the cooperative difference now?

Here is a long-30 minute example of the story credit unions should be telling. It is about economic warriors for their community,  The Barber of Little Rock  is a  video by New Yorker magazine.  This community CDFI lender received a credit union charter two years ago.

(https://www.youtube.com/watch?v=1amOPUn49aM&t=14s)

Or this example from credit unions.com. A Helping Hand for the Homeless.

Some individuals believe leadership is about the spirit of the poem Invictus:  that I am the master of my fate and the captain of my soul. 

The majority, I believe, understand our future will more likely be shaped by communities and groups with which we participate, professionally and voluntarily.

The following is a selection of issues that we will  encounter in the year at hand. In contrast to the certainty of Invictus, management guru Peter Drucker cautions:  “Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window. ”

Success May Look Boring

I start with an observation by banking consultant John Maxfield:  Banking is a sport of unforced error. The harder one tries the worse one performs.

Tennis.

Ping pong.

Don’t be too ambitious.

Credit Union Leaders Out of Touch?

Outlining vital missions is the job of leadership.   But this skill does not necessarily come with those in positions of authority.  Consultant Ancin Cooley described one industry challenge:

A core question is about advocacy in our movement: Who are we really advocating for? If we claim to represent the interests of members, why does it so often feel like so much public energy is spent protecting interests that don’t align with members’?

So, should we be out in front of the overdraft fight or supporting legislation that limits corporate ownership of single-family homes? The response you get from some folks is often very telling. I often wonder who is actually making these decisions for the credit union movement because the direction we are going seems out of touch with our members and the communities we serve.

A good example to understand Cooley’s concern is the debate on credit card fees.  This article clearly outlines the conflicting positions credit unions must balance for members.  One of the author’s observations:  “Nobody ever got rich through credit-card rewards, yet lives have been ruined due to credit-card debt.”

Innovative ideas and compliance mandates cannot create the kind of priorities that clearly define credit union’s unique role in the American economy.  That can only come from persons who care deeply about their members’ future and financial lives.  When leaders combine both mind and heart in their roles, it may be possible for coops to discover possibilities  never imagined before,

The Loosening of Social Norms-Culturally and Politically  (by David  Kaiser, American Historian)

“From Shakespeare: “The fault, dear Brutus, was not in our stars, but in ourselves.”  So it is again.  What my generation has done was only human.  The self-restraint which, as the Founders realized, was essential to make the American experiment work, had weighed upon too many generations for too long. 

“It could not, human nature being what it is, endure indefinitely, and it didn’t.  It had indeed gone too far in some ways, and humanity has benefited from loosening some of those restraints. 

“Now it will fall to future generations to re-establish some of those restraints and enable us to live together and solve new problems in the large, cooperative communities which their vast numbers now need to survive.” 

The Proper Use of Artificial Intelligence (AI)

What if AI is unleashed and never quite controlled — not in the sense of a robotic takeover but, as Harvard law professor Jonathan Zittrain puts it, as a new form of asbestos: dangerous, everywhere and hard to get rid of.  

Trump Administration: Uncertainty about Everything

( Analysis from  Kellogg Insight, Northwestern University)

Two months have passed since the election and the policy landscape under a second Trump presidency remains as uncertain as ever. We suspect that the Republican-controlled Congress will squeeze some savings out of the budget, but not enough to have a material impact on economic growth 

Economists generally view innovation as the main long-term contributor to living standards, as new ideas make people more productive and richer, freeing up time to innovate anew. But there is a second strand of thinking in the economic growth literature, and it holds that political institutions matter most of all.

Peter Thiel famously said, “We were promised flying cars; we got 140 characters.” With crypto we were promised DAOs and smart contracts; we got $100,000 Bitcoin.  

Technical progress desperately needs to be matched by social progress that increases trust and delivers better decision-making — from neighborhoods to boardrooms to relations between heads of state.

The Outlook for Interest Rates

How will markets perceive the growing burden of national deficits and debt?

From the Rising Burden of US Government  Debt

Federal Debt as a Percentage of Gross Domestic Product

From Bloomberg Forecasts:  Hopes that the Federal Reserve would keep up a swift pace of interest-rate cuts have dwindled. That means stocks and US consumers could face mounting pressure, and borrowing costs could remain higher for longer.

An Environmental Change That Aligns with Credit Unions?

From: Addison Del Mastro on Bringing Back America’s Small Cities and Towns

In last year’s predictions roundup, I predicted that 2024 would see the housing crisis, and urban policy more generally, become more of a mainstream issue. Of course, that didn’t happen all at once, but I feel pretty good about the trajectory of these issues’ salience.

This year, I’m thinking about a laterally related issue that may have the wind at its back: the question of economic revitalization in small cities and towns.

However much (or little) the incoming administration may do in terms of housing affordability or lifting the fortunes of deindustrialized or “forgotten” places, the hope that they might do something about it was certainly a factor in Donald Trump’s victory. And a lot of small cities and towns are seeing new construction in their old downtowns for the first time in decades.  

The eye-watering expense of housing in the biggest metro areas, the rising appreciation for classic urban patterns and the sense that perhaps we owe something to places that have lost out to globalization, may all combine to create a real movement or effort behind bringing back America’s intact but battered small old cities and towns.

(From Discourse)

The Institute for Local Self Reliance (ILSR) has turned 50 years old.  Its mission is to build local power and fight large corporate control through research, advocacy, and community assistance to advance vibrant, sustainable, and equitable cities and towns.

This 11-minute video below provides its history from founding in 1974 in D.C. to its present multi-faceted efforts.   The organization became national in the early 1980’s when it  opened its head office in Minneapolis.

(https://www.youtube.com/watch?v=Wp_DNUXVDt8&t=108s)

In the 90’s It was an outlier in the world of “bigger is better” and the pull of the global economy on large corporate growth ambitions.  However, its focus on local self-reliance regained momentum and focus as the power of monopolies became increasingly questioned, especially its impact on local economic communities.

The Institute’s  approach is decentralization emphasizing local control and resisting corporate displacement of independent options. The goal is enhancing freedom and democracy with self-reliant economic projects  and political control.  Today it has four areas of focus:  community broadband efforts, composting, energy democracy and promoting independent locally owned businesses.

While the advocacy and research efforts would seem to make the ILSR a natural ally of credit unions, there appears to be no overt participation in this cooperative financial sector.

Why Local Matters

In an era in which many tout scale as the most important competitive necessity, the real sustainable advantage for most credit unions is their “local” character, identity and related service advantages.

At September 2024, the industry’s call report data suggests that over 87% of credit unions offer some form of on online transaction access.  The Internet advantage, no matter how sophisticated, is rarely a sustainable or unique delivery channel or even special user experience. However, being local is.

An Example of a Large, Local Advantage

Recently Jim Blaine has posted several articles on the founding of the country’s second largest credit union, State Employees of North Carolina (SECU).  The post below details the founding character and common bond of the credit union.

Almost every state in the country had at least one or multiple credit unions with state employees as their core FOM.  But only SECU made the breakout to record this growth achievement versus many states with much larger potential in their employee base.

How was this breakout accomplished?  As the credit union’s operations expanded to locations and counties throughout the state, the critical advantage was keeping local input, oversight and responsibility at the branch level.  Loans were made and collected by each branch; local advisory boards and committees were formed; employees were local; and the various aspects of community involvement were locally determined.  Out of this local self-reliance, the second largest credit union in America was constructed.

Here is SECU’s brief founding story from a post on November 19, 2024 SECU Credit Unions as An Employee Benefit:

“No one questions that credit unions were created in the U.S. to provide access to credit for working men and women – particularly those of “modest means”. Why? Because “back then” many payroll offices were confronted with regular, recurring employee requests for “a short-term advance” prior to payday. Money is always in short supply for most folks – both “back then” and now.

“Not helping an excellent employee in a time of need was “bad for business” and employee relations. Sending them to a loan shark was worse. “Payday lending” at rates usually exceeding 100+% – both “back then” and now – creates a death spiral of financial dependency for a consumer. Shackles not made of iron, but shackles just the same.

.

. …” I owe my soul”... that can be a problem, … beware.

“Employers embraced “company credit unions” as an added benefit which could be used to assist and retain employees. Employers liked having an independent, employee-owned and led lender making the decisions on which employees qualified for loans – choices the employer did not want to make. Employers didn’t want to be in the lending business, nor have to “advance” company funds. To help out, employers frequently provided back office support, payroll deduction, office space and assisted employee-member volunteer leadership of the credit union.

“SECU, although a separate, independent organization, was “the company credit union” for North Carolina state government and the North Carolina school systems. The idea of a credit union as an important employee benefit caught on! 

“Other N.C. companies also formed credit unions – R.J. Reynolds, AT&T, IBM, Champion Paper for their employees – as did many municipalities, local post offices, our military, and churches. At its peak, there were 360+ different credit unions in North Carolina, today just 60 remain. 

“Is SECU still “the company credit union” for North Carolina state workers? What has changed?  In order to know where you’re going, it often helps to know where you have been.”

(End Quote)

SECU’s Relevance for Today

Some of the companies and many of the 360 credit unions referenced in Jim’s blog no longer exist.  However, the local communities and their residents are still present—even if now in separate lines of work.  Local does not go away.

Local does not mean an effort must remain small.  No, local wins because it is built on the ultimate credit union advantage of relationships and self-reliance.

A billion dollar credit union’s car loan, savings account or even mortgage are often a commodity, no different from similar products offered by a ten million dollar institution.  The difference is personal, being able to talk with a real person who is familiar with your community and circumstance.

The ILSR has continued to present the power of local solutions and control in its newsletter.  A recent article was on grocery prices:  High prices are a problem. Here’s how to solve it.  Perhaps its opportune for credit unions to align and participate with the work of the ILSR.  For it appears to capture the ultimate advantage of a member-owned cooperative-its local identity. control and focus.

In addition to consumer inflation concerns as in the price of groceries, another economic topic on voters’ minds was affordable housing.   High interest rates have brought the home purchase market to almost  a standstill except for the well-to-do.

The average home price in the United States in 2024 is around $420,400, a 25% increase from 2020. Home prices vary widely by location. For example, the average home price in Iowa in 2024 is $205,988, while the average in Alabama is $217,75.  Even with candidate Harris’ $25,000 down payment assistance for first time buyers, many would still see the aspiration as very difficult.

Today an update on the median home price for every state as of August 2024 was published by the Visual Capitalist website.  The overall median (not average) for the US was $385,000.

Credit unions have been innovators in assisting members first home purchase efforts. These changes often go outside the standard secondary market underwriting requirements as many credit unions hold non conforming loans on their balance sheet.  Product initiatives include low or sometimes no down payment,  waiving transaction closing costs,  and structuring variable rate loans with initial lower short term fixed rates followed by variable price reviews to ease the first years of payments.

This video is an example of how Community First (WI) structured their home lending to meet a family’s unique circumstances.

(https://www.youtube.com/watch?v=d6AQbDYSmpg&t=15s)

FHLB grants and other forms of community assistance are sometimes available.  But given the continual rise in home prices even in the current slow markets, the prospect of a higher normal level  interest rates, and the lack of affordable supply in many markets, is another approach required?  Housing is also a market where technology would seem to have limited potential to change the cost side of the problem.

New approaches rethink the structure of home ownership by separating the cost of land from the house built on the property.  Here are two examples of this approach.  The descriptions are largely from the linked websites.

Neighborhood Housing Trusts

The first example is the Community Housing Trust (CHT) based in Ithaca, NY.   CHT helps people with modest incomes buy their first homes. Since 2009, all of Ithaca Neighborhood Housing Service’s (INHS) home sales have been part of the Community Housing Trust. By using a special ownership structure, It is able to keep CHT homes affordable for the first buyer, and all future buyers as well.

INHS got its start by trying a new way to reverse the decline of downtown Ithaca: fixing homes up rather than tearing them down. In the 1960s and 1970s, Ithaca faced the problems challenging urban areas across the nation: a depressed economy, deteriorating housing, and the flight of homeowners to the suburbs.

Most of the homes in Ithaca’s downtown neighborhoods were more than 100 years old and owners could not get bank loans to buy new ones or didn’t have the skills or financial resources to make repairs.

In late 1976, inspired by an urban renewal program created in Pittsburgh which relied on a partnership between residents, businesses, and local government, Ithaca joined a network of successful Neighborhood Housing Services (NHS). Recognized by Congress in 1978 and known today as NeighborWorks® America, the national network of NHSs continues to recognize and nurture local solutions to local community development.

The Program’s Structure

The CHT is a “shared equity” program: the homebuyer purchases only the house and the Trust owns the land. The homeowner has a 99-year lease on the land, with a small monthly land rent. This arrangement greatly lowers the purchase price of the home.  Because most CHT homes receive a special tax assessment, the property taxes can be much lower than a market rate house. INHS ensures that all CHT homes are built or renovated to be energy efficient and environmentally sustainable, another way that operating costs are kept low.

In exchange for these financial benefits, CHT homeowners agree to limit the amount of profit they can take from their homes when they are sold. CHT homes have a resale value that is capped at 2% increase per year. This allows the homeowner to build wealth in their properties, while ensuring that the home remains affordable for future owners.

The Funding

CHT homes cost on average more than $400,000 each to develop.  The homes are sold for only about half that amount—between $150,000 and $210,000. INHS receives grant funds from a variety of sources to help fill the gap between development cost and selling price.

The permanent affordability of CHT homes means that the grant funds utilized to build them will benefit many lower-income households for generations to come!

The Durham Community Land Trustees

The timeline of this second example begins in 1987. The development of this  North Carolina affordable housing initiative can be found here.  This video, from 2017, shows a before and after  look for one neighborhood built with members’ self-help.

How It Works

Similar to to Ithaca, a community land trust nonprofit organization retains land ownership, ensuring future housing affordability.  Purchasers buy DCLT homes and lease the land these houses sit on for a low monthly fee for 99 years.

• Owners can improve and maintain their homes.
• They can leave their home to their children.

If a homeowner decides to sell, DCLT retains an option to repurchase the home to sell or rent to a future low-income resident or to assist the homeowner in identifying a new income-eligible purchaser.

The key feature: Homeowners share the equity they earn on their homes with future buyers, thus fostering long-term affordability even as surrounding neighborhood property values grow.

Credit Union’s Enhanced Role

Cooperatives are critical mortgage lenders in their local communities versus the nationwide all-comers model such as Rocket Mortgage.  Many credit unions also sponsor foundations for local grants.   Partnering with local housing agencies can  facilitate  oversight of land trusts or gain zoning support for both building and then managing the subsequent turnover with foundation land ownership.

Credit unions creative lending with on balance sheet solutions are a start to home ownership for some situations.  But the broader challenge of affordability requires a collaborative effort that brings multiple resources and a different ownership design to the economics of single home ownership.  A design that is partly cooperative but also combines with individual ownership responsibility.

If you are aware of credit unions participating in efforts to develop new ways of organizing home ownership and address affordability, I would welcome examples.

If one looks at the amounts of foreclosed property reported on the quarterly 5300 call reports, this suggests credit unions are already vested in home ownership turnarounds.   Why not go the next step and create CUSO’s or other organizations that will restore neighborhoods and members’ ability to build financial well-being from home ownership?