Loan Participations - If You're Waiting for a Sign, This is it

If You’re Waiting for a Sign, This Is It

By Bill Paton, Vice President, Lending, Loan Participations & Subordinated Debt, Alloya Corporate FCU

Ever felt like you’re waiting for a sign? Like some sort of symbol or nudge from the universe that clues you in to your next move? For those credit union decision-makers looking for a sign on what to do with their excess cash, consider this.

Now more than ever, the proverbial iron of the loan participation marketplace is piping hot. Many credit unions have taken notice, and they’re taking advantage of the opportunity to strike. In fact, nearly 2,000 credit unions indicated they have purchased or sold at least one loan participation, according to Callahan & Associates (Q1 2022). That amounts to a whopping 40% of U.S. credit unions!

Why have loan participations gained such steam over the last half-decade? The short answer is there’s no specific reason. It’s more an amalgamation of reasons.

In recent months, volatility in investment yields, coupled with increased loan origination activity, brought an influx of inventory to the loan participation market. We’re talking a tidal wave of inventory that we hadn’t seen in years. This has resulted in a perfect entry point for credit union investors to get in on the action with their excess funds. In the following market overview, you’ll see why.

Market Overview

Spreads

Glean the graph and you’ll notice an awe-inducing trend from the last three months. Across the board, loan types have seen a sharp uptick in yields, represented in the spread to comparable investment. Take auto loans, for example. They have increased by 0.50% in the past three months, representing a 50% increase in the spread to comparable investment. Every loan type has experienced a boost like this in their spread to comparable investment, with the leaders being auto loans followed by fixed rate and adjustable-rate mortgages. Each of these loan types has been popular in Alloya’s Loan Participation Program, with more inventory in the pipeline from our participating credit union sellers.

Inventory

Over the last three months, Alloya’s Loan Participation Program has seen a near-500% increase in loan sales. The increasing diversity of loans has been notable too, with no single loan type outpacing the others. Full-transparency is the name of our game at Alloya, so here’s a glimpse of the key loan types we’re seeing credit unions sell through our program, with a touch of market color from our team of experts.

Auto Loans – These continue to be the favorite among credit union investors – and for good reason! Auto loans are secured loans with a short weighted-average life, which provide a solid above-market return for investors. While auto-loan originations remain below pre-pandemic levels, they are picking up at a strong clip. At Alloya, we continue to see hundreds of millions of auto loan participations flow through our program monthly. For interested investors, this is a prime opportunity to invest.
Mortgage Loans – Credit unions saw a boom in mortgage originations over the last two years, with the focus primarily on refinancing. Consequently, credit unions have been pumping a tremendous quantity of mortgages into their books. But to sustain this level of mortgage origination activity, selling loans to the secondary market is a must (either through a government-sponsored enterprise (GSE) or via a loan participation). Since comparable investments (i.e., mortgage-backed securities) have increased in yield, mortgage participation yields have increased as well. And it’s not only fixed-rate loans in the market; more adjustable-rate products are available as well, which are ideal for investors seeking NEV support. The takeaway? Mortgages remain a safe bet (arguably the safest) for credit unions. This loan type has sustained low delinquency and charge-off ratios, making it an exceptional opportunity for the conservative investor.
Unsecured Loans – Unsecured personal loans, specifically those originated through FinTech partnerships, continue to gain popularity among credit union originators and are frequently sought by investors. There’s good reason too – these loans provide a strong spread to Treasury and offer short-duration lifespans (i.e., typically under two years weighted-average life). While most investors would expect these loans to carry greater risk compared to other loan types, the initial returning data indicates they are performing better than anticipated in most cases. The data is still forthcoming, and economic conditions have the potential to affect unsecured loans more quickly than a secured product set – but when it comes to investing in them, there’s a lot to be optimistic about.
Member Business Loans (MBLs) – Staying on trend with the past two years, credit unions continue to originate MBLs at historically high levels. As a result, credit unions are continuing to bump against their internal and regulatory cap, which prompts these credit unions to sell loans in order to ease their cap constraints. MBLs continue to return strong yields to investors, with many deals passing over a 4% return to the participants.

Seize the Sign

As a strong current of inventory continues to flow through Alloya’s Loan Participation Program, now just might be your time to buy. The recent growth in inventory and yields for investors positions loan participations as an extraordinary mechanism to deploy liquidity – all while helping other credit unions manage their balance sheets, too. (Did someone say, “people helping people?”)

So if you’re still waiting for a sign, this is it. Visit www.alloyacorp.org/loanparticipations for more.

Bill Paton
Vice President, Lending, Loan Participations & Subordinated Debt, Alloya Corporate FCU

As the Vice President, Loan Participations, Lending and Subordinated Debt, Bill Paton is responsible for the overall performance of Alloya Corporate’s loan portfolio and related liquidity products. Bill oversees the sales and distribution of Alloya’s debt capital markets programs and has a keen focus on member service as well as the present and future health of the corporate’s balance sheet as related to its loans.

Bill received his Bachelor of Arts in Economics from Hartwick College (Oneonta, NY).