Lending Perspectives: Need a headache? Try pricing loans right now

I’ve spent almost 39 years in the lending business, and I thought I had seen it all. I have never seen rates, both short- and long-term (as defined by the two-year and 10-year Treasury) go up as quickly as we’ve seen in the last four or five months. I also don’t recall these market-driven rates going up so much faster than the overnight rate and the resulting prime rate. The market has beaten the Fed to the punch, so to speak.

When it comes to pricing, I have lived an especially exciting life. Early in my career, I made small loans at 30% APR at a nationwide finance company. I’ve lived through several inverted yield curves. I’ve seen irrational pricing when lenders could have made more money investing their excess funds instead of lending at their advertised rates—which is also happening today, by coincidence.

A multitude of challenges face credit unions when pricing today! Here are five.

Challenge No 1: The Markets Are Ahead of the Fed

The fact that the financial markets have reacted faster than the Fed is challenge number one. While the average consumer isn’t happy when the Fed raises rates, they understand to a certain extent when loan rates go up as a result. But when rates, like the 30-year mortgage rate, go up 200 basis points in a few months when the Fed has raised rates 25 basis points, consumers are mad, and they don’t understand.

 

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