As Americans with cabin fever look for safe ways to travel during the pandemic, sales of recreational vehicles (RVs) are soaring by as much as 170% in some areas of the country. Drawn by the ease of social distancing in the outdoors, travelers see the many benefits of owning a second home on wheels, where they have significant control overexposure to COVID-19. In fact, approximately 46 million Americans plan to take an RV trip in the next 12 months, according to Ipsos Research.
This trend points to twoopportunities for credit unions: the first and most obvious is the ability to provide financing for RV purchases. The second opportunity may be less apparent: By purchasing RV loans in the secondary market from other credit unions, institutions can drive value for members. Tapping into the experience of an established credit union eliminates the need to build a sales force, develop a specialized underwriting team and establish servicing capabilities.
Following are four factors that credit union executives should take seriously as they consider entering this niche market.
The #vanlife movement has staying power beyond the pandemic.
While COVID-19 may be spurring a sudden bump in sales, the rising popularity of RVs is not a new phenomenon. A 2019 study by the RV Industry Association (RVIA) indicated that it’s a $114 billion industry.
Over the last decade, more Americans have begun embracing a minimalist, outdoorsy life on the road, inspired by the #vanlife lifestyle movement started on Instagram. Social media influencers have injected a “cool factor” into mobile living, and that’s translated into increased sales for RVs. In fact, the number of RV wholesale shipments soared to record breaking numbers over the last four years, according to the RVIA, which annually tracks industry production.
Social distancing may be spotlighting the appeal of RVs, but the movement is likely to stick long after we emerge from the pandemic. In fact, the growing acceptance for knowledge workers to work from home—or anywhere—may entice even more people to try out the nomadic lifestyle.
RV loans offer credit unions a balance sheet opportunity:it’s a new way toput rising deposits to work.
The increased demand for RV financing coincides with a time when credit unions are flush with deposits that need to be deployed. Credit unions saw a year-to-date 12% increase in deposit growththrough May, according to CUNA Mutual Group’s Credit Union Trends Report. Community banks and other institutions are seeing a similar deposit growth as COVID fears and government stimulus checks prompt consumers to pull back spending and park their money someplace safe. Since January, U.S. bank deposits have grown by more than $2 trillion, according to the Federal Deposit Insurance Corp.
At the same time, declining consumer confidence has taken a toll on loan growth. CUNA expects loan balances to grow only 2% in 2020. While loan growth ticked up in May, overall credit union loan-to-share ratiohit a four-year low of 76.9%, down from 84.4% in January.
Credit unions should not expect these trends to reverse any time soon. CUNA expects aggregate loan growth to drop by 46% in 2021. Clearly credit unions can benefit from exploring new paths to deploy member deposits outside of typical treasury investments, and RV lending is one niche way to do that.
Portfolio diversification is key to managing risk and building value.
In today’s environment of immense uncertainty, typical consumer borrowing patterns have transformed. Consider for example, demand for auto loans, which tanked during the first few months of the coronavirus shutdown. Overall, auto research firms estimate sales fell by about 34% in the second quarter.
While sales are gradually recovering, cautious consumer sentiment does not bode well for the auto industry for the near term. The market will recover and in the meantime credit unions may offset some of the slowdown by encouraging auto loan refinancing, but it’s a good idea to consider new product types as well.
A recent Moody’s webinar on key drivers of auto and RV lending uncovered some interesting statistics about expected losses in RVs and autos, which is driven by the probability of default multiplied by the loss given default and exposure at default. In a randomly generated portfolio,current expected credit losses (CECL) of autos increased from February to June by 79%, while RVs increased by 81%, as shown in Figure 1 below.
Moody’s analysis also sheds light on prime and super prime borrowers.CECL lifetime losses for borrowers with a VantageScore greater than 800 increased from February to June by 428% for autos loans;meanwhile during the same period expected losses for RVs increased by only157%, as illustrated in Figure 2.
In addition to the diversification an RV portfolio can provide, RV coupons for similar credit-worthy borrowers yield roughly150-250 basis points greater than comparable autos. These increased yields more than compensate a lender forincreased expected losses within RV loans. Typical analysis on probability of default of autos versus RVs finds only a small increase in probability of default in RVs versusautos for comparable FICO borrowers. Higher expected losses in RVs generally comes from increased loss given defaults in RVs, which primarily occursbecause historically RV recovery rates at auctions tended to be lower than autos. Given the current demand for RVs due to COVID-19,weexpect recovery rates to improve, driving RV loan performance on a relative basis.
No new origination is needed to build an RV loan portfolio.
While the prospect of foraying into RV financing is appealing to some credit unions, executives may see a challenge: how can they quickly ramp up the origination and marketing teams to enter the market? As mentioned above, credit unions don’t need to invest in internal originations to take advantage of the RV lending opportunity. Purchasing a pool of loans from a trusted credit union partner can be anefficient way to put funds to work, quickly.
Loan trading is sometimes overlooked as a path for credit unions to experiment with new products, drive loan growth and manage risk. It’s worth a second look. Purchasing and selling loans with trusted credit union partners can help an organization quickly expand in asset types that are driving loan growth when other loan demand is soft.
If you’re considering loan trading as a path to venture into RV financing, an important first step is to develop a purchase plan that outlines the types and sizes of loans you are looking to trade. It’s also important to develop a pricing model—credit unions experienced in the secondary markets can be anexcellent source of knowledge and performance analytics.
For many executives, talking with counterparts within your existing credit union network can be a clear path to finding a trusted partner for your loan trading program. If you’re looking to broaden your contacts in the age of social distancing, online forums offer a good venue for initiating conversations around loan trading. For example, participants in the CUNA finance and lending councils are receptive to discussions on this topic.
Embark on your journey into RV financing
It’s clear that the challenges of the pandemic will have lasting impacts for credit unions. As consumer behavior and finances shift throughout the recession and the age of social distancing, new opportunities will emerge. The organizations that are able to quickly identify and seize those opportunities will be well-positioned to best serve their members in the future.
David Hoffer, Manager, Loan Trading Desk, Alliant Credit Union.