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Wednesday, February 8, 2023

Neighborhood Credit Union Shares Insights on Being Financially Prepared for the Looming Recession

Neighborhood Credit Union On Being Ready For A Recession

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Sean Roderick

Written by: Sean Roderick

Sean Roderick

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Lillian Guevara-Castro

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In a Nutshell: Neighborhood Credit Union is one of the longest standing credit unions in the Dallas-Fort Worth metroplex area. The credit union’s CFO, James Frankeberger, has shared his insights on the impending recession and how to be financially prepared for economic downturns. Neighborhood CU provides its members a number of offerings that can help them protect their investments, like competitive interest rates on deposit and loan products. Frankeberger also addressed the importance of having an emergency fund and diversifying investments to protect against a weakening economy.

The public is usually the last to know — and the ones with the most to lose — as economists and financial researchers point out growing trends of a potential recession. But there are ways for consumers to be better prepared or at least feel less pain when a recession does occur.

We spoke with the CFO of Neighborhood Credit Union, James Frankeberger, to provide readers with some insight on what to expect.

Neighborhood CU has a long history of serving its members, as do many credit unions. Neighborhood CU is the oldest credit union in the Dallas-Fort Worth metroplex. It was started in 1930 and was formerly known as the Dallas Postal Employees Credit Union. Since then, the credit union has expanded to manage over $1.1 billion in member assets and operates 14 branches.

Neighborhood Credit Union logo banner

It’s that kind of long-lasting reliability that has made Neighborhood CU a trustworthy advisor to its members and the communities it serves.

Getting back to the economy, there’s no question we are in strange territory. Rates are rising, and the prospect of a recession is looming. Many people are still wary of addressing this likelihood, just as they avoided talking about the current inflation until it was too obvious to ignore.

While fear is swirling in the market, it’s good to think about the possibilities and to be prepared in case things go south.

It has been a crazy year for sure: Fed rates went from almost zero to 25 basis points. And just recently, the Fed raised rates another 50 basis points. As of now, the Fed rate is around 4.5, which is a massive increase in a short period of time.

The inflation we are now experiencing is the highest it’s been in 40 years, and even though recent trends showed that inflation saw a decline in November, it was still above 7%, which is incredibly high.

“We see real wages increasing, but the real amount of hard dollars that members have is really diminishing,” said Frankeberger. “So we’re seeing economic trends of, I believe, 40% of a member’s household income going to regular goods and services. And that’s a lot higher of a percentage than when it was pre-pandemic, which is usually in the 30s to low 30s.”

Frankeberger said that credit unions were going through a unique time during the stimulus packages where the deposit base had grown so much because members were getting loaded with cash.

What we’re seeing now, he said, is that a lot of that liquidity is running up. As a result, people are spending more and not saving, and they’re even borrowing more than usual. “We’re seeing high increases in installment loans and credit card loans. And I believe that, in the credit union industry, 17% growth is in installment loans right now,” said Frankeberger.

Indicators of the Next Recession

Numerous indicators appear to signal that we are headed toward a sluggish economy. And there’s much to look out for in terms of mortgages.

Although mortgages have just recently started coming down in value, consumers can expect to see a lot of property tax increases in the future. “We’re seeing escrow balance going up,” said Frankeberger. “So insurance is going up and property taxes are going up, and people need to be wary of that.”

Frankeberger said that now would not be a good time to refinance a mortgage loan because the rates are getting too high. So postponing the purchase of a new home would be a good idea because even though mortgage rates recently dropped from over 7% to about 6.3%, it is still a really high rate when compared to rates from a year ago.

Months ago, people were hopeful for a soft landing leading into a recession, but top indicators are pointing out that it is a mathematical certainty and that recession is coming hard.

Frankeberger noted that, even though employment numbers are looking very strong right now, it’s not fully reassuring because he said many big companies are planning to lay off 10% of their workforce. “They see something looming and that’s why they are being proactive in managing their balance sheets and income statements by conducting these layoffs,” said Frankeberger.

Another bad sign of things to come is that, despite the Fed rate hikes that were meant to stop people from spending, that doesn’t seem to be happening yet.

“The whole point of raising the rates is supply and demand,” said Frankeberger. “They want to make it harder for you to have access to cash borrowing, because it’s going to be a lot more expensive, and therefore, you’ll be purchasing less.”

“Borrowing, credit cards and unsecured loans have really grown astronomically. And so that tells me that people are using up their liquid funds, and now are having to dip into borrowing and using credit,” he said.

How Credit Unions Can Help Prepare Members

Frankeberger said that with credit unions in general, it’s really important to have a good pricing strategy because of these unprecedented times and how fast rates have been moving up.

As an example, if someone were to hold money at the Fed, they would be earning 4.5%. So if a credit union does a loan with a consumer, anything below 4.5% would be losing money at that point.

“You have to make sure you have your pricing strategies correct,” said Frankeberger. “Because it’s risk-free money sitting at the Fed when you’re at 4.5%.”

Photo of Neighborhood Credit Union branch location.
Neighborhood Credit Union offers its members ways to improve their investments and financial wellness

For its part, Neighborhood Credit Union is staying competitive on interest rates for deposit products and loan products, as well as various investment services and fee structures.

That could come in handy as a way to prepare for a recession. Frankeberger said one of the important things people should do is have an emergency fund, which Neighborhood CU can help members develop.

“It’s a challenge, but we reward our members. We have a high-yield savings account that pays 2%, and we also have a reward checking account that also pays 2%. We have great CD offerings, and we also do wealth management,” said Frankeberger.

Neighborhood CU also offers its members improved financial health through its GreenPath Financial Wellness program. It helps people reach their financial goals by providing personal and family budgeting, advice on credit reports and improving credit scores, money management, debt repayment, and help on avoiding bankruptcy, foreclosure and repossession.

Disciplined Strategies to Safeguard Families

The economy is an unpredictable beast at times, and no one has a foolproof method to beat the market every time. But one thing everyone from investors to average Joes can do is mentally prepare for what-if scenarios.

“It’s a good exercise to do as a consumer, putting that mindset in your head. What if this happens? What if I was laid off? Or, how would I react to that? We’ve got to start thinking of those things,” said Frankeberger.

And aside from having an emergency fund that can cover at least three to six months’ worth of bills, Frankeberger also recommends postponing large purchase items, such as cars, mortgages and the like. In other words, avoid any kind of debt as much as possible.

As far as investments are concerned, Frankeberger said people should ensure they are diversifying. “You want to have investments that don’t correlate together, meaning you want a mixture of stocks and bonds, because typically, when stocks go up, bonds go down, when bonds go up, stocks go down. So you want to have some diversity there,” he said.

And contrary to general opinion, Frankeberger said that when nearing retirement, investors should not put everything into liquid funds.

“Just reallocate a little bit and make sure you still have some money in equities. Not a large percentage, but you have to diversify. You’ve got to have some measure of risk in that portfolio so you can try to keep up with inflation,” said Frankeberger.

Last but not least, Frankeberger doesn’t recommend cryptocurrencies in these precarious times.