Solutions

Overview

Evidence continues to show that consumer spending is recovering. The Federal Reserve reported auto loan balances totaled $1.102 trillion in Q3 2016, increasing for 23 straight quarters. Based on Q3 data from the New York Federal Reserve’s Quarterly Report on Household Debt and Credit, the number of auto loan accounts has surged 32% since its post-recession low, surpassing the number of mortgage loan accounts since Q1 2013.†

While auto loans remain strong, home equity lines of credit have started to improve as well. A major lending company discussed the success of cash-out refinances in December 2016, noting that home equity products may continue to expand as mortgage rates trend higher.

Hedging an Auto Loan Portfolio

To hedge your auto loans on a portfolio basis, a mix of deposits, short-term advances, and an amortizing advance can be used. For example, an auto loan portfolio can be hedged with deposits, a 6-month fixed-rate advance at 0.78%, a 9-month fixed-rate advance at 0.89%, a 1-year fixed-rate advance at 1.05%, and a 5-year fully amortizing advance at 1.78% to mitigate interest-rate risk and maintain a starting net interest margin (NIM) of 2.56%, assuming an auto loan rate of 3.99%. On the other hand, rolling a short-term advance—such as a 6-month fixed-rate at 0.78%—could support your volatile auto loan portfolio if you do not expect interest rates to rise. While this may increase your starting NIM to 3.21%, there is higher risk of NIM compression if rates move higher.

Preparing for an Increase in HELOC Activity

Home Equity Line of Credit (HELOC) balances have been trending downward, according to data from the New York Federal Reserve’s Quarterly Report on Household Debt and Credit; however, the declines have been slowing and balances could potentially rebound if national home prices continue to rise. The rates on HELOCs are variable and contain periodic caps, lifetime caps, and floors, and are commonly tied to a variable rate index—such as LIBOR or Prime. Institutions offering lines of credit to customers can fund and hedge volatile notional balances with a LIBOR Floater Advance or a discount note indexed advance, where the interest rate typically resets monthly or quarterly. Balances can be prepaid on reset dates without a fee, and LIBOR floaters can have embedded caps and floors to hedge the options embedded in the HELOC.

To Learn More

For further information, contact your Sales Director at membership@fhlbc.com to find out more about the products, strategies, and tools you can use to develop competitive lending solutions for your consumer loan customers.

Contributors

Ashish Tripathy
Managing Director, Member Strategy and Solutions

James Hotchkiss
Director, Member Strategy and Solutions

Melissa Deven
Associate Director, Member Strategy and Solutions

Brian Frame
Director, Institutional Sales

Disclaimer

The scenarios in this paper were prepared without any consideration of your institution’s balance sheet composition, hedging strategies, or financial assumptions and plans, any of which may affect the relevance of these scenarios to your own analysis. The Federal Home Loan Bank of Chicago makes no representations or warranties about the accuracy or suitability of any information in this paper. This paper is not intended to constitute legal, accounting, investment, or financial advice or the rendering of legal, accounting, consulting, or other professional services of any kind. You should consult with your accountants, counsel, financial representatives, consultants, and/or other advisors regarding the extent these scenarios may be useful to you and with respect to any legal, tax, business, and/or financial matters or questions.

† Provided by New York Fed Consumer Credit Panel/Equifax

Federal Home Loan Bank of Chicago | Member owned. Member focused. | February 2017