In a November 13 speech to the American Association of Credit Union Leagues, NCUA Chairman Deborah Matz expressed concern about credit unions holding fixed rate long-term mortgage loans on their books.
According to third quarter 2009 data, federally-insured credit unions held almost $131 billion in outstanding fixed rate first mortgages. This represents about 60.5 percent of all first mortgages on credit union books. This year, credit unions have granted an even higher percentage of fixed-rate first mortgages, 82.5 percent.
Ms. Matz pointed out that about 55 percent of all such long-term fixed rate mortgages granted this year are sold. The ones that are unsold are not spread out among all of the credit unions, but concentrated in certain institutions. Those credit unions that are keeping the loans on their books are exposed to greater interest rate risk, as they fund long-term fixed rate loans at historically low rates with short-term deposits.
Ms. Matz warns: “When interest rates go up – notice I said when, not if – those fixed-rate mortgages that are earning relatively high rates now could slip underwater. And then it would be too late to sell them.”
When interest rates begin to rise, the cost of funds will increase a lot more quickly than yield on assets as these credit unions are saddled with low-yielding legacy fixed rate mortgages.
Anyone who studied the S&L crisis of the 1980s knows that interest rate risk played a central role. Will credit unions repeat the mistakes that led to that crisis?
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For anyone who is familiar with the S&L debacle in the late 1980s and bank disaster in the early 1990s is that 1) fraud--historically much lower in credit unions which only makes given their cooperative nature and lower, on average, pay for CEOs of similarly sized financial institution--played a role; and, 2) the National Credit Union Administration was the only federal financial institution regulator that did not aid in deregulation, but instead took the painful (but necessary) step of aggressively resolving CAMEL rated 4s and 5s. Credit unions have always been fortunate to see bank and S&L political and institution failures up close and to learn from them. Interest rate risk is always important to talk about, but given the pace of bank failures, I am not sure you are in the position to lecture credit unions on this count. I would commend you to the FDIC page (see below) on bank failures since 2000 with the vast majority of those coming in 2008 and 2009. I think what would be more useful for credit unions is that you comb over those current failures for wisdom that could be passed on (other than citing than the buzz saw of a severe economic down turn). http://www.fdic.gov/bank/individual/failed/banklist.html
ReplyDeleteMr. Zimmerman:
ReplyDeleteThere is an excellent article by FinCriAdvisors on interest rate risk at FDIC-insured institutions. Thought you would like to take a look at it. As Richard Brown, FDIC's chief economist, states: "Interest Rate risk is the risk for tomorrow."
http://www.fincriadvisor.com/2009-12-06/interestraterisk