Friday, June 26, 2009

Don’t Make Risky Mortgages, Oh Really

North Carolina CU League President/CEO John Radebaugh was quoted last year as saying that "credit unions did not make risky loans like others did.”

However, Credit Union Journal (paid subscription) broke a story on June 25, 2009 that credit union exposure to nontraditional mortgage loans is much greater than initially thought.

This financial data provided by credit unions to their regulators obviously contradicts this statement made last year by Radebaugh.

About 800 credit unions, as of the end of March 2009, reported holding interest only (IO) and payment option (PO) real estate loans on their books worth almost $17.8 billion – $7.4 billion in first lien mortgages and $13.3 billion in other real estate loans.

Many of these credit unions originating nontraditional mortgages are located in California and the California real estate market has seen a sharp decline in real estate values.

In fact, some of these California credit unions have a significant exposure to these exotic mortgages. For example, Kinecta (Manhattan Beach, CA) with $4.1 billion in assets reported holding almost $1.2 billion in IO and PO real estate loans. Exotic mortgages represent 1/3rd of its total loan portfolio.

To view a list of the 50 credit unions with the largest exposure to IO & PO real estate loans, go here.

To Monsieur Radebaugh, I can only say – “Oh Really.”

Thursday, June 25, 2009

NCUA Taps Borrowing Authority for Corporate Stabilization Fund

The credit union industry will no longer be able to claim that their insurance fund has not received taxpayer assistance.

On May 20, 2009, the President signed into law S. 896, Helping Families Save Their Homes Act. The bill created a Temporary Corporate Credit Union Stabilization Fund to pay expenses associated with the ongoing problems in the corporate credit union system instead of having the cost paid by the National Credit Union Share Insurance Fund (NCUSIF). This new Stabilization Fund authorizes the National Credit Union Administration (NCUA) to borrow up to $6 billion from the Treasury on a revolving basis.

As soon as the ink dried on this legislation, the NCUA Board on June 18 exercised its borrowing authority and shifted a portion of the cost of the corporate credit union bailout to this new Stabilization Fund.

NCUA authorized the Stabilization Fund to immediately borrow $1 billion from the Treasury to take assignment of $1 billion Capital Note from NCUSIF. Earlier this year, the NCUA Board approved assistance in the form of a $1 billion Capital Note from the NCUSIF to U.S. Central Federal Credit Union. At the time of this Capital Note placement, the NCUSIF established an allowance for the loss of the entire $1 billion, because it was highly unlikely that the $1 billion note would be recovered. By assigning the note to the Stabilization Fund, the NCUSIF will recognize a recovery of the $1 billion expense and thus increasing the NCUSIF’s equity by $1 billion.

But more borrowing is likely to come. The NCUA Board directed the Executive Director and the Director of the Office of Corporate Credit Unions to take the appropriate steps, with the assistance of the Office of General Counsel, to legally obligate the Stabilization Fund for any liability arising from the Temporary Corporate Credit Union Share Guarantee Program (TCCUSGP). The TCCUSGP guaranteed all shares in corporate credit unions that opted into the program. By making the TCCUSGP an obligation of the Stabilization Fund, this will shift $4.977 billion in reserves set aside for losses from corporate credit unions from the NCUSIF to the Stabilization Fund.

This suggests that total borrowings from Treasury by the Stabilization Fund could soon approach $6 billion and NCUA hinted that it could go even higher under its emergency borrowing authority.

Tax-exempt credit unions are the direct beneficiaries from this new Stabilization Fund, because they will be able to recover the impaired portion of their one percent NCUSIF capitalization deposit with taxpayer assistance.

Tuesday, June 23, 2009

Does NCUA Understand the Meaning of No?

An article in the San Diego Business Journal, “Credit Unions Making Business Loans,” wrote about San Diego credit unions seeing an increase demand for business loans. "You will need to search for the article title."

To accommodate the ability of credit unions to do more business lending, credit union regulators have approved some credit unions to exceed the statutory aggregate business loan cap of 12.25 percent of assets.

For example, United Services of America (USA) FCU has been granted a regulatory waiver to make up to 20 percent of its assets into business loans.

California Coast Credit Union, with $1.8 billion in assets, is permitted to exceed the 12.25 percent cap on business loans – going up to 18 percent of its assets.

How can this be?

The Federal Credit Union Act clearly states that no insured credit union may make any member business loan that would result in a total amount of such loans outstanding at that credit union that would exceed 12.25 percent of assets. An exception was made for:

(1) an insured credit union chartered for the purpose of making, or that has a history of primarily making, member business loans to its members, as determined by the Board; or
(2) an insured credit union that (A) serves predominantly low-income members, as defined by the Board; or (B) is a community development financial institution, as defined in section 103 of the Community Development Banking and Financial Institutions Act of 1994.

As far as I can tell, neither credit union qualifies for an exception nor does the Federal Credit Union Act grant credit union regulators the discretion to waive this requirement.

So, what is it about the word “NO” that NCUA does not understand?

Monday, June 22, 2009

Why Would They Do That?

NCUA announced on Friday, June 19 that Alaska USA FCU would acquire failed High Desert FCU in Apple Valley, California in a purchase and assumption agreement. NCUA has been overseeing the operations of High Desert since October, 16, 2008, when the NCUA Board placed the credit union into conservatorship.

Alaska USA FCU with $3.9 billion in assets has 52 branches in Alaska and Washington. High Desert FCU serves the residents of San Bernardino County, California and has assets of $102 million.

How does this transaction benefit the members of Alaska USA FCU?

As Kate Golden of the Juneau Empire wrote, “[e]verybody wants to diversify, but why would Alaska's biggest credit union buy a tanking Southern California credit union?”

Friday, June 19, 2009

NCUSIF Funding Mechanism Is Broken

The desperation of the credit union trade associations and its regulator, the National Credit Union Association, to shift the cost of the corporate credit union bailout to an entity other than their insurance fund shows that the funding mechanism for the National Credit Union Share Insurance Fund is fundamentally flawed.

The NCUA and credit union trade associations devised the current system for capitalizing the NCUSIF, and Congress enacted that system into law in 1984. Unlike banks, each insured credit union must maintain on deposit in the NCUSIF an amount equal to 1 percent of the credit union’s insured deposits which is held as an asset on their books. If the reserve ratio ever falls below 1 percent, credit unions must write off a proportionate amount of their 1 percent deposit and treat that amount as an expense on their income statements.

FDIC officials told the Treasury Department in 1997 that the difference between the funding structure of the NCUSIF and the FDIC’s funding structure is the timing of losses. FDIC-insured banks pre-pay for losses through premiums that they expense, while credit unions recognize the impairment at the time of the loss.

However, the bailout of the corporate credit union system – credit unions that serve credit unions –will cause credit unions to pay this year 99 basis points on their insured shares or $5.9 billion to restore the NCUSIF to its normal operating level. This would require credit unions to recognize an impairment charge of 69 percent to credit unions’ one percent NCUSIF deposit and pay a premium assessment of 30 basis points or $1.77 billion.

Now, credit union industry does not want to recognize the losses associated with their insurance fund that they designed. The industry and its regulator sought legislation to create a new Stabilization Fund that is separate from the NCUSIF as a way to avoid recognizing these losses in their insurance fund.

This newly created Stabilization Fund would mean that credit unions would not have to write-down their deposit in the NCUSIF; rather, the cost would be spread out over a number of years as credit unions repay the Stabilization Fund’s borrowings.

When it came time for the credit union industry to bite the NCUSIF bullet, they chickened out.

Since the credit union industry does not want to incur the cost of the deposit insurance system they designed, policymakers should change how their deposit insurance fund is funded and require credit unions to pay premiums going forward, just like banks.

Thursday, June 18, 2009

NCUA Chair Nomination Appears to Violate the Law

On May 21, 2009, the White House announced the nomination of Deborah Matz to the NCUA Board and designated her to serve as the chair of the NCUA Board. If the Senate confirms Ms. Matz’s nomination, this would mean that two of the three Board positions on the NCUA Board will be held by individuals who at the time of their appointment were officers or had recently been officers in a credit union. This appears to violate the Federal Credit Union Act.

In 1998, Congress expressly limited the appointment of credit union officials to the NCUA Board. Section 205 of the Credit Union Membership Access Act (12 U.S.C.102(b)(2)(B)) states “[n]ot more than one member of the Board may be appointed to the Board from among individuals who, at the time of the appointment, are, or have recently been, involved with any insured credit union as a committee member, director, officer, employee, or other institution-affiliated party.”

The goal of this provision is pretty clear – to limit the influence credit unions exercised over their regulator, the National Credit Union Administration.

After leaving the NCUA Board in 2005, Deborah Matz served as the Executive Vice President and Chief Operating Officer of the $800 million Andrews Federal Credit Union located in Suitland, Maryland until June 2008.

Gigi Hyland’s term on the NCUA Board began on November 18, 2005. Prior to joining the NCUA Board, she served as Senior Vice President, General Counsel for Empire Corporate Federal Credit Union in Albany, New York from 2003-2005. From 1997-2002, she served concurrently as Vice President, Corporate Credit Union Relations of the Credit Union National Association, Inc. and Executive Director for the Association of Corporate Credit Unions.

The question regarding the Matz appointment is whether a June 2008 separation from the credit union constitutes recently been involved with an insured credit union.

Given the financial difficulties facing the credit union industry, the independence of the NCUA Board is very important. Having two of the three NCUA Board members from the credit union industry may result in the agency being captured by the credit union industry.

The last thing the credit union industry needs now is a cheerleader regulator.

Tuesday, June 16, 2009

Backdating Corporate CU Capital Levels

While the OTS backdating scandal has garnered a lot of attention, there has been little, if any, scrutiny of NCUA's retroactive backdating the capital levels for corporate credit unions.

On April 21, 2009, the NCUA Board granted a waiver to corporate credit unions permitting them to use their capital levels as reported on November 30, 2008 for purposes of regulatory compliance and this waiver will remain in effect until modified or rescinded by the NCUA Board.

NCUA justified its regulatory forbearance because many corporate credit unions were likely to experience losses associated with the conservatorship of U.S. Central FCU, which would absorb their capital. Without NCUA's capital waiver, corporate credit unions would be required to curtail or stop offering a number of services.

In justifying this action, NCUA Chairman Fryzel in an April 24 press release stated "many of the functions that corporate credit unions perform are tied to the level of capital, there was a serious concern that they would be unable to provide normal daily operational services to their member credit unions after recording capital losses. To avoid any disruption of critical services, the NCUA Board has issued an order that will permit corporate credit unions to use the capital level as reported on their November 30, 2008, NCUA 5310 Call Report, for purposes of determining regulatory compliance with capital-based requirements and regulations in the corporate rule."
Fryzel concluded "this will allow corporate credit unions to continue to meet members' needs while also ensuring corporates do not take additional undue risk."

So, for example, Southwest Corporate's capital ratio at April 30, 2009 is 4.08 percent – below the minimum capital ratio of 5 percent it is suppose to hold. However, Southwest Corporate's capital ratio was 6.46 percent at November 30, 2008. This backdating allowed them to comply with its minimum capital requirement.

NCUA Chairman Fryzel, in his best Cher impersonation, has effectively turned back time for corporate credit unions and they will love me, love me, like they used to do.

Interestingly, when recounting the litany of efforts to stabilize corporate credit unions in Congressional testimony on May 20, NCUA Charman Fryzel's written statement did not mention the backdating of the capital levels of corporate credit unions to November 2008. To do so, could have brought unwanted scrutiny of the agency's practices from policymakers.

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