Credit Unions Facing Mortgage Troubles

In “what’s next news” some credit unions are sitting on paper losses that could potentially wipe out their net worth:

Graphic courtesy of the WSJ

(From the WSJ): “Five of the nation’s largest credit unions are reporting big paper losses on mortgage-related securities, a sign that housing-market distress is spreading even to the most risk-averse financial sectors.

The federal regulator overseeing credit unions says the losses are likely to be reversed when mortgage markets stabilize, and that the institutions are sound and adequately capitalized. But some outside observers are concerned that the credit unions are underestimating the depth of their mortgage-market problems.

“This is a serious situation,” says Gerald Hanweck, a finance professor at George Mason University, who studies the banking industry and is a visiting scholar at the Federal Deposit Insurance Corp. Mr. Hanweck believes the five firms have sufficient access to funding to handle a deeper downturn, but he worries that perceptions of added risk could lead to a run on one or more of them.

Credit unions are not-for-profit, member-owned cooperatives that take deposits and lend money like banks. The mortgage problems are focused on so-called corporate credit unions, which are key players in the industry. They don’t deal directly with consumers, but provide investment services and financing to regular credit unions, which do.

The five corporates showing big mortgage-related losses, according to federal regulatory filings, are U.S. Central Federal Credit Union; Western Corporate Federal Credit Union; Members United Corporate Federal Credit Union; Southwest Corporate Federal Credit Union; and Constitution Corporate Federal Credit Union. Together, they reported about $5.7 billion in “unrealized” losses as of the end of May, the filings indicate. Unrealized losses happen when the market value of a security falls, even if it hasn’t been sold.

Credit unions in general are among the most conservatively run financial institutions in the U.S. That some are showing strains indicates that almost no financial sector is immune from the mortgage meltdown that has caused widespread carnage among commercial banks and on Wall Street. Financial-services firms have already taken write-downs of more than $300 billion in connection with the mortgage mess.

“We’re not much different from any financial institution,” says Michael Kinne, chief financial officer of Constitution Corporate in Wallingford, Conn. “Nobody is insulated from this. It seems like every time you turn around, somebody else is taking a billion-dollar write-down…”

…The paper losses of the five big corporate credit unions are large enough to wipe out the net worth of each of them. Added together, their negative equity totals $2.9 billion — meaning, in theory, that their debts exceed the current market value of their assets by that amount. That would be a troubling situation for a commercial bank. But credit unions say their balance sheets are a lot stronger than they appear because current accounting rules don’t allow them to show a key source of capital — certain funds parked with the corporates by regular credit unions.

To address what it says is a misleading financial picture, the federal regulator, the NCUA, plans this month to revise an accounting rule to allow corporate credit unions to more clearly highlight in their federal filings these funds, called membership capital.”

Methinks that this is a muddy picture at best, yes the Credit Unions have additional capital that isn’t being reported, but is that capital necessarily enough to protect them against future mortgage investment losses? Furthermore why should we believe that the credit unions will fare better than the banks if they’re exposed to the same investments? Overall I’d say that this is definitely something to keep an eye on, after all: “Things look risky but we’ll be fine/we can just hang on to these bad investments/we’re confident that things will turn around/et al” have been recurring infamous last words over the past 15 months or so.

At this juncture is anyone especially confident in reassuring words from banking executives and regulators?

Probably the most important question is how long have the credit unions had these problems, if it’s a relatively new problem that indicates (to me) that they were significantly less vulnerable than their traditional banking counterparts, but if they’ve been sitting on these losses since last summer it’s a completely different story. However if the credit unions do escape from the credit crunch relatively unscathed (despite investing in many of the same mortgages) it will be very interesting to compare their lending practices, lending standards, how they approached risk management, etc, to the more traditional banks.

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