Friday the National Credit Union Administration sent a shock wave through the credit union industry when it seized control of two of the 28 large corporate credit unions that provide financing and investment services to the nation’s 7,800 federally insured credit unions.
The U.S. Central Federal Credit Union, based in Lenexa, Kan., and Western Corporate Federal Credit Union, in San Dimas, Calif are now in Federal conservatorship. U.S. Central has about $34 billion in assets while Western Corporate, known as WesCorp, has an estimated $23 billion in assets. The financial services provided by the two corporate credit unions “will continue uninterrupted” and there will be no direct impact on the 90 million members of retail credit unions nationwide,” the NCUA said in a news release.
However, the move provided the latest evidence that cracks are appearing in the once-confident façade of the nation’s credit unions. Corporate credit unions act like a Federal Reserve for retail credit unions and their health is critical to the viability of the system. In January, credit union leaders petitioned the Treasury Department to put aside $1 billion in TARP funds to stabilize credit unions and the NCUA proposed a self-funded bailout of corporate credit unions. Every credit union in the nation was asked to invest a 56-basis point premium for the share insurance fund to offset the costs of guaranteeing $80 billion worth of credit union deposits at corporate credit unions.
Credit unions have become victims of their own success. They historically have held most real estate loans rather than sell them to be securitized by others. In December, credit unions held $272.7 billion in first and second mortgages. Though fewer than 2.1 percent of credit union mortgages were subprime, foreclosures have been increasing each quarter to a high of $332 million as of year-end 2007 and $407 million as of March 31, 2008. By holding a total of $64 billion in mortgage-backed securities with no real market for them, they have created a severe strain on liquidity. Record unrealized losses from foreclosures and other loans are now $18 billion.
The two failures may not be the last. The NCUA predicts that approximately 62 percent of corporate credit unions will have negative income in 2009 and 18 percent will fall below the “well capitalized” threshold of 7 percent net worth, while 10.1 percent will fall below the “adequately capitalized” threshold of 6 percent.
The NCUA has made more than $40 billion available to support several corporate credit unions with a new borrowing from the Treasury Department and provided another $2 billion to help struggling homeowners. The NCUA also has proposed restructuring the corporate credit union system with an eye towards enhancing its stability.