RealEstateEconomyWatch.com

Until very recently, credit unions have gloated over the

woes besetting their competitors in financial services. Unshackled by mark-to-market accounting requirements, largely untaxed, non-profit and free of the pressures of Wall Street, and only minimally exposed to the risk of subprime defaults, credit unions as a whole survived 2008 like islands of soundness in a sea of chaos.

Credit unions, which refer to their industry as a “movement,” are moving the void into mortgage credit in a big way, marketing themselves as “rock solid,” an industry-sponsored full-page ad in the

New York Times put it last month.

Yet all is not well in the “movement.” The corrosive

cracks of the credit crisis have at last cracked the solid rock, igniting a civil war as different types of credit unions fight over who should pay the cost of funding a capital insurance fund mandated by the federal agency empowered to oversee credit unions.

In fact, things got so bad last week that the top state regulator in Connecticut told credit union executives in his state that the time for yelling and screaming is over. “The decibel of name-calling and recrimination about the corporate system needs to give way toward reasoned approaches on insurance fund recapitalization,” he said.

Credit union home lending—mortgages and home equity loans—today is a huge business, constituting more than half all credit union lending. Seventy percent of Federally-insured credit unions offer mortgages to their members. The majority of credit union mortgage lending occurs in larger federally insured credit unions that have the assets and the infrastructure to originate mortgages and manage mortgage portfolios. Not all credit unions are small, local entities. Approximately 12 percent of credit unions have $100-500 million in assets, for an average of $216 million each. They have an average of 344 members per employee. Operating expenses average 3.8 percent of assets.

Unlike other originators, credit unions hold most real estate loans rather than sell them to the GSEs, and the percentage has been declining in recent years. In De

cember, credit unions held $272.7 billion in first and second mortgages.

Though fewer than 2.1 percent of credit union mortgages are 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, about 0.15 percent of total real estate loans outstanding but greater than ever before.

Credit unions entered the new year with some serious issues. They have become victims of their own success. By holding $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.

Credit union leaders petitioned the Treasury Department to put aside $1 billion in TARP funds to stabilize credit unions, but that has yet to happen. In the meantime, in January the National Credit Union Administration (NCUA), which regulates all Federally-insured credit unions, proposed a self-funded bailout of corporate credit unions. Every credit union in the nation must 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.

The plan immediately ignited opposition among community development credit unions, which specialize in serving low-income and minority communities, claimed the assessment was unfair since the problems are being caused largely by the large, wealthier credit unions who do the bulk of the mortgages.

The plan immediately ignited opposition among community development credit unions, which specialize in serving low-income and minority communities, claimed the assessment was unfair since the problems are being caused largely by the large, wealthier credit unions who do the bulk of the mortgages.
“Assuming all factors remain equal, a mandatory investment of 62 basis points translates into $28 million and would represent a net loss for community development credit unions of $15.3 million in 2009, wiping out the modest gains made this year. The fallout from the economic downturn, coupled with the lack of capital, will result in a rapid reduction in community wealth, and for CDCUs, a crippling loss in earnings,” protested the National Federation of Community Development Credit Unions.
The bailout would fund the U.S. Central Federal Credit Union, the entity that provides liquidity to a network of 30 corporate credit unions that, in turn, exist to supply natural person credit unions with enough liquidity to run their businesses. There are about 30 corporate credit unions in the United States. Neither NCUA nor the corporates’ accountants know, in fact, exactly how much financial difficulty the corporates are in. The bailout may not be the last. However, the NCUA predicts that approximately 62 percent of corporates 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.
Natural person credit unions are scrambling to find an alternative before the February 28 deadline when corporates must opt in to the plan. The Credit Union National Association, the trade association for all credit unions, held a webcast last week to discuss the NCUA’s bailout plan with its members and more than 3800 people logged in to watch it.
No matter what happens with the bailout vote, things are likely to get worse before they get better for credit unions. They are raising the pressure on Treasury to get their fair share of TARP funds, which could spell the difference whether further bailouts will be needed. Meanwhile credit unions are proving they are not immune to the economic crisis. Two have failed already this year and CU National Mortgage, a large wholesaler and servicer of credit union mortgages, is no longer originating new loans and has lost access to the secondary markets through Fannie Mae.