Breadth Of Bubble Stunned The Pros
WEST PALM BEACH, Fla.-Even asset managers who were predicting a decline in housing were stunned by the downturn that eventually ensnared corporate credit unions' balance sheets.
A former corporate CU executive who remains close to the industry and asked to remain anonymous noted that a number of analysts predicted a multi-year dip in home values in the late 2000s as prices began to peak. But virtually no one was prepared for what actually happened.
"In retrospect it's always easy to see a bubble that occurred, it's much harder to identify it as it occurs. But were there warning signs? Yes," the person said. "What I don't think anybody saw was that household values would nationally decline by 30% to 35%."
The former executive accepted responsibility for everything his own corporate bought, noting that it "had a very good infrastructure in terms of risk management," and would not have seen such painful losses had it not been exposed to U.S. Central.
"We wouldn't have even impacted our members capital if it was just our portfolio," the source said.
Even as the now-failed U.S. Central loaded its portfolio with significantly more risky mortgage-backed securities than nearly every other institution other than WesCorp, natural-person institutions and even NCUA treated corporates differently, based on how much they had invested with the corporates' corporate.
"If you had 80% at U.S. Central (NCUA) treated you one way, and if you had 20% at U.S. Central they treated you another way," the source said, adding that ratings agencies were no different. "Universally there was a preponderance that if you were putting your money into U.S. Central, you were doing a safe trade. They were just as blindsided as anybody else."
NCUA examiners were always thorough and professional in the executive's experience, but the source did note the irony of U.S. Central exposing itself so greatly to the mortgage industry even as a representative was "sitting in the shop."
The former corporate executive noted that yields on AAA-rated mortgage-backed securities were not that high, but, as many experts Credit Union Journal spoke with concluded, the need to subsidize lower service prices drove many institutions to load up on the products that paid better than Treasuries and were considered nearly as safe by virtually all investors.
"We got chased into risk by each other," the source conceded. "One thing I can't forgive professional institution investors is such concentration. Increasingly, our concern became the rest of the network" as other corporates had much higher MBS concentrations.
In the future, natural-person institutions will have to find new trusted partners or re-new their allegiances with old partners and "keep things a little more simple" than they did during the bubble years.