WASHINGTON-The corporate credit unions, which are facing growing losses on their mortgage backed securities, are asking regulators to amend the rules for fair value accounting to take into consideration the unprecedented devaluation of the mortgage markets, in order to ease huge losses the corporates' books.
The corporate network, especially a handful of the largest corporates, are sitting on more than $10 billion of losses on their mortgage securities under the current rules for fair value accounting, known as mark-to-market.
The corporates have asked the Securities and Exchange Commission, which sets the rules for most financial entities, to consider allowing entities to report distressed assets at "realizable value," which, instead of using the current abysmal market valuations, would allow corporates to take into consideration expected value of an asset, based on principle and interest payments and whether the corporate has an intent and ability to hold the asset to maturity.
In the letter, the ACCU notes corporate CUs are not SEC registrants, but they are impacted by SEC actions-especially in connection with the large portfolios of agency and private label mortgage backed securities held by some corporates.
"We are concerned with the use of fair values based upon exit values in an inactive market when impairment exists that is deemed to be other-than-temporary," the letter states in part. "Fair value is defined as the exchange price in an orderly transaction between market participants. It is not intended to represent forced sales. However, FASB's requirement for an excessive liquidity risk premium...amplifies the current distressed market conditions and their fire-sale prices in the calculation of fair value. In an inactive and dislocated market, when such premiums may be significant, we believe the only sellers that would accept pricing at these levels would be sellers with no other options (i.e., forced liquidations or distressed sales). Marking to exit or fire-sale prices is essentially a liquidation value, which is contrary to the basic premise that financial statements are prepared as if the entity is a going concern."
The letter goes on to urge the SEC to determine the definition of "fair value" for held-to-maturity (HTM) and available-for-sale (AFS) securities, for which an entity has the intent and ability to hold until recovery or maturity, should be the "realizable value" of these securities.
"This change would place investors in debt securities on equal footing with entities that hold loan portfolios for investment," the ACCU argued. "Securitized loans should not be treated differently than unsecuritized loans when the intent and ability to hold the investments is present in both cases and the underlying collateral is the same."
Brad Miller, executive director of the Association of Corporate CUs, was in attendance at Southwest Corporate's Economic Forum here the day the letter was submitted, one day prior to the Oct. 29 SEC roundtable. He told Credit Union Journal, "Essentially, the letter says fair value today is an exit price, where it should be the realizable value. Corporates feel liquidity is the key, and as long as we have the liquidity we intend to hold these securities until recovery or maturity."
Miller said if the SEC agrees with the ACCU's suggestions on the fair value of mortgage backed securities, the changes would "provide stakeholders with the true economic impact of these holdings, improve comparability among reporting entities and will more accurately reflect the financial condition of reporting entities."
Corporate credit unions have reported increasing mark-to-market losses on their securities in recent weeks. U.S. Central FCU, has reported the largest by far, a $6-billion gap between the book value of its assets and the market value. Also, Members United Corporate FCU reported almost $1.3 billion in market value losses. Earlier, WesCorp FCU reported a $1.7-billion loss; Southwest Corporate a $1-billion loss; Constitution Corporate FCU a $199-million loss and Southeast Corporate FCU a $114- million loss.
