WASHINGTON – Corporate credit unions are weighing the pros and cons of the plan to bail out the mortgage industry, even as they cheer the government’s role as stabilizing the market, and thus the value of their huge mortgage securities portfolios.
The corporates see the plan as “bringing the asset value of these securities up,” said Brad Miller, Washington lobbyist for the Association of Corporate CUs. “So it will add liquidity to the financial system.”
But, he said, corporates’ mortgage backed securities “are performing as expected and there is no reason to sell securities into the program.”
Among the issues still to be resolved with the plan are what instruments will qualify to be purchased and what level of discount the government will pay to acquire mortgage assets from credit unions and banks.
David Dickens, senior vice president of asset liability management at U.S. Central FCU, said the plan should aid his and other corporates’ efforts to recoup some of the unrealized losses they have accrued on their mortgage securities just by recreating an active market for the securities. “For people who want to sell it’s very difficult to find a bid. What this will do is inject a bid into the market.”
But U.S. Central is not planning to sell its securities to the government and continues to hope to hold them to maturity.
Corporate credit unions have accrued some $10 billion in unrealized losses on their mortgage portfolios, with the vast majority of it in a handful of corporates.
U.S. Central this week reported its unrealized losses grew by $300 million in August to almost $3.1 billion. WesCorp FCU reported $1.4 billion in unrealized losses at the end of August; while Members United Corporate FCU reported $1.2 billion in unrealized losses and Southwest Corporate FCU almost $1 billion. Those losses are expected to have grown since then.
While most of these holdings are of mortgage backed securities, some corporates are exposed through other instruments. U.S. Central, for example, reported additional unrealized losses of $300,000 on instruments it holds to hedge its portfolio of jumbo mortgages that it bought from credit unions, and a potential $1 million loss on several interest rate swaps involving Lehman Brothers Holdings.
Wall Street analysts who follow U.S. Central cited the dilemma faced by the corporates. “There will be some real losses,” said Ken Ritz, an analyst for Fitch Investors who covers U.S. Central and the other large corporates. “But the question is, is it better to hold on to them or sell them into the Treasury plan at a deep discount?”
“If you charge off 20% of the value of the securities, is it better than a 60% discount offered by the Treasury?” said Ritz. “It’s a basic, fundamental investment decision.”
