LENEXA, Kan. – Corporate credit unions are reviewing the Treasury’s Troubled Asset Rescue Program which will buy up underwater mortgage backed securities, but the provisions of the program may be a deterrent because it could require the corporates to lock in billions of dollars in losses that are so far unrealized.
The Treasury is expected to begin over the next few weeks to begin buying troubled mortgage securities at a discount from credit unions and banks under the $700 billion bailout approved by Congress last month. About 28 corporate credit unions are sitting on more than $10 billion in unrealized losses on mortgage securities in hopes of a rebound in the markets in the coming months.
"While the details of the plan are still unknown, U.S. Central doesn’t anticipate wanting to participate in the relief plan if it would turn unrealized paper losses into realized losses," said David Dickens, executive vice president for asset/liability management at U.S. Central FCU, which reported as much as $6 billion of fair value losses on its $35 billion portfolio of securities on Wednesday. The $6 billion represents the gap between the book value of the securities and what they are worth in today’s market.
But Dickens said U.S. Central continues to hope that enactment of the Treasury’s program will recreate a credible market for mortgage securities, thus improving the value of its vast holdings. "We're still convinced that our biggest benefit will be from the unfreezing of the markets over time," said Dickens. "This will improve supply and demand, which in turn should lead to significantly improved market prices."
U.S. Central manages almost $40 billion of credit union funds.
Todd Adams, chief financial officer of Members United Corporate FCU, another corporate holding large unrealized losses on its mortgage securities, said the $9 billion corporate is also evaluating whether to participate in the program, but he expects the Treasury program to improve the prospects for Members United’s mortgage securities. "When a new buyer enters the market, in this case, the U.S. government with a $700 billion checkbook, supply/demand mechanics should improve," said Adams. "Currently, there are few buyers in the market for these securities, so prices are low. With a new buyer, prices might rise."
"We should begin to see unrealized losses stabilize and begin to improve if the government plans works as designed," he said.
Meantime, Members United announced yesterday it reported a loss of $40.3 million for the month of September, mainly because of holdings on which the corporate now expects to realize losses. Among them are $45 million of senior unsecured debt issued by Lehman Brothers, which filed for bankruptcy last month.
At the end of September, Members United reported a rise to $1.3 billion of unrealized losses on its securities.
Members United also reported yesterday it has been accepted to access the Federal Reserve’s emergency lender, known as the discount window.
Also yesterday, Corporate One FCU, of Columbus, Ohio, reported that NCUA has approved its request for a waiver of investment regulations, allowing it to continue to hold–and not divest–21 securities that have been downgraded below permissible investment levels. The $3.9 billion corporate, said it is working with to get NCUA approval to continue to hold five additional securities that have been downgraded.
Corporate One reported unrealized losses of $267 million at Sept. 30.
