ALEXANDRIA, Va. - NCUA last week said the declining value of mortgage backed securities held by corporate credit unions has prompted it to reclassify membership capital share accounts as equity.
Under current accounting for corporates, MCAs are not classified as equity, causing several corporates to report negative equity under generally accepted accounting principles as they mark down the value of their mortgage portfolios, according to Kent Buckham, chief corporate examiner for NCUA.
Under current accounting rules for corporates, only retained earnings and paid-in-capital are counted as equity. But NCUA believes MCAs, which are counted as regulatory capital, also can be legitimately counted as equity, Buckham told Credit Union Journal.
In recent months, growing mark-downs in mortgage securities has wiped out all of the net equity for U.S. Central FCU, Members United FCU, Southwest Corporate FCU and Constitution State CU, all of which hope to recoup those paper losses when the mortgage market rights itself.
The new accounting will add as much as $4.7 billion in net equity value to the corporates’ bottom lines, according to Buckham. It is expected to take effect in July for the August 5310 corporate call reports.
Buckham attributed the growing amount of mortgage securities being marked down in value by corporates to the illiquidity in the market. He said he is confident most of the losses will be erased once the credit markets turn around.
Several corporates with large MBS holdings have submitted Investment Action Plans to NCUA to explain how they plan to deal with the falling values of their mortgage securities. Buckham said NCUA believes corporates will be able to realize the full value of the securities by holding them to maturity. “They not only have the intent to hold them to maturity, but they have the ability,” he said.
The corporates also have adequate liquidity sources to enable them to hold the marked-down mortgage securities, which includes lines of credit with Federal Home Loan Banks and with commercial banks and commercial paper and medium-term notes programs.(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com
