WASHINGTON – CUNA has been adding details in recent days to a plan that would provide relief to troubled credit unions in a handful of the worst real estate markets by buying up distressed mortgages at a discount and infusing cash into those needy credit unions.
The plan, which has been presented to NCUA, could take several forms, depending on how successful NCUA and the credit union lobby is convincing the Treasury Department to provide funds from the Troubled Asset Relief Program to capitalize it. If Treasury agrees to provide some funds–CUNA has suggested as much as $20 billion to $30 billion–the money could be used by NCUA to both make cash infusions into needy credit unions and to buy up mortgage loans that are underwater.
The plan differs from the original intent–since abandoned--of Treasury’s TARP program, which would have bought distressed mortgage securities from credit unions and banks.
Even if Treasury does not agree to dedicate some of the TARP funds to credit unions, NCUA could still use the $8 billion National CU Share Insurance Fund to buy distressed loans or make cash infusions into credit union, according to CUNA.
The purchase of loans would be concentrated in the four states with the most distressed real estate markets, California, Nevada, Arizona and Florida, according to Bill Hampel, chief economist for CUNA, who has been developing the plan. The selling credit unions would have to take a loss on the loans, but less of a loss than if it had to sell it on the historically poor market, suggested Hampel.
Under this scenario, NCUA could buy about $2 billion book value of distressed loans now worth around 50% of their value, at a premium, thus infusing as much as $1 billion of new capital into troubled credit unions in those states, while taking bad assets of the books of those credit unions, according to Hampel. Then NCUA, which has significant experience managing these kinds of asset from failed credit unions, would either sell the loans in bulk, or manage them, either by servicing them or guide them through foreclosures.
For other credit unions, NCUA could provide a cash infusion, which would be a grant, through the emergency program operated by the NCUSIF known as section 208, for the section of the Federal CU Act that describes it.
The proposal differs from the cash infusion part of Treasury’s TARP, which is making capital deposits into banks in exchange for an equity stake. CUNA maintains that the mutual structure of credit unions does not allow for an equity stake such as that. In addition, for most credit unions to be able to count a cash infusion as net worth, Congress would have to amend the Federal CU Act to allow credit unions to accept supplementary capital. Under current law, only credit unions designated by NCUA as low-income, are eligible to accept supplementary capital and count it as net worth.
If NCUA is unable to get funding from the $700 billion that Congress agreed to provide to the Treasury’s bailout program, NCUA has resources to fund it itself through the NCUSIF, according to Hampel, who has estimated the cost at as little as $150 million to as much as $700 million. If that were to happen, it would most likely necessitate a premium be charged to all federally insured credit unions next year to pay the costs. This would spread the costs of the program through the entire credit union movement.
NCUA is said to be weighing the proposal, along with others.
