WALL STREET - Fitch Ratings put two more corporate CUs, Southwest Corporate FCU and Constitution State FCU, on its Negative Watch because of growing losses in the value of their mortgage backed securities portfolios.
The ratings on both corporates were retained but the Negative Watch puts investors in the corporates’ publicly traded debt, mostly commercial paper, on notice of possible losses down the road in the mortgage securities holdings, according to Doris Huffmann, the Fitch analyst who follows the two corporates.
Southwest Corporate officials attributed the Fitch move to the general market conditions for mortgage backed securities and said despite the poor market, its investments are comprised of high quality assets.
“We are very cognizant of the possibility of losses,” John Cassidy, president of $13-billion Southwest Corporate, told Credit Union Journal. “But we are confident that the probability is low because of the rigorous credit analysis our staff is doing on a bond-by-bond basis. The ratings agencies are taking a very cautious approach to all financial institutions in general.”
Officials at Constitution Corporate could not be reached for comment.
The Fitch action comes as the ongoing mortgage crisis continues to diminish the market value of mortgage backed securities, which provided fat profits for all institutional investors until the second half of last year. Dallas-based Southwest Corporate reported a $920-million loss accumulated unrealized loss on its $5-billion portfolio of MBSs at the end of the first quarter. Constitution Corporate, which holds $1.7 billion in assets, reported a $146 million unrealized loss for the same period.
Adding to the concern is that some of the mortgage securities held by the two corporates are insured by one of the monoline bond insurers, who are themselves in financial distress, noted Huffmann. Southwest Corporate said 18% of its MBSs are insured by the monoline insurers
In recent weeks, Fitch has also flagged other corporates for potential losses in their mortgage holdings, including Members United Corporate FCU and U.S. Central FCU.
Fitch’s Huffmann said while the corporates hope to hold the mortgage bonds to maturity and thus erase the potential losses, the increasing hole caused by the mortgage crisis raises the possibility that some of those market value losses will have to be realized. “The concern is that the bonds actually deteriorate to where either their auditors or the regulators make them take an impairment (loss),” said the Wall Street analyst.
“It doesn’t matter if it’s held to maturity or available for sale, the risk is still there,” she said.
Southwest Corporate’s Cassidy emphasized that while the possibility for losses exists, the probability that the corporate will suffer significant losses is low. “In a general sense, we would have to have a fairly significant erosion of mortgage performance well beyond what has already occurred" before Southwest would incur such losses, he said. “The fundamental issue is: is the underlying value of the security there. You don’t want to sell a security in a distressed market.”(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com
