WASHINGTON-The two-part addition to the financial rescue plan unveiled last week could both help and hurt credit unions, albeit only indirectly, according to credit union economists.
The Federal Reserve Board last week unveiled a plan to purchase the debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks-a move driven in part by the high cost of funding for the government-sponsored enterprises. For the past several weeks, the GSEs have been forced to sell their debt at much higher prices than normal because investors-seeking to avoid any risk-have fled to bank debt, which is now guaranteed by the government. The higher debt costs have been passed on to consumers in the form of higher mortgage rates, which is counter to what the federal government was seeking to accomplish when it placed Fannie and Freddie into conservatorship in September.
The Fed said it plans to purchase up to $100 billion of debt from primary dealers in auctions set to begin next week. The central bank also plans to purchase $500 billion in mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie Mae. The Fed also announced a program jointly developed with the Treasury Department that will lend up to $200 billion to holders of certain triple-A rated asset-backed securities backed by new and recently originated consumer and small business loans.
The Treasury will provide $20 billion from the Troubled Asset Relief Program to help protect the central bank against credit losses.
"There is no direct impact on creditunions from either of these two things," CUNA Economist Bill Hampel told CU Journal. "But the net indirect impact is positive." The portion of the plan that calls for the purchase of mortgage-backed securities could help credit unions because credit unions also sell mortgages to Feddie and Fannie, so this could allow CUs to offer lower rates on mortgages to their members, Hampel explained.
"It also could have the effect of slightly lowering foreclosure volume," he added. "It could make it easier for some borrowers with upward adjusting ARMs to refinance." That, in turn, could help decrease the number of foreclosed properties on the market, which could also help stabilize housing prices. But that is a sequence of events that has a lot of "ifs" attached to it, Hampel cautioned, so it will be some time before the impact is clear.
The other part of the plan, which calls for purchasing asset-backed securities has an even less clear effect on credit unions. In fact, technically, credit unions could suggest this will harm them, not help them, though Hampel said he wouldn't agree with that argument. The potential "harm," he said, would come in the form of loosening up the credit squeeze, which is currently giving credit unions an opportunity to increase their lending market share. "You could see this as funding competition for credit union consumer loans," Hampel offered. "But I believe there's been such a significant contraction that this move only slightly increases the supply of credit and should not hurt credit unions. If anything, it help keep consumer spending a little stronger, which would be good for credit unions."
Other CU analysts were still scrambling to deduce just how the latest plan-unveiled just before the Thanksgiving holiday-would impact the CU industry. "We commend Treasury and the Federal Reserve's ongoing efforts to improve liquidity, and we are reviewing the Term Asset-Backed Securities Loan Facility's (TALF) potential impact on credit unions," NAFCU said. "We also believe that one of the original purposes of the TARP was to purchase troubled assets and that this should be a priority for the administration."
