LENEXA, Kan. – The travails of the financial markets the last two weeks have sent a handful of corporate credit unions on an up-and-down ride, lifting prospects, then depressing them, for billions of dollars in underwater mortgage securities they hold.
Last week’s government takeover of Fannie Mae and Freddie Mac boosted the market value of so-called agency bonds, as the markets reacted to the effect of a federal guarantee for the debt.
But the weekend’s failure of Lehman Brothers Holdings has poisoned the market for so-called private label mortgage securities, for example those issued by Lehman, as well as agency bonds, because of new doubts regarding repayment injected into the markets.
The affected corporates intend to ride out the current storm in hopes they will recover the value of their mortgage bonds when the bonds mature. However, the ongoing crisis in the market, especially the events of the past two weeks, raises new questions whether they will be able to do so.
“The things that happened this weekend are continued evidence that the markets are in turmoil,” said David Dickens, vice president of asset liability for U.S. Central FCU, which reported almost $3 billion in potential losses on its vast mortgage securities portfolio as of July 31. “It shows that the problems are deeper than people expected.”
“It’s all sort of a continuing, unfolding situation, as each of these cycles hit,” said Victor Vrigian, chief of marketing at Members United Corporate FCU, which reported a $1.2 billion unrealized loss on its mortgage portfolio at the end of July.
He said the $10 billion corporate holds about $45 million in senior unsecured Lehman debt, but it is too soon to know how it ultimately will be affected by Monday’s bankruptcy of the venerable brokerage. “The problem with the Lehman pieces is you don’t really know what will happen until the disposition (of the bankruptcy court),” Vrigian told The Credit Union Journal yesterday.
Both Members United and U.S. Central yesterday issued statements saying neither has exposure to insurance giant American International Group, a major player in the mortgage securities market that is struggling to stay afloat this week.
Dwight Johnston, vice president of WesCorp FCU, another corporate with large mortgage securities holdings, noted that spreads in the market all widened Monday as the markets opened, indicating a lower value for mortgage bonds. But the market had factored in Lehman’s troubles for months as trading in private label mortgage securities had all but dried up since early in the year, he said.
WesCorp, which has almost $30 billion in assets, reported $1.4 billion in unrealized losses on its portfolio as of July 31.
Corporate credit unions are key liquidity providers for natural person credit unions, and U.S. Central is the liquidity provider for the corporates, managing more than $40 billion in credit union funds invested with it by the corporates.
