LENEXA, Kan. -
The losses illustrate how the continuing crisis in the mortgage market is infecting credit unions, which have tens of billions of dollars invested in mortgage backed securities.
The U.S. Central losses and increasing troubles in its MBS portfolio prompted Standard & Poors last week to downgrade the short-term outlook for the corporate credit unions' corporate to negative, from stable.
"The outlook revision," said the Wall Street rating agency, "reflects increased concerns about USC's exposure to subprime, home equity, and other MBS, the market for which is currently facing a severe liquidity drought brought on by concerns over fundamental deterioration in the housing market."
Despite the downgrade in overall outlook, S&P, affirmed its top AAA and A-1+ counter-party ratings for U.S. Central. These ratings are important when U.S. Central issues its own commercial paper, medium-term notes and other securities.
Robert Hoban, S&P's credit union analyst, said the losses may not seem like much for $49.8 billion in assets managed by U.S. Central at the end of the third quarter, but are amplified by the low capital maintained by U.S. Central, which is around 2%. "Even small losses on securities are magnified because of the high leverage of capital," said Hoban. "You don't need to take a big loss for it to eat into capital."
U.S. Central officials did not return several phone calls seeking comment.
Hoban, who has been covering corporate credit unions for 15 years, said the third quarter losses for U.S. Central occurred when the corporates' corporate "took some write-downs on individual securities" and marked down to market value some of its commercial mortgage backed securities that are being held in its held-to-trading portfolio. U.S. Central notified members in August that its lost $16.5 million on CMBS.
U.S. Central reported losses for July and August, but moved into the black for September, creating a $16.9 million loss for the three-month period, according to Hoban.
The "negative outlook" reflects the rating agency's projection that U.S. Central will face further market value depreciation in its mortgage-backed securities in the near term, according to the S&P report, written by Hoban. "We believe that the longer it takes for liquidity to return to these securities markets," said S&P, "the more pressure there will be on USC to reduce its exposure, which could turn unrealized losses into realized losses and result in further strains on capitalization and profitability."
The downgrade in outlook also reflects the changing landscape for corporate credit unions, he added. That means the continued consolidation among corporate credit unions, reducing the market for U.S. Central products and services, and the increased competition from both other larger corporate credit unions and traditional players in the investment markets seeking business of U.S. Central's corporate customers. "This has hurt the profitability of corporates and caused some strain in the market," he said.
