ALEXANDRIA, Va.-NCUA moved last week to aid the corporate credit unions, which are struggling to cope with rising unrealized losses on their investment portfolios, by providing them with a back-door to the agency's emergency loan fund, known as the Central Liquidity Facility.
The NCUA plan, dubbed CU System Investment Program (SIP), will allow natural-person credit unions to borrow from the CLF at a low rate on the condition that the funds are invested in the corporates at a slightly higher rate. The borrowing rate for natural-person CUs will be 1.25%, and the money will be invested with their corporates in certificates that will be guaranteed by the federal government at 1.50%.
"This frees up additional money for them (the corporates)," said NCUA Chairman Michael Fryzel. "That's the goal right now."
The initiative comes as unrealized losses on the corporates' books have surpassed $14 billion, including $7.3 billion for just U.S. Central FCU. Those losses are being caused by the continued fall in the value of asset-backed securities, mostly mortgage-backed securities, being held by the corporates.
Several regional corporates have also reported losses exceeding $1 billion, including WesCorp FCU with unrealized losses of $1.7 billion; Members United Corporate FCU with $1.6 billion and Southwest Corporate FCU with $1.2 billion.
Members United, which reported a $40-million loss in September, announced the first corporate lay-offs last week, a 20% jobs reduction aimed at cutting expenses by $10 million, including the lay-off of its president David Prieter, who once headed Mid-State Corporate FCU, one of two corporates (Empire Corproate FCU was the other) that combined last year to create Members United.
Other corporates are also reporting growing losses on their holdings: Corporate One FCU reported $300 million on held-for-sale securities at the end of October; Constitution Corporate FCU reported $230 million at the end of September; Southeast Corporate FCU $136 million and SunCorp FCU $118 million.
Feeling The Squeeze
The growing losses are squeezing corporate deposits at a time when natural person credit unions are needing greater liquidity, pushing up borrowing costs for the corporates to enable them to continue to hold the distressed investments. Members United, for example, reported its assets have declined by 40% in recent months from $15 billion to $9 billion.
NCUA's Fryzel said the CLF plan is not expected to solve the corporates' problems, but to buy them time while they bleed off some of the securities they hope to hold to maturity and while the markets recover, helping them to recoup some of the market value on their holdings. "We've got to do whatever we can right now," he said.
Still, some experts suggested much more will be necessary to save the corporates from realizing significant losses. "Somebody is going to have to absorb a loss; either the corporates, the NCUSIF or natural person credit unions. The bottom line is the industry is going to have to take a loss," said Charles Felker, VP at CU bond house First Empire Securities and a former head of NCUA's investments office.
The plan comes as the CLF has become the focus of NCUA's efforts to prop up troubled credit unions. The fund has been almost unused for the past 10 years. But soon after Fryzel took office in August he convinced Congress of the need to expand its available funding from $1.5 billion to $40.5 billion. Since then, the CLF has provided almost $2 billion in low-rate liquidity loans to almost 100 credit unions, exceeding it previous limit.
But the section of the Federal CU Act that provides for the CLF prevents the fund from being used by the corporates. Thus, the back-door entry into the CLF provided the corporates by NCUA.
All Can Issue SIP Shares
NCUA formally launched another plan last week that will provide the same 1.25% CLF loans to natural person credit unions that will be used to refinance at-risk mortgages for their members. The plan, dubbed CU Housing Affordability Relief Program, will make $2 billion of funding immediately available, and as much as $4 billion down the road.
All of the corporates, including U.S. Central FCU, will be allowed to issue the SIP notes, which will be guaranteed by the federal government under NCUA's new corporate credit union liquidity guarantee program. The one-year notes will not count as capital.
Officials of the corporates, many of which are weighed down by borrowings to help them hold underwater securities, are optimistic the new program will provide some relief. "It is going to have the effect of providing additional liquidity to the corporate network and U.S. Central by replacing liquidity sources from outside the system with a liquidity source from within the (credit union) system," said David Dickens, vice president of asset liability management at U.S. Central FCU. He said U.S. Central plans to participate in the program.
NCUA plans to issue $500 million of the notes in January and is likely to expand the offering. Corporates that plan to participate must notify NCUA by last Friday afternoon. Natural person credit unions must borrow at least $1 million in order to participate.
