WASHINGTON - NCUA Chairman JoAnn Johnson told Congress last week that credit unions have beefed up their provision for loan losses over the past year and are well positioned to weather the continuing credit storm, even as delinquencies and charge-offs continue to rise.
But, the credit union regulator added, storm clouds continue to collect over credit unions, as they do over the banks and thrifts, especially in mortgage lending.
The transfer of funds to loan reserves in the second half of 2007 pushed dozens of the largest credit unions into the red last year, with more than 50 credit unions reporting losses of $1 million or more. The number of credit unions reporting an annual loss rose to 1,011, from 901 in 2006.
Johnson was testifying before the Senate Banking Committee along side other banking regulators on the state of the banking industry, which was described in dire terms. Regulators for the banks and thrifts all told of plunging profits and huge losses, especially in mortgage lending, and predicted continuing losses for the foreseeable future.
For credit unions, the numbers were not as bad, but indications are they could get worse.
“Federally insured credit unions have appropriately positioned themselves to withstand the current economic cycle and related mortgage lending crisis,” Johnson told the congressional committee. “However, the federally insured credit union industry is not immune to the macro economic impact of increasing credit risk exposure created by the current housing market.”
As a result, NCUA has increased its monitoring of potential problem areas, both on a macro and a specific credit union basis, said Johnson.
She pointed out that the mortgage delinquency rate for credit unions rose from a low of just 0.34% at the start of last year to a 13-year high of 0.67% at year-end 2007.
The largest concern for NCUA, she said, is among other real estate adjustable rate loans, particularly home equity lines of credit, where delinquencies rose from just 0.36% at year-end 2006 to 0.80% at year-end 2007.
Home foreclosures are also on the rise among credit unions, increasing by 28% in the third quarter last year, and by 22% in the fourth quarter, to a high of $332 million–double the amount of a year ago. But Johnson assured the senators that credit unions continue to have limited exposure to subprime and other non-traditional mortgages that have been the major cause of the market crisis. At the end of 2007, only 2.3% of all credit union mortgages were classified as non-traditional, that is, interest-only or optional payment-type loans.
There are other signs of trouble though, the NCUA chairman told the senators, including a rise in credit card delinquencies to 1.33%, the highest since 2003. NCUA believes that may be because some consumers are tapping into their credit cards more for additional cash because their HELOCs have been cut off or significantly reduced.
As a result, credit unions continued to move large amounts to their provisions for loan losses, pushing down the industry’s profitability, or return on assets, in the fourth quarter of 2007 to a meager 0.35%, and to just 0.65% for the whole year, its lowest in more than a decade.
“This level of return, however, was more than sufficient to cover the cost of operations and contribute to the already solid level of net worth,” said Johnson, pointing to a near-record level of 11.4% capital at year-end 2007.
Johnson also explained that credit unions still have a significant exposure to the mortgage crisis on the investment side, but while the amount of mortgage-backed securities held by credit union has remained stable over the past five years, the amount as a portion of assets has declined. The majority of these mortgage-backed securities are either guaranteed or issued by government sponsored agencies, like Fannie Mae or Freddie Mac. And natural person credit unions are not allowed to invest in so-called collateralized debt obligations, which have been plagued in recent months by major defaults.
Federally insured corporate credit unions, on the other hand, hold small amounts of CDOs and have taken small impairment charges, according to Johnson.
