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.
The government takeover of Fannie Mae and Freddie Mac two weeks ago boosted the market value of so-called agency bonds, as the markets reacted to the effect of a federal guarantee for the debt.
But last week's failure of Lehman Brothers Holdings has poisoned the market for so-called private label mortgage securities, like those issued by Lehman, as well as agency bonds because of new doubts on repayment injected into the markets.
The affected corporates hope to ride out the storm in hopes they will recover all of the value of the mortgage bonds when they mature, but the ongoing 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, VP-asset liability for U.S. Central FCU, which is reporting almost $3-billion in potential losses on its mortgage securities portfolio at 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 some private-label securities issued by Lehman, which eroded in value immediately, but it is too soon to know how they will ultimately be affected by last week'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 CU Journal.
Members United has exposure to $45 million in senior unsecured Lehman debt. Given the Lehman bankruptcy filing, it is uncertain what the loss to Members United will be, but it will be less than $45 million. Members United has $333 million in retained earnings to absorb any losses from Lehman's bankruptcy, so members will not be impacted.
Both Members United and U.S. Central issued statements last week saying neither has exposure to insurance giant American International Group, a major player in the mortgage securities market that was struggling to stay afloat last week.
Dwight Johnston, SVP of WesCorp FCU, another corporate with large mortgage securities holdings, noted that spreads in the market all widened last Monday as the markets opened, indicating a lower value for all 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 at July 31.
Officials at Southwest Corporate FCU, which reported more than $1 billion of unrealized losses on its mortgage securities, declined to comment.
Charles Felker, vice president for credit union bond house First Empire Securities and a former investments officer at NCUA, said he expects the mortgage portfolios of the corporates to deteriorate, as the Wall Street ratings agencies were already downgrading all private label issues last week. The result will likely be that some of the issues are impaired, forcing some of the affected corporates to either sell them at a loss or borrow money.
The greater the unrealized losses the less the corporates will be able to respond to the liquidity needs of natural person credit unions, said Felker. "Corporate credit unions were chartered, in part, to provide liquidity. Have you ever heard of a liquidity provider that has no liquidity?" he asked.(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
