WASHINGTON – Faced with continuing losses on its huge mortgage backed securities holdings, U.S. Central FCU is working with officials of the Federal Reserve to gain access to the Central Bank’s Discount Window for short-term liquidity loans.
The effort began last year as losses started to grow on U.S. Central’s portfolio of residential mortgage backed securities. The losses recently increased to almost $2 billion, from $1.1 billion at year end. U.S. Central said in a recent report it expects to hold the mortgage securities to maturity, thus erasing the current devaluation in their market value, but emphasizes there are no assurances it can do that.
U.S. Central said it has begun restructuring its capital in order to qualify for access to the Fed’s lending and converted $1.2 billion of short-term member accounts to member Fed Fund transactions, in order to reduce reserve requirements for the Fed’s purposes.
Industry experts said U.S. Central has adequate liquidity to weather the storm, but it could be eaten up if the corporate is required to realize some of the losses on its MBS portfolio. “They do have the ability and the intent to hold this to maturity,” said Ken Ritz, an industry analyst with Fitch Investors, which downgraded U.S. Central five weeks ago. “It really comes down to the auditors. If the auditors say it’s (the mortgage backed securities) been under water for so long they’re going to make you take an impairment.”
Concern over U.S. Central’s exposure to the mortgage market recently prompted both major Wall Street ratings firms, Fitch and Standard & Poor’s, to lower their ratings on U.S. Central from their top AAA.
While U.S. Central realized as much as $90 million of losses on its huge mortgage backed securities portfolio last year, most of that was taken from earnings. The Wall Street agencies both expressed concern that any additional realized losses will have to come from U.S. Central’s capital.
U.S. Central reported to its members it lost $3.1 million for the month of March, which cut its first quarter net income to $8.1 million, down 63% for the same period last year.
Officials with U.S. Central did not return telephone calls seeking comment.
NCUA said it continues to monitor the situation. "NCUA has been aware of their efforts for several months, but are not lobbying to assist them,” said John McKechnie, chief spokesman for the agency. “NCUA would provide our views from a supervisory and regulatory perspective, if asked by the Fed or Congress."
