WASHINGTON – Congress yesterday was negotiating to expand the huge government bailout of the mortgage markets by adding provisions to help distressed borrowers and foreign lenders with major investments in the U.S. markets, as well as several other measures, increasing the projected $700 billion cost of the plan.
Credit union lobbyists yesterday were working to ensure that any plan approved by Congress includes credit unions. “What we’re focusing on is making sure that credit unions have access to the sale of their assets on equal terms as other financial institutions,” said Bill Hampel, chief economist for CUNA, who is working with the lobbyists on the legislation.
Meantime, U.S. Central FCU, which is holding a large portfolio of underwater mortgage securities, yesterday said it supports the government bailout but has no plans to join in by selling those securities to the Treasury Department under the initiative.
David Dickens, vice president in charge of asset liability management at U.S. Central, said it believes the government’s plan will help the market for its holdings by adding liquidity for all mortgage securities, but it continues to hold its bonds in hopes of receiving their book value when they mature. “They continue to amortize nicely and we’re receiving $400 million a month,” he told The Credit Union Journal yesterday.
“I would not expect us to sell assets into the [Treasury’s] warehouse,” said Dickens. But, he added, the $40 billion central bank for credit unions would benefit by the restoration of liquidity to the fixed income markets, for both mortgage and non-mortgage assets.
Yesterday, U.S. Central reported unrealized losses on its mortgage portfolio increased by another $300 million in August and totaled almost $3.1 billion as of Aug. 31. The value of those securities is believed to have deteriorated even more over the last two weeks as the markets have seized up with the bankruptcy of Lehman Brothers Holdings, the acquisition of Merrill Lynch and the government bailout of American International Group, three of the central players in the mortgage markets.
U.S. Central is one of a handful of corporates holding large unrealized losses on its mortgage securities. That includes WesCorp FCU, which had a $1.4 billion loss as of July 31; Members United Corporate FCU, a $1.2 billion loss; and, Southwest Corporate FCU, a $1 billion loss. But almost every corporate is holding some unrealized losses on mortgage securities.
“We can’t comment much because we haven’t seen the details,” said Terry Young, a spokesman for Southwest Corporate, on the bailout proposal. “But we’re generally supportive of the government’s effort to get liquidity into the system.”
Representatives of WesCorp and Members United declined to comment.
Under the bailout proposal the Treasury would provide up to $700 billion to buy distressed mortgage assets, including mortgages and mortgage securities, from banks, credit unions and insurers, in hopes of recreating an active market. Values of mortgage assets have plummeted in recent months and trading activity has dried up as a response to market conditions, pushing the market values of those assets lower.
As a condition of the bailout of lenders, Democratic leaders of Congress yesterday were working to include provisions to help distressed homeowners. One proposal floated by Senate Banking Committee Chairman Christopher Dodd would allow distressed homeowners to ask the federal bankruptcy courts to amend the terms of their mortgages, an initiative the credit union lobby has opposed in the past.
The Democrats also were urging that Treasury receive an equity stake in banks that sell assets under the plan, or that entities such as credit unions put up collateral to support the assets to be sold.
The Democrats were working to ensure that executives who benefit from the bailout do not receive large financial compensation as a result.
