Details to layer failed credit union assets into securitization platform being released Friday
The federal regulator of credit unions will finally unveil the details of its plan to securitize more than $50 billion in assets from failed corporate credit unions. As HousingWire first reported in April, the National Credit Union Administration is taking a page from the Federal Deposit Insurance Corp. by disposing of failed corporate credit union "legacy assets" — predominantly mortgage-backed securities — with structured finance notes that carry the full faith and credit of the U.S. government. At a NCUA board meeting scheduled for Friday afternoon, corporate credit unions dominate the agenda, and sources tell HousingWire the legacy asset plan is prepared and will be made public during the meeting. In addition, new regulations regarding corporate credit unions will be discussed. "There is simply no easy way to un-bundle about $50 billion worth of long-term assets, repackage them, and isolate them from the corporates’ balance sheets – all in a way that, under accounting rules, does not end up causing greater losses," NCUA Chairman Debbie Matz said in a speech Tuesday to the National Association of Federal Credit Unions congressional caucus, during a meeting held in Washington, D.C. "One of our main goals is to devise a way to safely deal with the legacy assets at the lowest possible cost consistent with sound public policy," Matz added. "To accomplish this, NCUA staff is navigating through more legal, accounting and procedural issues than you can imagine." Corporate credit unions are like a "credit union's credit union." They're owned by groups of traditional "natural person" credit unions and provide short-term and long-term credit to promote liquidity in credit union lending. At July's NAFCU convention held in Chicago, Matz said the number of troubled credit unions is on the rise, up 31% to 2,100 in 2010, compared to 1,600 three years ago. On a NCUA scale of one to five — called the Capital, Assets, Management, Earnings, and Liquidity, or CAMEL, rating system — there are 367 credit unions rated CAMEL 4 and 5, or "troubled." In addition, there are an additional 1,750 institutions rated CAMEL 3 — not technically "troubled" in the NCUA's technical lexicon, but more and more CAMEL 3s are becoming CAMEL 4 and 5. And as of late, the stability of corporates has been in question. In March 2009, the NCUA placed the two largest corporate credit unions, U.S. Central Credit Union and Western Corporate Federal Credit Union in conservatorship. Earlier this month, the NCUA alleges WesCorp departed from its traditional business model of providing liquidity for credit unions and "began an aggressive campaign to increase the size of the organization" around 2002. WesCorp fueled this growth through borrowing and then investing "heavily in private-label [MBS]," according to a complaint filed in District Court for the central district of California. This lead to WesCorp reporting total assets of $32.5 billion at the end of 2007, more than 50% higher than five years earlier. But the credit union's exposure to private-label adjustable-rate MBS was $22 billion, or about 95% of its total investment portfolio, at the end of 2007. "If WesCorp’s officers and directors had imposed prudent concentration limits on its private label MBS, including its option-ARM MBS, almost all of this loss would have been avoided," the NCUA claims. Those claims are echoes of a speech Matz gave in July during the NAFCU 43rd annual convention in Chicago. Matz warned then that the National Credit Union Share Insurance Fund, the fund that insures deposits for the nation's 90 million credit union members, would dip below Congressionally mandated levels of 1.2% to 1.3% by the end of summer. "The amount of the assessments for the National Credit Union Share Insurance Fund really depends on the industry’s own performance,” Matz said. "Simply put: If credit union losses are lower, credit union assessments will be lower." At the end of August, the equity ratio was at 1.176%. On Sept. 16, the NCUA acted, ordering a 12.4 basis points premium on insured deposits for credit unions, adding $933 million to the share insurance fund to cover higher losses at natural person credit unions. Matz said that the premium will keep the equity ratio above 1.2% through December of 2011. With the uncertainty of the share fund premium out of the way, the NCUA is turning its focus on the legacy assets and new corporate regulations. The combined one-two punch of the legacy asset plan and the new corporate rules must work in tandem with each other to support the credit union industry moving forward, Matz said Tuesday. "We are approaching a major milestone," she said. "The new corporate rule and legacy assets plan will resolve the problems in the corporates and will help the entire credit union system to break free from the burdens of the recent past and move into a brighter future." Write to Austin Kilgore.