Treasury Funds On the Way to Credit Unions?
Credit unions might soon see their own version of a mortgage bailout program. National Credit Union Administration (NCUA) chairman Michael Fryzel on Tuesday unveiled a proposed plan to use funds borrowed from the U.S. Department of the Treasury at lower rates than those available through private sources to aid credit unions in temporarily lowering monthly mortgage payments. The proposed initiative would be a sort of hybrid bailout/loan modification program specific to credit unions, which would receive Treasury funds and pass the rate reductions on to struggling low- and moderate-income borrowers in the form of temporarily lowered monthly mortgage payments. The plan, which would be called the Credit Union Homeowners Affordability Relief Program -- or CU HARP -- aims to increase homeownership affordability, keep borrowers in their homes and limit the costs of mortgage defaults to the credit unions. In return for the reduced likelihood of borrower defaults, credit unions would be required to match the rate break, doubling the benefit to struggling homeowners. “My principal reason for advancing CU HARP is simple: The consumer must not be left out of the broader government efforts to mitigate the housing and credit market dislocations,” Fryzel said in a media statement regarding the initiative, a "win-win" for each party affected, from the credit union to the borrower to the broader economy. Fryzel had sent a letter to Treasury secretary Henry Paulson last week urging a reversal of the new direction TARP funds will take away from homeowners and toward consumer credit and bank and nonbank capital. The new initiative seems to be Fryzel's answer to Paulson's changed strategy. “CU HARP ... represents what I believe to be an innovative and practical use of federal homeowner assistance that will also benefit credit unions and the market," he said Tuesday. Through the program, NCUA would be able to impose standards and requirements for participation to ensure credit unions act as "responsible stewards" of public funds. Borrowers would also have to meet eligibility standards like income level, default history or danger of default and required occupancy on the properties in question. Credit unions would have the option of setting the period of rate break -- from 3 to 5 years -- and would be able to create a 40 year maturity and/or reduce the principal balance to increase mortgage affordability, according to a media statement by the NCUA. Advances received by the NCUA through the Central Liquidity Facility -- the vehicle through which Treasury funds would move -- will be repaid to the Federal Financing Bank -- an arm of Treasury -- with interest. If approved by the NCUA Board and signed off by the Treasury and the Board of Governors of the Federal Reserve, the CU HARP should receive initial funding of $2 billion. But will it stick? There has been rising doubt circulating in the media over the fundamental effectiveness of modification programs. The latest evidence comes courtesy of analysts at Keefe, Bruyette & Woods, who cited industry data provided by Lender Processing Services, Inc. (LPS). The results show that, in general, 25 percent of recent loan modifications went delinquent after just one post-modification payment — and more than half had become delinquent after multiple payments, according to a MarketWatch report Tuesday. It's unclear now how the credit unions' version of a mass loan mod program will work or even whether it will pass a board vote. NCUA officials could not comment on how soon the initiative will be brought before the board at the time this story was published. Write to Diana Golobay at firstname.lastname@example.org. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.