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would these same general comments apply to the allowance account for the NCUSIF? NCUA is stating that they are following GAAP--what might differ from the allowance requirements you layout above?
Very informative. It is always gratifying to know that there is someone of Mike's caliber that has not only the knowledge of ALL Accounting, but a pulse on the industry. With the FASB's proposed, and very complicated, impairment model on the warming tray, he will be in high demand.
Lots of good information in a concise format. Each statement can be an article in and of itself...Thank you...from an examiner from Venus.
In all of the due diligence we have conducted as part of merger negotiations in over dozen cases, we have seen that the allowance is in every case understated.
The common mistake is that credit unions use historical loss rates to determine future losses. That does not work. Credit unions often fail to record the original credit scores for their loans and then do not track changes in credit scores over the life of the loan. We suggest quarterly refreshes of credit scores during periods of high unemployment and financial distress. Credit Unions also need to reassess property values with automated third party assessments.
Future loan losses are most likely to directly track changes in the unemployment and the price per square foot of homes that are sold.
I do not fully subscribe to the notion that if property values are impaired that there is not impairment in the loan. I would recommend that any loan with impaired property value and impaired borrower's credit score should require a member contact to talk about the borrowers ability and intent to continue making loan payments. After talking with the member an informed decision can be made with regard to adequately reserving for the loan.
One of the biggest risks is that borrowers with the ability to repay their loan are walking away because they don't beleive the home value will ever increase. If the loan amount exceeds the home value by a signficant amount there is a huge risk of loss even if the borrower has the means to repay the loan.
The best practice for credit unions is proactive member contact to help members before the member's problems become too difficult to resolve.
This crisis is different than the usual recession. I believe we have another five years of high unemployment and soft or falling housing prices. I think it is far too early to think about reducing the allowance for loan losses. Our credit union has one of the first to increase the allowance ahead of this crisis and we will be one of the last to lower the allowance. The auditors where wrong in 2004 to 2006 by insisting that excessive allowances be trimmed. They are likley to be wrong if they suggest reducing the allowance given the current economy. Be strong and resist the urge to reduce the allowance.
I see no indications that lowering the allowance makes sense with unemployment at double digit levels and over 40% of all home sales are of distressed properties that are selling at 20% or more discount to normal prices. There is ample evidence that their is a big backlog of properties yet to come on the market and there is no evident demand for these properties.
The reality is that we have lost a lot of jobs and we have not yet become to replace those jobs and are not likely to do so for many years. Unemployment and low home prices are the key to our loan losses. Neither unemployment or low home prices show any sign of changing in the near future in any significant way.
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