The Key Question for the House Hearings

While other regulators look for alternative approaches to overcome current market dislocations, NCUA is choosing to pursue policies that have an immediate negative impact on credit unions. Why is our federal credit union regulator making decisions that hinder the industry's ability to continue serving members at a time when consumers need it most?

 
 

NCUA released U.S. Central's first quarter financial results last week, which included a revision to the year-end 2008 financials that more than triples the other-than-temporary-impairment (OTTI) charge on the investment portfolio. The comment on the $3.8 billion OTTI charge in the first quarter statements is preceded by a description of continued real estate market deterioration that is impacting pricing of the non-agency mortgage-backed securities (MBS). But is U.S. Central’s situation unique?

Ratings Downgrades and OTTI: A Comparison

NCUA has discussed the downgrades of securities held by U.S. Central in public releases and in interviews with the financial press. Given the market conditions, it is not surprising that securities in U.S. Central's $18 billion private label MBS portfolio have been downgraded. At year-end 2008, 58 percent of the portfolio was rated AAA and 19 percent was rated BBB or lower. As of February 28th, 53 percent of the portfolio was rated AAA and 30 percent was rated BBB or lower. This segment of the investment portfolio is highlighted in the first sentence of the March financial statements as the driver of the $3.8 billion in OTTI charges.

To judge the severity of the downgrades in U.S. Central's portfolio, a relevant comparison can be made with the Federal Home Loan Banks. In their combined financial statement release, the 12 FHLBs reported holding nearly $73 billion of private-label MBS as of year-end 2008. In December, 84 percent of these securities were rated AAA and 8 percentwere rated BBB or lower. Between year-end and the financial statement release in March, the portfolio was downgraded further. As of March, 58 percent of this portfolio was rated AAA and 31 percent was rated AAA or lower. In other words, the decline in the credit quality of the FHLB portfolios has been more severe than that of U.S. Central's.

Given this dynamic, as well as an FHLB portfolio that is four times the size of U.S. Central's, it would seem likely that OTTI charges on the FHLB portfolios would be greater. Yet the OTTI charges on the FHLBs' $73 billion portfolio total just over $2 billion at year-end, roughly half the charge taken on U.S. Central’s $18 billion private-label MBS portfolio.

The difference between the two is the approach by the regulator. A January article in Investment Dealers' Digest discussed unrealized losses on the FHLBs' portfolios and how the key decision regarding impairment charges rested with the Federal Housing Finance Agency (FHFA). If the FHFA required higher OTTI charges at the banks, their capital would likely be impaired. Although the year-end statements reported $19 billion of unrealized losses in the FHLBs' private label portfolio, the FHFA did not require the banks to take OTTI charges at a level that would impair capital because of, according to the financial report, "each FHLBank's ability and intent to hold such securities through the recovery of unrealized losses."

NCUA has taken a different approach. As with WesCorp's March financials, there was a reclassification of U.S. Central securities from held-to-maturity to available-for-sale, reversing decisions made by U.S. Central in 2008. The statements note that "U.S. Central currently does not intend to sell securities, nor is there any expectation that U.S. Central would be required to sell debt securities." While this judgment of intent seems similar to that of the FHLBs, the accounting outcomes of the two regulators' judgments are very different.

A Question of Policy

While other regulators look for alternative approaches to overcome the current market dislocations, NCUA is choosing to pursue policies that have an immediate negative impact on credit unions. At the House hearings this week, NCUA will give testimony and respond to questions from the Subcommittee members. A key issue that must be addressed is why the federal credit union regulator has chosen to make decisions that hinder the industry's ability to continue serving members at a time when consumers need it most.

Credit unions have an incredible story to tell on Wednesday. Their positive impact on mortgage, auto, credit card and student lending is evidenced by their increasing market share in each of these areas. This is exactly the role that cooperatives are intended to play at times when 'traditional' markets break down. NCUA's decision to have credit unions incur expenses based on potential loss projections that will continue to vary based on changes in market conditions slows this momentum, to the detriment of consumers. Congress needs to ask them why.

 

 

 

May 18, 2009


Comments

 
 
 
  • Excellent article with good questions that need to be answered.
    Chuck Van Court
     
     
     
  • Before accusing the FHFA of favorable accounting treatment, you need to evaluate the types of securities held. All AAA-rated securities are not the same and the FHLBs tend to hold securities with greater credit enhancement than the corporates.
    Anonymous