NCUA’s accountability for its corporate actions impacts every credit union:
There is a minimum of $3 billion and as much as $7 billion due to credit unions from the legacy assets NCUA seized from the corporates, according to the numbers NCUA has posted on its website.
NCUA’s regulatory practice of asserting its ability to take over institutions based on scenarios, hypothesis, or a single projection still motivates NCUA’s approach to other regulatory issues. The most recent example involves its actions in North Carolina.
The state of the corporate system is still unsettled. The new regulatory constraints have not been shown to be sustainable. Credit unions need a way to aggregate their transaction and liquidity activity to preserve the integrity of the cooperative system. Other market options are dependent on organizations whose primary responsibility is not to credit unions.
NCUA’s TCCUSF liability is documented by the Receiver’s Certificates. Moreover, every credit union has paid TCCUSF assessments totaling $3.3 billion. The question now is how much refund will credit unions receive and when?
Under its fiduciary responsibility for the corporate assets, there are three sets of books for which NCUA is now accountable:
The books for the five corporates that NCUA conserved, seized their assets, and sent member credit unions Receiver’s Certificates.
The books kept for the NCUA Guaranteed Note (NGN) program.
The books for the Temporary Corporate Credit Union Stabilization Fund (TCCUSF), which nets out the results of the two other financial statements.
From the data posted by NCUA on its website, it is possible to estimate the range of repayments that will be due to the corporate members, credit unions, and their members.
According to NCUA, the assets acquired include the following:
Legacy assets held as of 12.31.10: $39.974 billion.
Total premium assessments: $3.3 billion
Overfunding of NCUSIF transferred to TCCUSF: $.300 billion
Total TCCUSF assets acquired: $43.274 billion
(this does not include the assets of $10+ billion taken and previously sold by NCUA from WesCorp and U.S. Central’s balance sheets or the announced recoveries of $168 million from legal actions).
Less Liabilities for NGN: $28.116 billion
Difference between assets acquired versus liabilities: $15.158 billion (net balance)
NCUA’s website shows accumulated pay downs on the legacy assets of $1.987 billion, which exceeds the NGN note payments of $1.583 billion for the same period. These are cash flow transactions and do not affect the net balance. They do show, however, the positive cash flow coming from the performing legacy assets.
More importantly, according to NCUA’s website, cumulative realized losses ($2.691 billion) plus implied cash flow losses ($285 million) total current actual losses ($2.976 billion). Taken from the net above ($15.2 billion), this would leave a net positive balance of $12.224 billion ($15.158 - $2.976). This is a loss rate of 7.4% on securities that were purchased before 2007 and for which there is a minimum of five years of performance history.
NCUA projects additional actual losses of $5.2 billion to $9.5 billion on the remaining assets. Even using the highest projection, this would still leave a minimum of $3 billion ($12.224 - $9.5) due back to credit unions.
Why Would There Be Future Premiums?
NCUA is projecting additional premiums of $1.9 billion to $6.2 billion. Why would any future premiums be necessary when even the worst possible losses still leave a positive net balance before adding premiums?
The NCUA’s premium projections make no sense given the projected legacy asset surplus. Moreover, legacy asset pay downs (i.e., cash coming in) exceed payments on the NGN funding notes (i.e., cash going out).
Corporate Capital Remains
According to NCUA, there was $5.6 billion in credit union capital in the conserved credit unions. This number shows up nowhere in the net worth calculations above. If the realized losses on legacy assets total $2.9 billion dollars after conservation, there is still in excess of $2.7 billion of credit union capital to be used before any shortfalls would have to be covered by any insurance assessments, past or future.
Actual investment losses have not extinguished corporate credit unions’ capital after four years of NCUA’s imposed OTTI estimates. Were the original estimates wrong? Were the corporates solvent after all? What is the history of these loss projections?
Loss Projections And The Changing Real Estate Market
The legacy assets are primarily privately issued real estate mortgage obligations that are divided into numerous payment tranches. Corporates bought the highest-rated tranches in these securities. Through efforts by all parties to develop the least costly corporate solution, the primary question was how to project reasonable future losses. The variables used in the OTTI loss projection models change monthly depending on delinquency, charge-off rates, and loss ratios on the underlying collateral.
How can the credit union system evaluate the five-year total 7.4% actual loss on these investments to determine if total projected resolution costs of three to five times the actual losses incurred are realistic? What is the range of estimates of the NCUA’s third-party provider? What is NCUA’s track record of accurately predicting the actual cash flow losses?
The top national economic priority for the past three years has been to resolve the housing crisis, including the backlog of foreclosures, the burden of underwater mortgages on consumers, and the declines in home values and market activity. Today, after years of record-low rates, continued refinancings, HARP I, HARP II, and other public policy initiatives to address these issues, the real estate market seems to have stabilized. Both new and existing home sales and values are heading in a positive direction in all areas of the country, especially those with the highest declines in value. Now is the time to publicly review the trends in NCUA’s loss projections in light of the actual data of the past four years.
The Absence Of Numbers And Fiduciary Oversight
According to NCUA’s published data, there is no need for further TCCUSF premiums. In fact, the agency should repay credit unions a minimum of $3.0 billion.
And this is part of the problem. NCUA’s data is old. NCUA did not release the December 2010 audit until December 2011. The market value posted for the legacy assets is as of June 30, 2011. NCUA has not posted data from December 2011. NCUA’s “current” posted data is nearly a year old. By publishing summary data every six months, and then six months after the fact, NCUA falls far short of minimum standards of fiduciary and director responsibility.
The absence of data is even more critical because there is no income and expenses presented for the management of the legacy assets. Is the agency earning a spread on these assets? Does the funding expense for the NGNs exceed the revenue from the earning assets? Is it possible that every day credit unions are losing money through this refunding? Where are the earnings on the $34 billion of performing assets going? How did NCUA use the $2.0 billion premium it assessed credit unions in 2011?
Shouldn’t the regulatory agency follow the same timely reporting, disclosure, and auditing requirements it requires of corporate credit unions, which previously reported on these same assets and their market values on a monthly basis?
Closing Windows That Were Open
Every board of directors, even a governmentally appointed one, has the responsibilities of:
The duty of due care;
The duty of loyalty in their positions of trust;
The duty of good faith;
The avoidance of corporate waste.
The corporate data, and the absence of timely and full reporting, unfortunately fits an ever-increasing pattern of NCUA’s decreasing responsiveness and accountability to credit unions and to Congress.
It has discontinued issuing monthly statements for the NCUSIF, CLF, and the operating fund. The latest CLF report posted on the website is from December 2011. The latest NCUSIF report posted is from February 2012. Is NCUA’s management no longer using monthly statements? If it is using monthly statement, why is NCUA not providing them – as has been the standard practice for more than 30 years – to the credit unions that provide its funding?
For the fourth consecutive year, NCUA has failed to comply with the statutory requirement in Title I, 1752a (d) of the Federal Credit Union Act as follows:
"Not later than April 1 of each calendar year, and at such other times as the Congress shall determine, the Board shall make a report to the President and to the Congress. Such a report shall summarize the operations of the Administration and set forth such information as is necessary for the Congress to review the financial program approved by the Board."
The Law Of The United States
NCUA’s open board meetings, which are held monthly so the public can see how the agency conducts official business, were cancelled two of the first five months of the year. Closed board meetings now outnumber open ones by a margin of seven to three.
There has been no timely audit of the TCCUSF since it was established, and both GAO and the Auditor General commented on the lack of adequate accounting practices in their reports for 2010. The December 2011 audit is now past due by almost four months. This delay suggests ongoing accounting and management problems.
Credit Unions Are Paying
I’m not saying there were not investment losses; in fact there will be more than the $2.9 billion reported. But as NCUA visibly pursues individuals and volunteer board members it deemed responsible for losses, it has been silently adding to them.
Beyond dollars, the future financial integrity of the cooperative system is at stake. Most financial crises are first driven by liquidity pressures, not insolvency. In the midst of the recent financial crisis, NCUA made matters worse by generating a liquidity shortage for credit unions. NCUA put itself in a liquidity squeeze by funding the assets of the conserved corporates at a ratio of $1.40 of assets per each funding dollar. As a result NCUA was unable to fund a plan to replace shares in the corporates without a premium.
In shuttering the corporates and imposing a new corporate business model, NCUA has reduced future liquidity options for credit unions. Now NCUA is demanding credit unions open up more assured credit lines, which raises credit union costs and forces dependence on firms whose priority is not credit unions’ success.
Now is the time to undertake a cooperative review. If NCUA does not make the cash flows and asset transfers visible now, it will be harder to put the picture together later.
For more than four years NCUA has acted in a way that no credit union or corporate would be permitted to do in terms of reporting its financial condition. Is it possible events are turning out better than NCUA had predicted, but it can’t say so? If NCUA has been a responsible steward of credit union funds, everybody would welcome a corporate review demonstrating so. Without an independent and full accounting, it’s not only NCUA’s credibility that suffers, it’s also the soundness and self-confidence of the cooperative system.