Tuesday, December 9, 2008
Rescue Plan Aims to Aid Some Large Credit Unions
By MARK MAREMONT Federal regulators are preparing a rescue plan to shore up the finances of some large credit unions, using billions of dollars in new government borrowings. The plan, expected to be announced this week, involves tapping into a $41 billion lending facility that Congress made available to credit-union regulators in September. The aim is to provide help for a handful of big credit unions -- all of them institutions known as corporate credit unions that don't deal with the general public -- that have been reeling from large paper losses on mortgage-backed securities. Some observers feared the financial woes were so severe they had the potential to undermine the stability of the credit-union system. Credit unions largely haven't received any funds from the financial-rescue packages announced by the Bush administration. Michael E. Fryzel, chairman of the National Credit Union Administration, the industry's federal regulator, said in an interview that the plan wasn't a taxpayer-funded bailout. Instead, Mr. Fryzel called it a short-term "mechanism to stabilize the credit-union system" while regulators work on other steps, to be announced early in 2009. A related program also to be announced by NCUA will provide as much as $2 billion in inexpensive loans to credit unions, which the institutions can use to reduce mortgage interest rates for homeowners. Regulators hope the program will bring relief to as many as 10,000 homeowners, by cutting their mortgage rates by as much as two percentage points. Mr. Fryzel said he didn't know how much new federal borrowing the two programs would entail. Funding for the loan programs will come through the Treasury Department. Credit unions are member-owned cooperatives that act much like banks, taking deposits and offering loans. At the end of last year, there were about 8,400 credit unions in the U.S. with $775 billion in assets. Most are faring fine financially. The rescue plan is aimed at shoring up the network of corporate credit unions, which are wholesale-style institutions that provide financing, investment and clearing services to retail credit unions. The retail credit unions are cooperative owners of the corporate credit unions. As part of their role, corporates take deposits from retail credit unions, then invest that money in longer-term assets. But some of the largest corporates invested in mortgage-backed securities, and lately have suffered paper losses. The losses show no sign of abating, expanding from $5.7 billion at the end of May to more than $10 billion as of Oct. 31. Retail credit unions have been pulling funds out of some of the corporates, which have been forced to borrow to meet demands. The largest by most measures, U.S. Central Federal Credit Union, had used up 96% of its borrowing facility from the Federal Home Loan Bank system by Oct. 31. It said in its most recent financial statement that it had other sources of borrowing. In September, NCUA got approval from Congress to expand an existing loan facility that was originally intended to act as a lender of last resort to retail credit unions. Congress increased the funding authorization from $1.5 billion to $41 billion. Regulators first thought of directly lending some of that money to the corporate credit unions. But it turned out that wasn't allowed; under the law, only retail credit unions could tap into the funds. The stabilization plan to be announced by the NCUA would involve two steps. Retail credit unions would borrow from the lending facility, at a favorable interest rate, currently 1.5%. They would then deposit that money with the corporate credit unions, earning a small additional rate of return. The idea is to stop the outflow of funds from the corporate credit unions, and generate an inflow of relatively stable, low-cost money that the corporates could use to retire other debt. The new deposits would be guaranteed under a federal program announced in October. Mr. Fryzel, the NCUA chairman, said he recognizes there is no guarantee the retail credit unions will take advantage of the loan program. But he said retail credit unions "have a vested interest in those corporates. If they want to maintain those as strong entities, they will have to take advantage of these programs." NCUA officials said the retail credit unions also have a financial interest in helping the corporate credit unions. They stand to lose their ownership stakes, and they have other, older deposits at risk. The plan doesn't provide any new capital for the corporate credit unions, and doesn't do anything to relieve them of the losses on mortgage securities. "This is not a long-term solution," Mr. Fryzel said. "We're buying time." Further out, he said, "we are looking at the entire corporate system," but he declined to provide details. The second program, which NCUA has dubbed the Credit Union Homeowner Affordability Relief Program, also involves loans from the $41 billion lending facility. Under it, retail credit unions could borrow up to $2 billion at favorable rates, now 1.25%, and use the money to subsidize interest-rate relief for homeowners who are having trouble paying mortgages. The retail credit unions would be expected to shoulder about half the expense of reducing homeowners' interest rates. Money that a retail credit union borrows under the program also would have to be kept on deposit with a corporate credit union, further bolstering liquidity in that segment of the industry. Previously, credit-union regulators and executives had hoped to tap into the Treasury's $700 billion bailout package. Credit unions were explicitly included among the institutions that could be aided by the Troubled Asset Relief Program, or TARP, which initially was aimed at shoring up financial institutions by buying some of their illiquid mortgage-related holdings. But last month, Treasury Secretary Henry Paulson announced that his agency was abandoning that plan, in favor of taking direct stakes in banks and other financial firms. Nearly all of the $350 billion initially allocated by Congress was spent on major banks and insurers. That left credit unions out in the cold. "I am concerned about the second-place status into which credit unions and other smaller financial institutions have been placed," Mr. Fryzel wrote to Mr. Paulson on Nov. 13. The credit-union regulator asked for credit unions to be given access to federal bailout money. Mr. Fryzel, who took office in August, said he still hopes credit unions could gain access to TARP money.