Corporate Failures: Estimates Brighten the Loss Outlook
More of the costs left over from failed corporate credit unions will hit most existing credit unions in late September. The NCUA board approved assessing federally insured credit unions an additional 25 basis points of insured shares to help foot the bill for the Temporary Corporate Credit Union Stabilization Fund.
The agency created the fund to help defray the costs from the collapse of many corporate credit unions in the wake of the housing and credit crises and faces ongoing losses from bonds previously held by the corporates. The most recent shortfall is what compelled the assessment, the agency said.
The total assessment will be $1.96 billion, and agency staff said the primary payments the stabilization fund needs to make this year include $2 billion on notes that come due in October.
The board made its decision during a rare August meeting, the shock of which, NCUA Chairman Debbie Matz joked, had been sufficient to cause an earthquake and draw a hurricane. “I promise you, we won't do it again,” she told meeting attendees.
If there was a bright line of hope shining over the assessment decision, it came from analysis projecting that future losses to the fund may not be as bad as originally forecast.
Under the estimated losses projected as of Dec. 31, 2010, remaining losses to the corporate stabilization fund had been estimated to come between $5.0 billion and $7.2 billion. But the most current estimate as of June 30, 2011 projected remaining losses of between $1.9 billion and $6.2 billion. This potentially lowered the remaining losses by roughly $2 billion.
But the lowered numbers also brought some additional uncertainties. Larry Fazio, NCUA's director of examination and insurance, told the board members that increased economic instability had been behind the range of the most recent projections and that the range was appropriate given how underlying economic factors like unemployment and home prices will impact how the securities perform or fail to perform.
“Yes, I say can its very likely that we’ll be back here in December with different figures,” Fazio said, in response to a question about the likelihood the numbers might change from Board Member Michael Fryzel.
Another hopeful item came in the projection that the NCUA would not need to assess a natural person credit union premium for the NCUSIF for next year.
“Should the number of credit union failures remain near the current pace (our optimistic scenario), an NCUSIF premium will not be necessary in 2012. Even in the pessimistic scenario forecast, a 2012 premium of $607 million (about 7 basis points of insured shares) would return to the NCUSIF's equity ratio to a full 1.30% of insured shares,” Mary Ann Woodson, NCUA's chief financial officer told the board.
Neither the NCUA board nor staff commented at length on the four lawsuits the agency has brought against some of the issuers and sellers of mortgage-backed securities in an attempt to recapture some of the money the bonds have lost–in large part because those potential gains are so uncertain.
The projections of fund losses, for example, included only this one footnote on the topic. “These projections do not include any potential recoveries from settlements or litigation, which are inherently inestimable,” the footnote read. “Any such recoveries would reduce the cumulative total costs.”
“The new quarterly projections do not include any potential recoveries from settlements or litigation, which would reduce the cumulative total assessment costs,” said NCUA spokesman David Small. “It is impossible to forecast these potential recoveries or when they would occur, however, if any come to fruition, the benefit would be directly passed on to all credit unions."
Reactions to the assessment have mirrored the assessment itself: regret that it had to be done mixed with hope that the overall situation might allow for lower costs going forward.
The NCUA board appeared to anticipate some of the reaction, with Matz expressing how deeply she and the rest of the board are aware of how these assessments hurt credit unions. She reiterated the agency's instructions to examiners that they not administratively sanction a credit union whose capital position slides to below acceptable levels solely because of the impact of the assessment.
Board Member Gigi Hyland noted the same thing, pointing out to Fazio and Woodson that the agency heard regularly from credit unions that felt like “they are being kicked when they're down,” she said. “Over. Over. Over again.”
Bill O'Brien, CEO of the 55,000 member Suffolk Federal Credit Union, headquartered in Medford, N.Y. said he accepted that the assessment was necessary, but added that he hoped the litigation might cut some of the costs.
“I just hope that some of their lawsuits against the firms that sold these securities result in bringing back some of the money,” O'Brien said.
Mignon Tourné, CEO of the 73,000 ASI Federal Credit Union, headquartered in Harahan, La., said that the assessment would hurt her credit union, just as it hurts all credit unions, especially community development credit unions like hers. But she also expressed hope that improving economics would wind up cutting some of the costs in the future. “We are all hoping that some of those costs come in a little bit lower, that would be a help,” she said.
Jim Blaine, CEO of the 1.6 million-member State Employees' Credit Union in North Carolina noted that the assessment was simply part of the costs that the industry was having to bear.
“You don't walk away from the table without paying once you have eaten the meal, right?” Blaine asked in his frequently folksy style. “These assessments are part of the costs that credit unions are all going to have to bear for the next nine or 10 years, and all we can do is plan for them,” he added.