An NCUA official told credit union executives the agency continues to explore how credit unions can mitigate risk of real estate loans and discussed a mix of mitigation strategies.
Tim Segerson, Deputy Director in the Agency's Office of Examination and Insurance, addressed the executives attending the American Credit Union Mortgage Association conference on September 25.
Segerson pointed out that real estate loans had steadily become a greater part of the industry's collective balance sheet, with credit unions leading banks of similar asset size in the percentage of their balance sheets held in mortgages.
Segerson's range of different approaches included the use of derivatives under a new derivative authority, the possibilities of holding more capital and managing liquidity more effectively.
Segerson detailed the derivative option but declined to discus it in depth since that rule is still being considered by the agency. But he did point out that under the proposed derivative authority, most credit unions of $250 million in assets and larger would be able to use derivatives to help mitigate mortgage risk.
When it came to capital, Segerson pointed out that several credit unions which had been considered well capitalized but were in areas hard hit by the housing crisis and recession had failed.
“I know the issue of keeping more capital is controversial and that some say it should be returned to members,” Segerson said. “ But in addition, we also found that credit unions which had kept a bit more capital were better positioned to take advantage of opportunities when the economy began to pick up,” he added.
He also discussed how the agency had begun to reexamine the risk based capital standard, observing that the current way risk based capital is calculated effectively uses money from lower risk credit unions to subsidize higher risks at other credit unions.
“The NCUSIF is a risk pool,” Segerson pointed out and he used the analogy of auto insurance. “You might be a very good and safe driver, but you could still see your rates increase because your neighbor down the block with the same insurance company regularly gets tickets.”