Tim Segerson, deputy director in the NCUA’s Office of Examination and Insurance, told executives attending the American Credit Union Mortgage Association conference in Las Vegas Sept. 25 the agency continues to explore how credit unions can mitigate real estate loan risk.
Segerson said real estate loans have steadily become a greater part of the industry’s collective balance sheet. Credit unions hold a larger percentage of mortgages on their books than banks of similar asset size, he said.
Derivatives under a new derivative authority, more capital and more effective liquidity management were strategies he said could help manage that risk.
Segerson declined to discuss the use of derivatives in depth because that rule has not yet been finalized. But he did point out that under the proposed rule, most credit unions with $250 million in assets or more could use derivatives to help mitigate mortgage risk.
When it came to capital, Segerson said several credit unions that had been considered well capitalized failed because they were located in areas hard hit by the housing crisis and recession.
“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 that had kept a bit more capital were better positioned to take advantage of opportunities when the economy began to pick up.”
He also said the agency had begun to reexamine the current risk-based capital standard, saying lower risk credit unions were subsidizing higher risks at other credit unions.
“The NCUSIF is a risk pool,” Segerson said, evoking an auto insurance analogy. “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.”