The NCUA's recent asset securitization proposal, which would allow credit unionsto bundle the loans they originated and sell them as securities onthe secondary market, is tangled in so many tripwires that itseverely limits the number of credit unions that can participate.So says many of the credit union executives and industry expertswho submitted letters to the NCUA during the comment period thatclosed Aug. 25.

Moreover, the NCUA's lack of experience and oversight in thesecondary market further hamstrings credit unions trying to attractinvestors without violating what some experts believe are cripplingrestrictions. If the proposal is adopted as presented, creditunions may wind up playing a zero sum game, according to ChrisHoward, vice president of research for the Washington-basedCallahan & Associates.

“What's right with the proposal are the objectives that we canall agree on,” Howard said. “What's wrong with the proposal is thatit's about credit unions interacting with other parts of theeconomy. You can't bring two economic sectors together effectivelywhen you focus on just one of them.”

The NCUA's lack of experience with and authority over thesecondary market raises concerns about the agency's abilities todraft a rule that enables credit unions to fully take advantage ofsecuritization in ways that will be effective, Howard said. NCUA'straditional focus on avoiding risk poorly serves the intent of theproposal, since the agency doesn't fully understand risksassociated with securities.

“This is really a market driven by investors,” said Callahan EVP Jay Johnson, who with Howard coauthored a commentletter to the agency. “This is not a market that (the) NCUA is allthat familiar with.”

“There was a point in the proposal in which (the) NCUA said thatthis is unknown risk, but if you unpack it you'll see that it'sfundamental risk. It's nothing to be afraid of and should be dealtwith head-on,” Howard said.

“But they don't have a lot of experience operating in securitiesat this juncture,” he added. “It's a learning process for them justas it will be for credit unions entering into this process.”

Read more about the NCUA asset securitization proposal and whyJohnson and Howard feel it has no practical value as written in theOct. 1 issue of Credit Union Times.