CU HARP: Will it Play?

By Mary Arnold

Since I left this comment on Friday about the Member Mortgage Relief Initiative, which a group of credit unions proposed to NCUA, the agency looks like it is serious about backing it. In a press release yesterday, "NCUA unveiled a new initiative aimed at assisting credit union members who are experiencing mortgage-related financial difficulties to preserve their homeownership.

"The Credit Union Homeowners Affordability Relief Program (CU HARP) would enable NCUA, through the Central Liquidity Facility, to work with credit unions and their members in temporarily lowering monthly mortgage payments. The CLF would provide credit unions with funds borrowed from the Department of Treasury at lower rates than otherwise available through private sources. In turn credit unions would pass the entire rate reduction to struggling low- and moderate-income borrowers. The credit union, in exchange for the reduced likelihood of borrower default on the mortgage, would also match the rate break, doubling the benefit to struggling homeowners." 

“My principal reason for advancing CU HARP is simple: The consumer must not be left out of the broader government efforts to mitigate the housing and credit market dislocations,” stated Chairman Fryzel. “CU HARP is an effort to foster a solution whereby the NCUA and credit unions work together to assist distressed borrowers.  It represents what I believe to be an innovative and practical use of federal homeowner assistance that will also benefit credit unions and the market. At the same time, the standards and requirements for CU HARP participation will be stringent and will enable NCUA to be responsible stewards of any public funds used. CU HARP will be a ‘win-win’ for all involved.”

As part of that win-win, the plan involves no spending of taxpayer dollars, something CUs can continue to feel good about. "CLF loans are made to credit unions on a fully-secured basis, and all advances received by the CLF will be repaid to the Federal Financing Bank (an arm of Treasury) with interest," the release explains.

NCUA's announcement comes on the heels of last week's change to the bailout plan, which eliminated CUs' possible use of TARP funding. Though, theoretically, being eligible for TARP placed credit unions on "equal footing" with the rest of the financial industry, most credit unions are already on higher ground, thank you very much, and eager to help their members--not to obtain taxpayer assistance.

To go forward, CU HARP must be approved by the NCUA Board, as well as the Treasury Department and the Board of Governors of the Federal Reserve, according to NCUA's release.

Initial funding would be $2 billion. What do you think? Does this have legs?

Mary Arnold is VP/publications for CUES.

Comments

[Jeffry Pilcher]

You can change the name and call it HARP, but it still sounds like those credit unions with a large volume of ARMs are looking for a bailout to avoid losses.

This issue raises a lot of questions.

How big is this problem? How many credit unions out there were engaged in risky lending practices that now need a bailout?

After weeks and weeks of mainstream media articles touting the safety, security and soundness of credit unions, why would the credit union industry want to come out with a “we-need-a-bailout-too” message?

Here's a big question: What do you think the ABA will do if CUs get TARP money? How will the ABA react?

This situation is highly volatile, and could blow back on credit unions hard. It needs to be handled with the utmost care. Proceed with caution.

[Christopher]

I agree with you in many respects, Jeffry. Anything that smacks of bailout for CUs needs to be carefully weighed and handled. That's one of the things that I like about HARP. The benefit is passed straight on to the consumer, and in the process the CU adds their own skin to the game by further reducing the rate. In the end, I think HARP is a little more PR savvy than diving into TARP. Just my two cents.

[Mary Arnold]

@ Jeffry & Christopher: Great points, both. I tend to see HARP as more of a member bailout than a CU bailout, which makes it a different animal to me.

That said, I just saw disturbing news in a CU Journal special bulletin that NCUA now is asking Congress for "a TARP-like program, which creates a market for certain distressed assets..." and requesting help in "securing funds for NCUA to construct a TARP identical to the one created by Congress."

If this has me wondering more about credit unions' overall stability than I had previously, what will it do to consumer confidence? Jeffry, you might have been way too right when you said, this "could blow back on credit unions hard."

[Jeffry Pilcher]

Mary, the article you saw about NCUA asking for TARP bailout money for CUs with "toxic assets" was precisely what triggered the article I published Monday:

"Don't throw the TARP on credit unions"
http://thefinancialbrand.com/2008/11/17/dont-tarp-credit-unions/

Yesterday, I saw a CUNA piece on what NCUA was calling for a "shadow TARP."

http://www.cuna.org/newsnow/08/wash111408-2.html

"Shadow TARP?" What a horrible name. TARP is already associated with "bailout/rescue plan." Add "shadow" and it smacks of "sly and underhanded."

Today, NCUA drums up a new case for TARP money and renames it HARP. It's a shotgun, "whatever-argument-works" strategy.

These are just some of the examples of how poorly the CU industry's political leaders have handled the request for TARP money.

Why not try this approach: "All those banks you've given billions to aren't doing what they're supposed to with the money. They are doing two things. (1) They are sitting on it, and aren't lending it out. (2) They are using it to buy-up other banks. If you give money to us, the credit unions of America, and guarantee that we'll lend it out -- directly to American consumers on Main Street. That's what we do. That's all we do!"

[Jeffry Pilcher]

The paragraph above should read as follows.

Why not try this approach: "All those banks you've given billions to aren't doing what they're supposed to with the money. They are doing two things. (1) They are sitting on it, and aren't lending it out. (2) They are using it to buy-up other banks. If you give money to us, the credit unions of America, we guarantee that we'll lend it out -- directly to American consumers on Main Street. That's what we do. That's all we do!"

[Denise Wymore]

HARP, TARP.....it all smacks of nasty.

It's time to dip into our capital..... Isn't that what it's for? Surviving a rainy day? It's pouring in some credit unions......get out that credit union umbrella.

For years many credit unions have been accused of having TOO much capital - they weren't serving their members if they had too much cash. Now it's time for people helping people -- and those "people" are not American taxpayers -- they are members of the financial cooperatives.

[Christopher]

Jeffry and Denise: I'm going to push back on your thoughts on HARP a bit. I view HARP as a way for CUs to answer the call to help people stay in their houses. It's not a passive "gimme gimme" program; credit unions are investing in the program by further reducing the rate for troubled homeowners. It benefits the homeowner while keeping the credit union from having a fistload of foreclosures. Win/Win.

TARP is different. If I understand correctly, the CU TARP would buy the troubled assets from the credit union. All kinds of problems arise from that, including a PR nightmare.

But even if CUs succeed in getting HARP and pass by TARP, they'd better be on the offensive with a strong communications plan that will lay out what they are doing and why they are doing it. Hiring a powerhouse PR firm would be in their best interests. Can't be lazy about it or the banks will have a hayday with CUs.

[Jeffry Pilcher]

I still want someone to outline how big this problem is before I address any specific plan.

• How many credit unions are in a tough spot?
• How many home loans are we talking about here?
• How many millions/billions of foreclosure losses are we talking about?

Someone has yet to provide proof -- data -- that says the vast majority of credit unions need some sort of relief. Ill-defined problems lead to ill-advised solutions.

[Jeffry Pilcher]

More contradictions in this story here:
http://www.cuna.org/newsnow/08/system112008-8.html

From the article: "Credit unions have the cash necessary to modify home loans, because they have made very few subprime loans to risky borrowers, Bill Hampel, chief economist for the Credit Union National Association, told Dow Jones."

So which is it? Do credit unions have money? Or do they need money?

The article also notes that there are credit unions already making their own adjustments to distressed mortgages -- without any help from Uncle Sam.

The arguments and rationale for "bailout relief" are inconsistent at best, but more likely spurious.

[Mary Arnold]

Agree, Jeffry. Things are just getting curiouser and curiouser, to steal a line from Alice in Wonderland, although it may be the regionalized effect of the problems--so far--that make NCUA's actions seem so contradictory.

[Jeffry Pilcher]

Translation: Florida and California. Maybe Nevada too.