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Shared Appreciation Mortgage: Help or Hindrance?

Posted by Lisa Hochgraf

In late May, NCUA issued a legal opinion letter stating that credit unions are permitted to offer shared appreciation loan modifications for members struggling to make their mortgage payments so long as these modifications are conducted in a safe and sound manner.

A shared appreciation mortgage is a home loan offered with a very low interest rate, or that forgives some principal, in exchange for a share in the home's profit at its sale. In other words, with a shared appreciation mortgage, homeowners are offered the chance to write down a portion of their mortgage debt but, at the same time, they are required to share future appreciation gains with those who helped them out.

In the current economy, anything that helps CUs help struggling members is probably worth a good look. (Read "Responsible Debt Relief" from Credit Union Management magazine, which describes RIT Professor Robert Manning's take on why forgiving some debt may well be worth it.) On the other hand, shared appreciation mortgages are not without their drawbacks.

For example, as I read up on SAMs, I found it likely they could face the same problem faced by another kind of specialty mortgage--the reverse mortgage: a high potential for backlash.

Some people charge that the fees associated with reverse mortgages are too costly for borrowers--and that the children of seniors who take out a reverse will be disappointed when they find out that all the equity in their parents' home has been mined before they could inherit that stored wealth. (CUES members can download our reverse mortgage briefing here; non-members can download the briefing's executive summary. Also read Christian Mullins' Skybox post about reverses.)

In similar fashion, consumers could be disappointed when it actually comes time to give their shared appreciation mortgage lender a portion of the proceeds from their home sale.

But I don't consider myself a true lending expert. So I also checked in about SAMs with someone who is: CUES member Bill Vogeney, SVP/chief lending officer at $2.8 billion Ent, Colorado Springs. (Read my recent post about Vogeney.) Here are his thoughts on the matter:

"We're not in one of the ground zero states, so shared appreciation mortgages are not on our front burner as they might be for one of the credit unions in Florida, California, Arizona or Nevada.

"Still, I'd be concerned about what kind of incentive the borrower would have to keep their house in tip-top condition. Would they invest $7,500 in a new roof in three years? Would they change the carpeting if they knew the credit union would get half the increase in the value of their home by doing so?

"Better yet, does this seem like a good idea, but one that few consumers would agree to? Foreclosures today are happening to people:

    "1. Who lost their job. A SAM might not allow them to stay in the house anyway, if they have no income.

    "2. Who bought way too much home to begin with, hoping to flip it. When they can't afford the mortgage even being fully employed, and the allure of the big profit goes away, will they be willing to stay in the home for the long haul?

    "3. Who are only looking at today's value, that they're upside down. It's always happened with auto loans: People wake up one day, try to trade, and find out they're $5,000 upside down. They make a very short-sighted decision. Not sure that the short-sighted thinkers will look to shared appreciation as a solution.

    "I could be way wrong," Vogeney concludes. "It could be the solution for many credit unions. It probably is worth considering for those credit unions in the worst-hit areas."

What's your take on shared appreciation mortgages? Help or hindrance?

Lisa Hochgraf is board/operations editor for CUES' Credit Union Management magazine and edits the CUES Tech Port e-newsletter, News to Go.
 

What’s Age Got to do With It?

By Ginny Brady

Are under-30-year-old credit union leaders discouraged from sharing their ideas with the boomers who predominate in credit unions today? Periodically, this is a question that's discussed in the blogosphere. Earlier this month my friend Tim McAlpine wrote a post for CUES Skybox that touched on this issue. He described the frustration experienced by "next gen" credit union leaders who bring new ideas to "the old-people-at-my-credit-union" only to be met with skepticism and lack of interest.

I have learned many valuable lessons from wonderful young credit union professionals and advocates like Tim. Willingness to dream, to take risks and to be innovative are qualities that invigorate the credit union movement. There are some opportunities to reshape and influence the structure of credit unions that place all of us, young/old, volunteer/professional, senior management/first-line staff, on equal footing. If all of us do not take our rightful place in speaking our minds and sharing our insights, then shame on us.

Last week, for example, the Adirondack Chapter of the Credit Union Association of New York sponsored a panel to update members on

NCUA's Corporate Stabilization Plan and the current financial status of Members United Corporate Federal Credit Union. NCUA Associate Regional Director of Operations Anthony LaCreta; Members United Corporate FCU EVP/Member Relationships Kevin Brauer, and Credit Union Association of NY Director of Compliance Mike Carter answered challenging questions on the current financial position of Members United. They discussed the value of services being provided by the CUANY and the culpability of NCUA for the current crisis.

Each speaker reminded the group that NCUA is currently developing a plan to reorganize the corporate system. The general consensus of attendees was that corporates provide an invaluable service to small credit unions and their members. In many instances corporate membership gives us access to the technological infrastructure necessary to offer competitive services to our members under the credit union banner.

Many in the group, however, questioned the need for 27 corporates and wanted safeguards put in place to avoid future financial crises. Mr. Carter pointed out that NCUA is in the process of formulating a plan to address these issues and had earlier asked for suggestions and responses to its Advanced Notice of Proposed Rulemaking by those interested in credit unions. He reminded us that NCUA, along with organizations like CUNA, NAFCU and CUES, had publicized the ANPR and repeatedly asked for comments from credit union professionals, volunteers and advocates. Approximately 450 organizations and individuals wrote letters or e-mails to NCUA. This was a small percentage of the thousands of possible respondents.

The ANPR provided an opportunity for an important voice in shaping the future of credit unions. All input was encouraged and not restricted by age or status. Sharing ideas and suggested innovations with a single credit union leader or CEO is one thing, but here was an opportunity to have one's voice heard by those who develop policy affecting all credit unions in the United States.

Some respondents decided to add their voices together and speak as a group while others preferred to write individual suggestions. Group input came from state and national associations, corporates and individual credit unions.

One question that I have is whether young credit union professionals used this opportunity to present their ideas. I may be wrong but I do not recall any letters or e-mails that specifically represented the Gen Y perspective. What a powerful message might have been sent to NCUA had respondents identified themselves as speaking from a young professional or volunteer perspective! It is important for our future credit union leaders to be heard, recognized and encouraged. Those same innovators who represent the movement of the future need to look for every opportunity to influence and challenge, including something as establishment-focused as the ANPR.       

NCUA will again be providing us with an opportunity to speak up and give our feedback later this year. Those of us who want to influence the future of credit unions should take advantage of our equal voice and be front and center with our opinions and ideas.

Ginny Brady has been a credit union member for over 15 years and has served as a member of the Ufirst Federal Credit Union Board of Directors since 1997. She has held the position of board president and is currently board vice president at the $15 million CU. A CUES Director member, Ginny was awarded the 2008 Volunteer of the Year Award by the Credit Union Association of New York. She has also completed the CUNA Volunteer Leadership Program and received the Blue Diamond Certificate. She has also developed a board of directors blog, The Boardcast.

Read two other posts by Ginny: "A Model for Credit Union Board Renewal" and "Is it Time to pay Credit Union Directors?"
 

Is it Time to pay Credit Union Directors?

By Ginny Brady

The Advanced Notice of Proposed Rulemaking circulated by NCUA early this year sought to gather opinions from interested parties regarding the present structure of corporate credit unions. Specifically, NCUA was looking for ideas to help redesign the corporate system with an emphasis on transparency, fairness, safety, accountability and service to natural person credit unions. Toward the end of the document NCUA solicited views on corporate governance. They observed that, "The sophistication and far-reaching impact of corporate activities requires a governing board with appropriate knowledge and expertise." NCUA followed this observation by positing a series of questions regarding changes in board recruitment and training that might be required to encourage a high level of board excellence. One area of exploration that resulted in numerous responses was, "Comment is also sought on whether corporate directors should be compensated..." Of course this statement and other ANPR questions were designed to address the corporate credit union structure and practice, but as Gary Irvin of FORUM Credit Union observed, if we are considering compensating corporate board members then compensation for all credit unions board members should be examined. Is it time to pay natural person credit union board members?

Traditionally, credit unions in the United States have had volunteer boards, supervisory and credit committees. The Federal Credit Union Act states in provision 1761a paragraph 112 that, "Only one board officer may be compensated as an officer of the board and the bylaws shall specify such position as well as the specific duties of each of the board officers." Alphonse Desjardins, in describing the foundations of the Caisse Populaire (Cooperative People's Bank) in 1914, stipulated that, "The services of officers of the cooperative people's bank save those of the manager are gratuitous." The practice of volunteer board members has changed in Canada. A May 2005 presentation by Linda Archer, VP/human resources and marketing for Credit Union Central in Canada, gave an overview of compensation paid to directors according to asset size in British Columbia, Alberta, Saskatchewan and Manitoba. One of my favorite Canadian credit unions (and the largest in Canada), Vancity, includes board remuneration as part of its board governance policy. A resolution brought before the membership of the $14 billion credit union in April 2009 proposed board honorariums of from over $56,000 per year for the board chair to over $25,000 per year for board members without committee chair assignments. Although Canadian and American credit unions share the same founding principles, Canadian credit unions are regulated as for-profit financial institutions.

Tradition and practice seem to differ as they relate to board remuneration. Those who argue for paying boards an honorarium for service state that the time devoted to credit union responsibilities warrants pay. They say attracting qualified board members who are willing to devote themselves to responsible oversight requires monetary compensation. A sample of the responses to NCUA’s Advanced Notice of Proposed Rulemaking indicates that many U.S. credit union volunteers and professionals disagree. Out of the 22 responses I read, approximately half expressed views on board compensation and 9 supported continuing the volunteer board system. Those who were in favor of financial compensation for boards reasoned that it would improve the quality of boards. Among respondents who opposed the idea, Roshara Holub of the Missouri Credit Union Association stated, “Paying board members would not guarantee quality and could pose the risk of self-interest and corruption." Some of those making comments, like David Savoie of Louisiana Corporate Credit Union, cited credit union tradition observing that, "Voluntary Service has long been a part of the credit union difference."

My view on board compensation leans toward the traditional. The recent past has shown that paying boards of directors does not necessarily improve corporate oversight. Boards of Fannie Mae, Freddie Mac and AIG have been accused of a lack of due diligence in spite of compensation. Examples from the for-profit world whose boards have shown lapses in competence is not my only reason for favoring a volunteer board system. I agree with those who have observed that the credit union difference has some key identifiers. A board that serves the membership without the expectation of traditional remuneration seems to me to be at the heart of any nonprofit system. As a nonprofit, credit unions place members' financial wellbeing at the center of their mission. Directors exemplify this primary principle by not accepting additional reimbursement for the products, services or investments made by credit unions for members.

Credit unions are bound to change in structure and practice during the years to come. This process of updating and revitalization is necessary for the health of the entire credit union system. Please share your thoughts on whether you think boards should retain their volunteer status or if members should be allowed to consider financial compensation for their boards.

Ginny Brady has been a credit union member for over 15 years and serves as a member of the Ufirst Federal Credit Union Board of Directors. She has held the position of board president and is currently the vice president of the board. Ginny was awarded the 2008 Volunteer of the Year Award by the Credit Union Association of New York. She has also completed the CUNA Volunteer Leadership Program and received the Blue Diamond Certificate. She has developed a board of directors blog, The Boardcast.

 

NCUA Fields Questions on US Central/WesCorp

By Ron Jooss

The National Credit Union Administration was hit with 500 questions from concerned credit union leaders during yesterday's Webcast explaining its decision to put US Central Credit Union and Western Corporate Credit Union into conservatorship last Friday. About all it could offer in return was more bad news.

NCUA Executive Director David Marquis said US Central and WesCorp were placed into conservatorship to reduce the credit union system's exposure in the face of estimated loss projections, to maintain greater control over the corporates and improve the transparency of financial information provided from the two institutions.

"It's very vital that we maintain confidence of member CUs and especially the payment system," Marquis said.

The CEOs, boards and some senior executives of the corporate credit unions have been removed, with NCUA-appointed officers assigned in their place.

In what he said was "a hurtful point," Marquis said projected credit losses have entirely wiped out paid in capital and member capital share accounts at WesCorp under the NCUA's base, pessimistic and optimistic test case scenarios."

At US Central the best case scenario reveals that 77 percent of paid in capital and membership share accounts have been impaired. In addition, all of the NCUA's $1 billion emergency infusion is gone.

Marquis said natural person credit union shares—but not capital—are insured up to $250,000, with any additional amount guaranteed under NCUA's Voluntary Temporary Corporate Credit Union Share Program and backed "by the full faith of the U.S. Government."

Marquis said the NCUA is holding a closed board meeting on Thursday, March 26, in an effort to hammer out a way for credit unions to spread the cost of the impairment. But any fix will take legislative approval.    

When asked why the corporate credit unions weren't allowed to fail Examination and Insurance Director Melinda Love said, "One of the reasons we took the conservatorship action was to ensure that the payment system and settlement processes continued uninterrupted. Had we gone ahead and just let the two corporates fail, that would have created an interruption in the payments system that would have come back and been felt by all of the members of all your natural person credit unions."

Marquis added that allowing the institutions to fail would also have meant putting their distressed securities on the market, rather than letting them continue paying down over time.

"We can't emphasize enough that it's vital to maintain liquidity in the system," he continued. "Since Jan. 28 credit unions have done a very good job in helping in that arena as they've taken a great deal of external borrowings off the table."

Yesterday, the NCUA released a statement that due to the success of the three Credit Union System Investment Program offerings there will not be an April CU SIP offering. Over $8.2 billion was issued in the first three subscriptions. Corporate credit unions used the funds to pay down external borrowings, freeing collateral for future contingency liquidity needs. 

Although the NCUA has said its examiners will be flexible with credit unions that approach Prompt Corrective Action status because of the expected reductions in return on assets and net worth, Marquis did not provide details. (See "Corporate Stabilization: The Longer View" for a previous NCUA explanation of PCA implications.)

"Our examiners have been told and we've worked with them more than once on taking these items into consideration," Marquis said. "That doesn't mean it's a complete free pass. We do have to look at the safety and soundness of the institution as it runs its own business and how its business model is working in this environment." (See also NCUA's Supervisory Letter No. 09-01.)

More bad news on the corporate credit union front is still to come. Marquis said US Central's absorption of paid in capital and membership capital shares will roll down to other corporate credit unions with capital investments in US Central and, depending on how hard this hits their balance sheets, will affect natural-person credit unions that invest in those corporates. Members of WesCorp will lose all their PIC and MCS.

Ron Jooss is a CUES editor.

After this Webcast, CUES held a teleconference on communicating industry issues like this with your staff and the media.

 

NCUA: Tell Us Where You Stand

By Ron Jooss

 

Credit unions should let the NCUA and their trade associations know if they are in favor of their industry accessing TARP funds to stabilize the corporate credit union system or rely on internal funding to ease the burden, NCUA Executive Director Dave Marquis said during a Webcast hosted by the regulator yesterday.

 

When one participant suggested that credit unions stand together and absorb the loss to distinguish themselves within the financial industry during a turbulent time, Marquis responded:

 

“We need to understand, and the trades need to understand, what the divide is on, because we don’t fully understand that. To the extent that you can send in your pros and cons on if we want the taxpayers to pay for it over time or do we want the credit unions to step up and take the hit to show we are a different type entity than the rest of financial institutions. We don’t know how that divides in the credit union community and that’s probably something we need to get a better handle on. Send in your e-mails to us or send them in to your trade association so we can get a better feel for what the community has a preference for out there.”

 

NCUA Insurance Director John Kutchey said the NCUA does not favor one solution over the other. “Where the industry wants to go, as the regulator, we’re behind it. But you as an industry, you’ve got two ways of solving this. If you solve it internally, the con of that is the charge-up funds that you've got to deal with, and there’s going to be a hit to your bottom line and there’s going to be a hit to your net worth.

 

"The pros of that is the political capital that the industry could gain in relation to future taxation, in relation to maintaining an independent regulatory and insurance structure and having the influence over that system in future legislation as it relates to your institution. The flip-side of that is TARP funds or Treasury injection. The pro of that is being able to spread the cost over time or forgoing the cost altogether. The negative of it is credit unions become, as I understand it, much more susceptible to taxation.”

 

Another issue under consideration is if the system should take a one-time hit or spread the charges over four to five years years. Pursuing the latter option would require legislative and Treasury approval.

 

“There has not been a consensus on how to approach some of these things but one of the core questions that comes up is if the industry wants to take this loss in one year or do you want to stretch it over several years so that you’ll be taking a 12 to 15 point hit over four to five years to pay for this or would you rather deal with a 60 basis point approach in year one,” explained Kutchey.

 

He likened the first strategy to removing a Band-Aid gradually, and the second approach to ripping it off quickly.

 

“That’s something you’re going to decide as an industry and you’re going to need to work through the legislative process to decide what the majority of the industry wants,” Kutchey said. “I encourage you to talk to your trades and your organizations so your voice is heard about whatever direction you want to go.”

 

What is the likelihood that more capital will be required from natural-person credit unions?

 

The short answer is that the NCUA doesn’t now, but “the market is not in our favor right now,” said NCUA Loss/Risk Analysis Officer Steve Farrar.

 

NCUA representatives said the regulator considered alternatives such as liquidating or purchasing the undervalued corporate credit union investments.

 

In regard to purchasing the undervalued assets, WHO? said, “The share insurance fund has “$7.5 billion in assets to draw from and the total investment portfolio of the corporate system is $80 billion, so there’s no way the insurance fund could fund a purchase of those investments. Secondly, the purchase of those assets does nothing to reduce the liability and exposure to natural-person credit unions because if the NCUSIF actually took those in they would have to bring them in at market value, so that market value basically becomes a realized loss and that downstream effect would be higher than the uninsured share guarantee and capital notes that we already used.”

 

The undervalued portfolios also created a problem for liquidating the problem institutions. Marquis said even if the undervalued assets were sold at 50 cents on the dollar, the NCUSIF would take a $30 million to $35 million dollar hit, which would downstream to natural-person credit unions.

 

"Think in terms of what does that does to you in terms of retraction to your lending ability,” Marquis said. “We don't want to economically create the effect of not making any loans in the community right now. If that retraction took place it really does some serious damage to your ability to make loans in the years to come.”

 

Kutchey added: “The approach we took we feel very strongly that it is the least-cost alternative to the credit union system. It was not an easy decision to make. This alternative gave us two things: the least cost to credit unions and the most flexibility for resolving this on a go-forward basis."

 

Ron Jooss is a CUES editor. 

Corporate Stabilization: The Longer View

By Mary Arnold

Yesterday Ron Jooss and I reported on the CUNA audioconference and the NAFCU Webcast held concurrently on Feb. 4. Now, highlights from yesterday's CUES Webinar, "NCUA's Corporate Stabilization Program: What Will it Mean to Your CU?" featuring Callahans' Chip Filson and Jay Johnson and John Kutchey, acting director of NCUA's Office of Examination & Insurance:

While all three programs have featured extensive Q&A between participants and NCUA representatives, the CUES Webinar also sought to put the situation into a going-forward context. According to Filson, this time of corporate stabilization is actually the first steps of establishing what credit unions will be like in the 21st century. He suggested looking at how the CU system can benefit from the issues that are coming to light and avoid "letting the problem claim us."

For example, the Central Liquidity Facility doesn't currently have authority to lend directly to corporates, hence the need for the System Investment Program, or SIP, which lends money to natural-person CUs so they can loan it to the corporates. Now is the time to get authority to use the fund to meet existing needs, Filson suggested.

Additionally, NCUA has said it is instructing examiners to look at CU financial results net of the insurance assessments necessary for corporate stabilization. Kutchey confirmed this in the Webinar, saying, "We would discount these actions in their CAMEL rating. I want to make this crystal clear to the universe."

However, if a CU fell below minimum reserve requirements, it would still need to file a capital restoration plan. Kutchey explained during the CUES Webinar that this is a statutory requirement under Prompt Corrective Action. NCUA must have the plan. But, he added, the agency has the discretion to evaluate it in light of the assessment.

Filson saw this as an opportunity to ask Congress to modify PCA.

Sharing a range of comments posted on the CUES Net listserve since NCUA first announced its corporate stabilization plan on Jan. 28, Filson illustrated how executives' responses quickly moved from shock and outrage, to denial and finger pointing, to a "how-can-we-work-together-to-survive-this-challenge" stance. It's the same repsonse you typically see as humans deal with any great change, including the death of a loved one.

"The challenge now," Filson continued, "is to convert this energy into positive opportunity. Credit union leaders across the board are eager to do more."

Kutchey opened his portion of the program by saying, "I know the impact on each credit union is substantial and significant. The industry is going to get a chance to not just tell its story as it has in the past, but to live a story." He said CUs' ability to right their own system would provide immeasurable "clout on Capital Hill."

He came back to this point later in the Webinar, as he addressed a participant question on whether CU members are being "double-whacked" by first paying for TARP through their tax dollars and then paying to stabilize corporates via their own CU's financial results.

Kutchey paused, then answered that "yes," he believed they are. "But you have to decide how you want to invest your political capital," he said, whether it should go into CU earnings and ROA or fixing this problem. "If we fix it ourselves, we gain political capital going forward--to articulate the strongest possible argument against taxation" and against having CUs fall under a single regulator.

Regarding the temporary guarantee on all corporate deposits, Kutchey confirmed that it would end on Feb. 29 for any corporates not signing a supervisory agreement with NCUA. "We are actively working with every corporate," he said. "The largest corporates that hold the bulk of the troubled securities are the priority, the corporates that are under the most stress.

"I couldn't imagine a corporate not participating," he said, suggesting that corporates' member CUs would urge them to do so to maintain the guarantee. Kutchey added that the $3.7 billion NCUA is reserving is based on all corporates participating.

Responding to another participant question, he noted that "as early as 2007, NCUA has had some supervisory agreements in place" concerning how certain corporates could invest their funds.

Kutchey also addressed a number of questions regarding the insurance fund assessments:

• By statute, the assessments will be based on $100,000 of member deposit insurance, not the temporary $250,000 level. It will be based on insured shares as of June 30, 2009. (To figure out how much your credit union would owe, go here.)

• He confirmed that the $1 billion capital infusion to U.S. Central will come back to the fund if it is not needed, explaining that the arrangement had been "structured with incentives" for U.S. Central to pay it back. Any dividends the $1 billion earns will also be returned to the fund. If the share insurance fund becomes over-capitalized, CUs will receive a dividend.

• Kutchey clarified that the $1 billion infusion will result in an immediate expense for credit unions, but that the premium assessment expected to be billed in September would be considered an asset. Read more on this in Accounting Bulletin 09-01. He added that national CU accounting practitioners are meeting this week with the American Institute of Certified Public Accountants about when the expense needs to be booked.

Regarding the $3.7 billion, Kutchey emphasized that it is "not an estimate of losses on U.S. Central's portfolio; that's just one factor. It's our best estimate of what we'd need if we had to perform on the (temporary) guarantee (on deposits)." He added that keeping liquidity in the corporates gives them "not only the intent but the ability of hold those (troubled) securities. Liquidity reduces the risk exponentially"--and thus reduces the risk of needing the guarantee.

To help NCUA get a better handle on potential real losses in U.S. Central's portfolio, the agency has engaged PIMCO to study each investment and its underlying mortgages and analyze the market for the investments. Results of the first, baseline, study are due in two to five weeks, Kutchey said.

What should credit unions do in the meantime? Filson suggested they should look for ways to improve their business, with helping homeowners at the top of the list. If you need help funding that, consider asking NCUA about the possibility of offering a second round of CU HARP (Credit Union Homeowners Affordability Relief Program), he said.

If your balance sheet will be severely hurt by the insurance assessment, be proactive about alerting NCUA.

Above all, "start thinking about the redesign of the corporate system (direct your comments to NCUA here.) Get involved in setting the legislative agenda ASAP."

And, finally, Filson said, "It's time to re-engage the corporates themselves in these conversations."

 

Thousands Dial in to Discuss Stabilization Plan

By Ron Jooss

3,000 people called in for CUNA's audio conference yesterday on NCUA's corporate stabilization plans. Here are some highlights:

CUNA President/CEO Dan Mica said CUNA's official position on the NCUA recent action was mixed. While the association agreed the regulator had to take action, CUNA is not convinced the proper mechanism has been prescribed.

"There are two parts with regard to our feelings about what's happened at NCUA. One, we have reviewed the information as to what NCUA has done and we feel they had no other course of action but to act. They had to do something, whether it was an injection of cash, whether it be conservatorship, they had to do something. Second, we do disagree at this point with the approach that they've taken and we are working as hard we can to find alternatives that are workable. NCUA has indicated to us as recently as today .... that any alternatives ... that are realistic responsible, and legal they will consider."

Owen Cole, director of the Office of Capital Markets and Planning at NCUA, said the proposed remedy by the NCUA was actually the least costly way to stabilize the credit union system. "By stabilizing the situation, even if we end up having to absorb the full $4.7 billion dollars in losses, that is significantly lower than the cost every CU would have borne, including the CUs that did not participate in the corporate system, through a premium expense based on the losses we would have realized if we had to liquidate these assets and subsequent assets of natural person credit unions that would have failed as a result at these fire-sale prices in this dysfunctional market," Cole said.

Bill Hampel, SVP/research/chief economist at CUNA noted that given the economic times credit unions already faced an uphill battle achieving profitability in 2009. "This is not the only bad thing happening to credit union financial statements this year," Hampel said. "Other bad things are going to. There are going to other negative pressures on credit unions this year."

Hampel did not mince word on the effect the NCUA proposal would have for natural personal credit unions--some 60 percent would finish in the red. "There is no sugar coating this. This would be horrible. I've been in this business 30 years. Never in my experience have over 60 percent of credit unions lost money in a year which is what would happen if these charges went through as they are."

Mary Dunn, CUNA SVP/deputy general counsel, outlined alternatives to be considered by the NCUA:

• injection of capital from natural person CUs through member capital accounts, paid-in capital accounts, subordinated notes and term deposits;
• greater use of the Central Liquidity Fund;
• natural person credit unions could purchase corporate CU assets (a group of natural person credit unions has expressed interest in this idea, according to Dunn); 
• expanding the System Investment Program;
• corporates could deposit capital to defray the deposit guarantee;
• explore extent to which NCUA can defer from GAAP rules for funding the premium and
• explore the Temporary Asset Relief Program.

As for pursuing TARP funds, Dunn said, "Even the critics of going to TARP are diminishing, as the need for assistance increases. So we are exploring all options and all opportunities to working with NCUA, Treasury and Congress."

Dunn said CUNA reps, including herself and Hampel, will be meeting with Vice President Joe Biden's economist, chief economist Jared Bernstein, next week and access to TARP funds is "tops on our list."

Regarding TARP funds, Mica said: In my conversation with Chairman Fryzel, they are now pursing aggressively TARP funds as backup funds for NCUSIF. Fryzel is requesting a meeting with Secretary of Treasury Geithner to discuss that this next week.

When asked if credit unions would concede lobbying power in legislation battles with bankers if they accepted TARP funds, Mica said: "Absolutely, we would love to see an internal solution, but I want to be realistic. Looking at the size and scope of the problem, it would be irresponsible not to have a back-up. We hope we never use it.  We don't want to use it. But it's a little like not having insurance."

Dunn said under the alternatives under consideration, natural-person credit unions would fund the first $1 billion if there were losses in the corporates. The next $5 billion would be sought from TARP. "Even though we are seeking funds from TARP, if would be in a much defined and circumscribed way," Dunn said.

NCUA Deputy Executive Director Larry Fazio was asked why the NCUA requires the 1.3 percent balance in the share insurance fund and why it can't be reduced. "The statute requires us to charge a premium when the equity ratio falls below 1.2 percent. We cannot charge a premium to increase the fund above 1.3 percent. That's the framework in which we currently operate.

"The board decided as part of its January action to replenish the fund all the way up to the 1.3 percent because of the continuing uncertainty regarding the economy and other potential losses in the corporate system as well as challenges being faced by natural person credit unions and potential further pending losses and also with the hope to provide a cushion that we would only have to charge the premium once."

Fazio was also asked, if the market turns around would the funds be returned to credit unions? "How we structured both the capital note and the guarantee program—the capital note has a $1 billion reserve implication for the fund, and the guarantee has a $3.7 billion guarantee implication for the fund—to the extent that we are repaid on all or any part of the $1 billion capital note given to U.S. Central and to the extent that we don't have to exercise on the guarantee for the uninsured deposits, that money would flow back to the share insurance fund and be returned to the credit unions."

Mica asked Fazio if $15 billion were to flow into the corporates, in term deposits for example, if that would mitigate "a great deal" the current problem. Fazio responded, "Yes, sir, that's correct.

Ron Jooss is a CUES editor. 

NCUA’s Marquis on Corporate Stabilization

By Mary Arnold

Why now and what does it mean to natural-person credit unions were two of the audience questions addressed yesterday by David Marquis, executive director of NCUA, during a free National Association of Federal Credit Unions archived Webcast.

Let's start with "why now?" which topped the list for the 1,200 Webcast participants.

Marquis explained that while NCUA had been tracking corporate liquidity on a daily basis for some time and had placed some restrictions on their investment actions, it became necessary to take immediate action when it learned U.S. Central would report other-than-temporary impairments of $1.2 billion on its year-end financials, turning unrealized investment losses into realized expenses and severely threatening its capital position.

"The biggest issue was the leverage on the corporate balance sheets and what happens in the credit markets if credit on U.S. Central's books gets called or there is a run on deposits," Marquis said. NCUA feared trouble would spread to natural-person credit unions, leaving thousands of CUs with problems.

"We needed to stabilize liquidity first. Then let (U.S. Central's troubled) assets pay out over time," added John Kutchey, acting director of NCUA's Office of Examination & Insurance. "This was the best scenario, industry wide."

When will the insurance assessment come? "When the fund drops below 1.2 percent, we have to restore it," Marquis explained. "Not like in 10 seconds," but within the established billing cycle of March and September.

He said the current plan is to bill for the infusion in September when the amount needed will be clearer. "We hope to only have to bill one time," he added, alluding to the possibility that the $3.7 billion loss reserve currently being estimated could fall short. There is also possibility Congress will approve a five-year time frame for replacing National Credit Union Share Insurance Funds, providing a reprieve for CU financials.

To help NCUA get a better handle on potential real losses in U.S. Central's portfolio, the agency has engaged PIMCO to study each investment and its underlying mortgages. "The real credit loss could be just a fraction of the OTTI loss" that U.S. Central is facing—or it could be greater.

Asked why NCUA can't access TARP funds, Kutchey noted that if TARP were provided as a loan, it would help the liquidity situation, but not the capital side. "Be careful what you wish for," he added. If TARP funds were used to buy up troubled assets, "What price would the assets be sold at? It could cost more than the program on the table."

Besides the $1 billion of capital infused into U.S. Central from the NCUSIF, NCUA temporarily is guaranteeing all corporate deposits, even those over $250,000, to help keep credit union investments in the corporates. Marquis said previous attempts to speak directly with larger credit unions about maintaining their corporate deposits had had the opposite effect of money being pulled out.

Marquis also said that NCUA "can reduce the $3.7 billion in a shorter term if corporate balance sheet structures improve," and that increasing corporate liquidity is one way to do so. If credit unions end up over-paying to the insurance fund, Marquis said, "a dividend payout could potentially be in the future."

The System Investment Program funds credit unions are purchasing from the Central Liquidity Fund and, in turn, placing into corporates at a 25 basis point, fully guaranteed spread greatly improve corporate liquidity because it is new money flowing in, Marquis said. He noted that SIP funds "inflate credit union balance sheets as short-term borrowing transactions and added that NCUA is "providing direction to examiners to take this into account, so SIP credit unions won't be penalized."

Following up on this point, Marquis said this information would be in a supervisory letter to NCUA examiners that would also be shared with state examiners and made public to credit unions.

He also emphasized that examiners are being instructed to look at credit unions' financial results net of the impending insurance assessment. "Our examiners get it," he said. "We don't want credit unions to make critical mistakes (or take on undue risk) to manage this issue.

"Examiners should look at the credit union separately from this industry event; your business models should show that you are adjusting to your own situation and that your balance sheet can stand future interest rate increases."

Still, those CUs that fall under minimum reserve requirements will be required to file capital restoration plans, Marquis said.

$8 billion of SIP has been purchased in two rounds so far. When asked where the $8 billion has gone, Marquis replied that the majority went to U.S. Central, explaining that infusing the "top tier (of the CU system) feeds the rest of the system."

To continue the unlimited deposit guarantee after Feb. 28, 2009, corporates will need to enter into what Marquis called supervisory agreements with NCUA, similar to the "letters of understanding " troubled natural-person CUs are familiar with. "This process will start at the end of the week," he noted.

NCUA is also looking at different regulations for the corporates but, instead of drafting something for comment, Marquis explained that NCUA issued an Advance Notice of Proposed Rulemaking with 60 days for CUs to provide feedback on the role of corporate credit unions and whether to amend corporate regulations pertaining to capital; permissible investments; management of credit risk and liquidity; and corporate governance. Comment here.

According to Marquis, the NCUA Board is also willing to listen to alternative solutions for corporate stabilitization. "They are open to solutions that are legal and represent the industry," he said.

Mary Arnold is VP/publications for CUES.

CU Corporates: The Way Forward

By Henry Wirz

SAFE Credit Union faces a $7 million expense (maybe more) for the U.S. Central bailout. That expense will wipe out any net income for 2009 and most likely cause us to report a loss. SAFE has advocated restructuring the corporate system for a long time. We use Wescorp to invest most of our liquidity and we depend on WesCorp for share draft processing and as our banker's bank. We believe it is time to restructure the corporate system.

We believe any restructure of the credit union system should have the following elements:

• The corporate system is a three-tier system. Members deposit their money in a natural person credit union that invests some of those dollars in a corporate like WesCorp which in turn invests some of its dollars in U.S. Central. There are 28 corporate credit unions. Many of those corporate credit unionss pass through most of their assets to U.S. Central. Each level of the corporate system maintains capital and takes a cut of the spread on the assets they manage. In my opinion we have one too many levels and too much capital and too much overhead. We don't need three levels. Many of the corporate credit unions should be consolidated. It would create more efficiency and better returns to the natural person credit unions. Some of the corporate credit unions have fewer assets than the natural person credit unions! Ironically NCUA has been a key impediment to consolidation of the credit union system by rejecting mergers of corporate credit unions (Volunteer Corporate Credit Union and SunCorp Corporate Credit Union).

• U.S. Central's board of directors is not directly accountable to the rest of the credit union system. We need to change that. The members of the board are elected by corporate credit unions or by ACCUL. I feel that our bailout of U.S. Central should give natural person credit unions the right to elect the board of U.S. Central.

• I would favor a corporate system that mirrors the Federal Home Loan Bank System. The corporate system should be consolidated into five or six regional corporate credit unions that have the ability to raise funds thorough bonds that have the full faith and credit of the U.S. Government. The Federal Home Loan Bank System provides liquidity to support home ownership. We should create a Federal Consumer Loan Association that provides liquidity for consumers. Consumer spending represents 70 percent of GDP. What could be more important than supporting consumers?

• The problem in the credit union system is that there is no tangible ownership. We have to change that. We have to give members ownership interest in their credit union and we have to give credit unions tangible ownership interest in their corporate credit unions. Owners pay attention to financial results and hold management and boards accountable. We have little or no accountability for what corporate boards are doing. The reason for that is that we have no tangible ownership equity in our corporate credit unions. We need to change that. We should get a dividend for our ownership interest and we should have a direct vote for all board members. We should not see board members run unopposed. There should be dividends paid based on the net income of the corporate. That would create a laser-like focus on the quality of management.

• There must be consequences for poor performance. Who is accountable for $1 billion of losses at U.S. Central? Is this just business as usual? I suggest that when a baseball team loses more than they win, we get a new manager. I expect the same results in the credit union system.

Henry Wirz, a CUES member, is president/CEO of $1.3 billion SAFE Credit Union, North Highlands, Calif.

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CUES members, tune in for a free Webinar, "NCUA's Corporate Stabilization Program: What Will it Mean to Your CU?" Feb. 5 at 1-2 p.m. Central.

My Hope for 2009

By Gary Easterling, CCE

In an earlier post, "Main Street in Crisis–The Credit Union Difference," I shared an action plan for capitalizing on our difference from other financial institutions and coming together to help members and the economy out of this recession, while at the same time building market share and gaining expanded powers from our regulators. As we begin this new year, I see even greater urgency for CU leaders to take action, to build on—maybe even preserve—our credit union difference.

What is the CU difference? It is our ownership structure that drives credit union profits back to the consumers they serve.

It is our governance structure of unpaid volunteers who focus on the long-term benefits of the credit union cooperative rather than near-term return for the board and shareholders. It is our focus on Main Street need rather than Wall Street greed.

What is our response for 2009? Our voice must be consistent if we are to preserve the credit union value option. Our message must be focused as we address increased regulatory burden from NCUA and Congressional action. Our vision must be clear as we honestly address the challenges in financial services and within the credit union movement.

Our voice should shout out, "Let every citizen have the option of credit union value. The credit union value proposition can help stimulate our economy." Seeking increased latitude in field of membership is a means to bring credit union value to more people.

Our message should declare, "Legislative and regulatory responses must focus on those who were motivated by greed." Regulation is most needed where profit-motive exists. To borrow a phrase from Bob Barbera, chief economist for ITG, "The invisible hand of capitalism is not infallible." The asset bubble that burst was inflated with profit-motivated greed without an eye toward risk, safety and soundness.

Increased regulation for those who want to play dangerously is appropriate; but throwing another web of regulatory compliance across the entire industry is counter-productive. We need to assist our policy makers in surgical precision rather than mass prescription as they search for solutions.

Our vision should acknowledge, "We have collateral damage in our industry and we will have casualties." We must avoid the temptation to weaken the strong in an attempt to strengthen the weak. Every economic downturn creates casualties.

From my vantage point, most struggling credit unions are victims of asset devaluation. Many are looking to partner with stronger credit unions to preserve the franchise; however current rules and regulations create barriers to voluntary partnerships, unless the struggling franchise is in imminent danger of failure. Our industry needs to promote mergers and consolidation to allow franchises with synergies to come together to preserve the franchise value for the members.

What is my hope for 2009?

I hope our industry can respond to its specific needs without following the for-profit solution set. Preserving the number of credit unions is not a victory, if the credit unions being preserved are on taxpayer life support. Seeking bailout money places the tax-exempt argument at risk, blurs the line of distinction between the for-profit and not-for-profit sector, and accelerates Treasury's "Blueprint for a Modernized Financial Regulatory Structure," which calls for one financial institution regulator and insurance fund.

The New Year will bring change. Our leadership will determine what kind of industry, if any, the credit union movement will be in 2010. Our focus must be on the value proposition to the members we serve, even if it means the franchise changes. If we lose our focus on the member-owner, there is no credit union difference to preserve.

Gary Easterling, CCE, a CUES member, is president/CEO of $845 million United Federal Credit Union, St. Joseph, Mich.

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