Tuesday, August 12, 2008

Mortgage Losses Now Hitting Credit Unions

Credit Unions are among the most conservatively run financial institutions in the country. They're not-for-profit and member owned, taking members' money and loaning it to others (if you think this sounds like George's business in It's a Wonderful Life, you're right, it's similar).

The mortgage problems are focused on "corporate credit unions," which are vital entities in the industry. Instead of dealing with consumers, they provide investment services and financing to regular credit unions, which do. Regular credit unions park a portion of their funds with one or more of the corporates, which in turn invest the money. Five of the largest corporate credit unions are in trouble.

Negative Equity: The paper losses of the five big corporate credit unions are large enough to wipe out the net worth of each of them. Added together, their negative equity totals $2.9 billion -- meaning, in theory, that their debts exceed the current market value of their assets by that amount.

The federal regulator overseeing credit unions says the losses are likely to be reversed when mortgage markets stabilize. But when might that be? Outside observers are afraid that there could be "bank runs" and failures.

This is a careful WSJ story that puts into perspective the gravity of the mortgage situation at all levels, just as Standard & Poor's Rating Service is downgrading certain securities at Mortgage Losers Fannie & Freddie, which may make it harder for them to raise capital.

Read it all at WSJ.


mahalia said...

i read the article. thanks for the link. it's bad news.

i'm not the kind, usually, who panics, but this is really disturbing. i use the UVa credit union. i thought it was safer than any bank. but is it?

(i'm hoping another commenter is going to offer insight into this particular credit union)

Montpellier said...

I think any bank that is FDIC insured is "safe" - I too am a UVACU member, and I'm not worried (of course, I don't have >$100k in the CU!).

Because Credit Unions are not commercial banks, they are regulated by a different government agency - the NCUA - and they have a different insurance pool/system, which is basically analogous to the FDIC: the NCUSIF (National Credit Union Self Insurance Fund). The FDIC gets it's money (insurance premiums) from commercial banks; the NCUSIF gets them from the CUs.

You can find out more here.