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Credit Unions Seeking Bailout Might Back Down on Cramdown « The Washington Independent

Foreclosure-new-house.jpg
Foreclosure-new-house.jpg

It’s crunch time these days for the credit union industry, which needs emergency help from Congress and may have to swallow some of its beliefs to get it.

The once-stable credit union system faces both an expensive rescue of two failed corporate credit unions that invested in toxic mortgage securities and economic pressures from members who lost their jobs and can’t pay their loans. As TWI reported recently, more credit unions could fail, and the system’s problems show the widespread reach of the financial crisis.

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Debt.jpg

Illustration by: Matt Mahurin

As a result, credit unions this week are pressing Congress for access to emergency funds to shore up their system. And they’re trying at the same time to figure out whether they’ll have to end up supporting a mortgage cramdown bill they initially opposed, in order to get the money. House lawmakers attached the credit union rescue package to the cramdown legislation, which changes federal law to allow judges to modify mortgages. Senate negotiators are now working on a final bill, which credit unions hope will include more than $6 billion in borrowing authority from the U.S. Treasury to replenish their insurance fund and up to $40 billion in additional emergency borrowing approval, said Marvin Umholtz, a financial consultant and former lobbyist for credit unions. The industry wants the $40 billion on hand in case the crisis worsens. Credit unions also are seeking more time to pay back their insurance fund.

If the final package includes both the cramdown legislation and the borrowing authority, credit unions would have to decide which is more important – opposing cramdowns or getting their money. And the showdown may come just as credit unions face increasing urgent financial pressures. The system experienced a disastrous first quarter, with some credit unions incurring large losses due to hefty assessments to rebuild the insurance fund. And the weak economy is only making things worse, said Gerald Hanweck, a finance professor at George Mason University who follows the credit union industry.

“It’s not a mark to market problem, and it’s not an accounting problem,” Hanweck said. “It’s having more people out of work, being unable to pay back their mortgages, their auto loans, and their unsecured personal loans.”

The Credit Union Journal reported Monday that two of the largest credit unions were hit particularly hard. The Navy FCU reported a $166.9 million loss for the first quarter, the biggest ever in credit union history, blamed mostly on bailout charges. And the Pentagon FCU saw almost all of its $28.7 million net for the first quarter erased by a $27.7 million charge for the corporate bailout, the Credit Union Journal reported.

Credit union regulators last month seized two of the nation’s largest credit unions, U.S. Central Credit Union in Lenexa, Kansas, and Western Corp. Federal Credit Union in San Dimas, Calif. The two, with combined assets of $57 billion, are in trouble over their investments in toxic mortgage backed securities, including Pay Option Arms and other risky loans. The corporate credit unions handle investments and provide other services to the retail credit unions.

The credit union regulator, the National Credit Union Administration, estimates that it could cost as much as $5.9 billion to stabilize the corporate credit union system by rebuilding the fund, or more than the industry’s entire profit for last year. Unless the credit unions can borrow money from the Treasury to cover that shortfall, the cost could trickle down to customers, in the form of higher fees for loans and other services. The regulator also said total losses to the credit union system due to toxic securities could reach as high as $16 billion.

While stabilizing the system is crucial to credit unions, they also have long opposed mortgage cramdown legislation, saying their smaller system in particular will face higher losses that eventually will felt by customers. The legislation would allow judges in some bankruptcy cases to reduce a borrower’s loan principal and interest rate.

“Both of these issues are top issues for us,” said Brad Thaler, director of legislative affairs for the National Association of Federal Credit Unions.

Thaler said his organization is waiting for a final package before deciding on it. His group has been open to supporting a mortgage cramdown compromise that would limit loans that can be modified to subprime or Alt-A mortgages, which generally weren’t issued by credit unions.

Mark Wolff, spokesman for the Credit Union National Association, the industry’s largest trade group, said his organization also remains undecided.

“On judicial mortgage modification (“cramdowns”), we continue to talk with our membership and remain in discussions on the Senate side, but we have not agreed to any deal at this point,” he said.

Wolff added that while some credit union industry lobbyists are fighting to separate out the emergency money from the cramdown bill, his group isn’t necessarily opposed to including it, depending on what ends up in the final bill.

Bob Foster, a spokesman for National Credit Union Administration, said that as the regulator for the system, the NCUA doesn’t take a position on cramdowns. The NCUA isn’t “the least bit surprised” that the bill has stalled in the Senate, because legislative delays are not uncommon, he said. The NCUA, however, is hoping to get the funds as soon as possible. “We certainly have some stresses in our system.. it would be nice to soften the blow” with the $6 billion in particular, Foster said.

Umholtz, the former credit union lobbyist and industry analyst, noted in a recent newsletter that horse-trading on Capitol Hill isn’t part of the credit union culture, making the whole situation even more tense.

“While … quid pro quo horse-trading is common on the Hill, it is rarely used by the credit union industry. For the credit union lobby, horse-trading legislative provisions with members of Congress is a slippery slope. Once started down that path, it is difficult to reverse course… The credit union lobby’s own constituents are not a very tolerant or forgiving lot.”

Umholtz said if the credit unions wind up having to choose between opposing cramdowns and taking the money, they’ll oppose the cramdowns, and try to get the money on another attempt down the road.

But Hanweck disagreed, saying the credit union system is in such precarious shape that credit unions will have to give in on their cramdown opposition to get the funds.

“They’re going to have to go for the money,” Hanweck said. “If unemployment keeps rising, credit unions are going to be in severe financial trouble. And what’s going to happen if another coporate credit union goes under?”

The credit unions actually need a bigger fix than just emergency money from Congress, Hanweck also contended. The entire credit union system may need to be put under the supervision of the Federal Deposit Insurance Corp., he believes. But that’s something the powerful credit union lobby will balk at. “They would lose an enormous amount of power,” Hanweck said.

In the meantime, it’s possible negotiators will separate the credit union money from the mortgage cramdown bill. Or they could come up with a version of the mortgage cramdown bill, with emergency money for the credit unions, that the credit unions could support. Housing advocates consider the cramdowns a crucial tool to slow down foreclosures, but the bill stalled in the Senate last month. Consumer groups and financial services industry lobbyists have been involved in negotiations for a compromise, and lawmakers are adding provisions to attract support from lenders, such as a proposal to increase the FDIC’s borrowing authority to avoid the agency having to charge higher fees to banks. Some Democratic senators also reached out to the credit unions recently, and more money for the credit union system could be an additional sweetener.

Whatever the final result, the fact that the battle has gone this far shows the need for credit unions to stabilize their system, even as their membership continues to get hit hard by a faltering economy.

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