By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, December 10, 2008
The federal government plans to pump billions of dollars into the nation's credit unions in a bid to stabilize an industry long considered to be sheltered from the problems shaking other kinds of financial institutions.
The National Credit Union Administration said yesterday that it would offer credit unions $2.5 billion in low-interest loans to support new lending and to help some institutions weather mortgage-related losses. The agency could expand the lending programs to a maximum of $41.5 billion.
The federal intervention highlights the reach of the financial crisis. Credit unions, cooperatives that lend to members at low interest rates, are widely regarded as the conservative wing of the financial industry. Most of the nation's 8,400 credit unions serve small communities, such as the employees of a particular company.
Credit unions themselves mostly remain in excellent financial condition, but the industry's health is threatened because smaller credit unions generally invest some of their assets in larger institutions called corporate credit unions, which in turn invested in mortgage securities.
The declining value of those securities has drained money from the credit union system even as many face growing demand for loans from customers who once relied on commercial banks. The volume of lending by credit unions has increased 6.3 percent this year through the end of September.
"The credit unions through this credit cycle have continued to lend and have had more opportunities to lend and so they need more funds to lend," said Ken Ritz, a Fitch Ratings analyst who follows the industry.
In normal times, the smaller credit unions would borrow money from the corporate credit unions. But the corporate credit unions are running out of money. They don't want to sell billions of dollars in highly rated mortgage securities because they would have to sell at a severe loss in the current market -- the market values of the securities held by the 28 corporate credit unions have dropped by about $14 billion -- and the credit unions believe those prices eventually will recover.
At the same time, they are struggling to borrow money from investors, in part because the federal government has guaranteed debt issued by commercial banks, making it hard for the credit unions to compete.
"We need to have a level playing field to every other financial institution," said Brad Miller, executive director of the Association of Corporate Credit Unions.
The NCUA program seeks to accomplish that goal. The agency will lend money to the retail credit unions on the condition that they invest the money in the corporate credit unions. The NCUA will also guarantee those investments. The indirect approach is a creature of necessity. Existing law prohibits the NCUA from lending directly to the corporate credit unions.
The corporate credit unions can use the money to pay off loans with higher interest rates from other sources, such as the federal home loan banks. The new loans also will increase the borrowing capacity of the corporate credit unions because the NCUA will not require assets to be pledged as collateral, freeing up those assets to be used as collateral against future loans.
The agency will allow credit unions to borrow up to $500 million in the initial round of loans. Bill Hampel, chief economist at the Credit Union National Association, said the eventual total for the program probably would not exceed $15 billion, because that is the amount of the external funding held by corporate credit unions that they could replace with the new, lower-cost loans from NCUA.
A second program, previously announced but finalized yesterday, will offer $2 billion in low-interest loans for the purpose of refinancing mortgages for troubled borrowers. The NCUA estimated the money is enough to refinance 10,000 loans.
The NCUA board approved the refinancing program in November after the Treasury Department turned away from its original plan to buy troubled loans from banks and credit unions. Treasury Secretary Henry M. Paulson Jr. instead decided to invest directly in banks, excluding credit unions.
"He changed directions 180 degrees, and we've been left out of the process and consumers have been left out of the process," said Fred R. Becker Jr., president of the National Association of Federal Credit Unions, a trade group. "NCUA intends to use the money from our central liquidity facility to help credit unions restore money right where it makes a difference."
The program also will help credit unions that are struggling with rising numbers of defaults on mortgage loans, particularly in the Southern and Western states where home prices spiked highest. Providing money for refinancing could avert defaults on some loans.
Credit unions have been pushing for increased help from the federal government since September, when the industry persuaded Congress to remove a long-standing limit on the amount of money the NCUA could lend to credit unions. That limit, previously fixed at $1.5 billion, was increased to $41.5 billion -- an amount derived by a statutory formula from the size of the industry.
The following month, the NCUA loaned $1.7 billion to credit unions that needed short-term funding. November data are not yet available.
The same pot of money, which comes from the Treasury but is controlled by the NCUA, will now be used to finance the two new programs.
Staff writers David Cho and Nancy Trejos contributed to this report.