Mortgage Holdings Weigh Down Another Corporate CU

CHICAGO – Fitch Rating on Friday said it has placed its rating for Members United Corporate FCU on its Rating Watch Negative based on growing concerns over losses on its large holdings of mortgage backed securities.

The Rating Watch Negative reflects Fitch’s concern of an increasing possibility that the corporate could realize meaningful losses on its investments. “They have a sizable accumulated unrealized loss,” said Doris Hoffmann, an analyst for the Wall Street rating agency. “Really, this is central to our concerns.”

The accumulated unrealized losses in Members United’s portfolio, which represent the difference between the book value of the holdings and the current market value, have continued to grow in recent months – rising to $890 million at the end of April, according to Hoffmann. That represents the continuing fall in the value of its agency and private label mortgage backed and asset backed securities, she said.

Officials with Members United were at the corporate’s annual investment conference and could not be reached Friday.

Fitch said in its report the size of Members United’s mortgage holdings and the current crisis in the market have contributed to the large unrealized loss in relation to capital. “The investment portfolio is of high quality and continues to pay as agreed to at this point, but does contain meaningful exposure to subprime and Alt-A mortgages,” said the agency. “Many of the select securities nearing sub-investment grade are wrapped by monoline insurers currently under stress.”

Officials with the corporate have indicated an intent to holding the securities to maturity, in which they would be able to realize the full value of the holdings, said Hoffmann. “We recognize Members United’s ability to hold to maturity. We’re not questioning their intent and ability to hold to maturity,” she told The Credit Union Journal Friday.

“At some point, this is just so material that we need to acknowledge it,” said the Fitch analyst.

Several other corporate are faced with similar problems, most notably U.S. Central FCU, which cited a $2.4 billion loss on the current value of its mortgage backed securities portfolio at the end of April. Officials with U.S. Central insist they intend to hold the impaired mortgage securities to maturity, so they will not have to book the losses.

Hoffmann indicated Fitch also is reviewing other corporates with large holdings of mortgage backed securities.

Members United was formed by the 2006 merger of two large regional corporates, Mid-State Corporate FCU and Empire State Corporate FCU, and manages almost $14 billion of credit union funds.