Where The Opportunities Lie For Credit Unions In The Turmoil Of Mortgage Market

The considerable turmoil in the credit markets this summer, especially with respect to residential mortgage-backed securities, has sent ripples virtually throughout every aspect of our economy and captured the full attention of the financial services industry, legislators, regulators and the world at large.

When members of Congress returned last week, they were keenly focused on this turmoil. In fact, the House Financial Services Committee held a hearing, "Recent Events in the Credit and Mortgage Markets and Possible Implications for U.S. Consumers and the Global Economy," the day after Congress returned.

NAFCU has been fully engaged, working with lawmakers on Capitol Hill as well with the Federal Reserve, the National Credit Union Administration and others on this matter. We are also staying in close contact with the media, emphasizing the safety and soundness of credit unions.

News reports that indicate about one-third of the U.S. mortgage market may be effectively shut down obviously are quite disturbing. Other reports indicate that foreclosures may have increased over 90%. The Federal Deposit Insurance Corporation has reported that banks have seen the largest increase in late mortgage payments in 17 years, and loan loss reserves are up 75% over 2006.

MacroMavens, an economic consulting firm, estimates that 23% of adjustable-rate mortgages, covering loans with a value of $693 billion, are already in negative equity. One commentator has estimated that we have seen only the tip of the iceberg - that the subprime mortgage market carries a $150-billion price tag in investor losses, with possibly foreclosures on 20% of the $1.3 trillion in subprime loans over the next several years.

For the moment, it appears that the actions of the world's central banks and the Federal Reserve have restored some sense of order to what one banker described as one of the greatest financial panics in the past 55 years.

In an effort to ensure that the liquidity crisis did not become a solvency crisis, on Aug. 9 and 10 the world banks injected over $200 billion into the money markets. Subsequently, for the first time since 1980, the Federal Reserve lowered the rate at the discount window, without lowering the federal funds rate.

The lowering of the rate at the discount window (which was created to prevent a run on a bank), the extended 30-day availability of loans from the discount window, as well as Bank of America's $2- billion loan were not enough, however, to prevent a run on Countrywide Financial. Some of those seeking return of their deposit in Countrywide were initially turned away. Underscoring the nature of depositor concern, calls to the Federal Deposit Insurance Corporation's banking call center have run two to four times higher, as depositors at other banks inquired about the safety of their funds. Finally, to shore up its position, Countrywide is reportedly making plans to transfer its mortgage rate production from its non-banking subsidiary to its federally insured bank.

As we all know, the centerpiece of the world's financial markets is investor confidence that for depository institutions results from the backing of the full faith and credit of the federal government. Emphasizing the fundamental importance of investor confidence, one commentator recently described the world's financial markets as a Ponzi scheme. In this vein, the recent restoration of order has in many ways been quite remarkable, clearly reflecting the value of the action of the world's central banks.

I believe that the turmoil in the financial markets provides credit unions with both challenges and opportunities. Reflecting the high quality of credit union lending, credit unions are by most indications weathering the storm much better than other financial institutions, with delinquent mortgages growing only slightly and charge-offs remaining historically low. I have, however, been told by some credit union CEOs that their credit union is for the first time dealing with foreclosures. And, some credit unions are experiencing some problems with nonparticipation loans.

Further market irrationality may result in investor concerns expanding beyond subprime mortgages to include Alt A and prime jumbo products. A lack of liquidity could also cause certain mortgage products to be unavailable, or available only at premium. In addition, as Countrywide and others experience reduced capacity to fund loans or tighten their underwriting standards, loans may be harder to obtain, even for A -credit borrowers. As a result, credit unions should be prepared for the possibility of declining revenues from mortgage lending.

Mortgage rates might also reverse their current course, going higher and pricing some buyers out of the market. Investor concerns about mortgage-backed securities might also push rates higher. Vanishing equity could also result in more foreclosures, further depressing home values. Finally, credit unions with significant investments in mortgage-backed securities should monitor their investment portfolios very carefully as even high quality mortgage-backed securities may see market declines as the markets react irrationally.

Turning to opportunities, credit unions today hold a very small portion of the mortgage market. We know that when a credit union holds a member's mortgage, it is more likely to be the member's primary financial institution. I encourage credit unions to look at opportunities that consolidation in the mortgage market might provide. I also know credit unions will make every effort to assist members who may be facing financial difficulty as a result of turmoil in the financial markets, depressed home values or their having taken out a subprime loan.

The potential implications of these challenges and opportunities are significant, and NAFCU will continue its work in educating policymakers, the media and others.

Fred Becker is CEO of National Association of Federal Credit Unions.