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Credit Union Fix May Be $9.2 Billion, Regulator Says

Credit unions in the U.S. may absorb as much as $9.2 billion in losses over the next decade as the industry strives to recover from sour investments in real estate and consumer loans, U.S. regulators said today.

Part of the plan to resolve the credit unions’ financial problems includes the National Credit Union Administration packaging $50 billion in distressed securities for sale as $35 billion in bonds carrying government guarantees, the agency said today. The debt will be backed primarily by bonds tied to home loans, with the first sale scheduled for next month.

The NCUA already sold more liquid securities from two credit unions that failed last year: U.S. Central Federal Credit Union in Lenexa, Kansas and Western Corporate Federal Credit Union in San Dimas, California. The administration said today that it assumed control of Members United Corporate Federal Credit Union of Warrenville, Illinois; Southwest Corporate Federal Credit Union of Plano, Texas; and Constitution Corporate Federal Credit Union of Wallingford, Connecticut.

“Up until this point we’ve been doing stabilizing actions,” Larry Fazio, NCUA’s deputy executive director, said in a telephone interview. “We’ve pumped some liquidity into these institutions. Our resolution is going to be the exit from these government programs.”

Repaying Treasury

Proceeds from selling securities that belonged to institutions in conservatorship will go to help repay $10 billion in U.S. Treasury loans used to prop up the credit unions, Fazio said.

The regulator sold $800 million in commercial-mortgage backed securities from seized institutions earlier this week. Barclays Capital managed the sale, according to a person familiar with the transaction who declined to be identified because terms weren’t public. Typical CMBS offerings are backed by loans on hotels, office buildings, rental apartments or shopping centers.

The NCUA, which insures accounts of 90 million credit union members, estimated ultimate industry losses of $7 billion to $9.2 billion based on expected writedowns from the securities portfolio and other costs of managing the troubled corporate credit unions. To recoup those costs over the next 10 years, it will levy a special assessment on the credit union industry.

NCUA is also creating bridge institutions to handle the “good bank” and “bad bank” sides of the seized firms. About $65 billion in assets will be funneled into the stronger of the two, while the “bad bank” is used to sell bonds backed by the $50 billion in distressed securities.

Asset Values

The offering is over-collateralized, meaning the assets are worth more than the debt on them, and any losses or gains from the underlying will be borne by the government, the regulator said.

“We’re doing this without any cost to the taxpayers,” NCUA Chairwoman Debbie Matz said in a telephone interview ahead of today’s announcement. The agency’s actions have headed off $40 billion in possible costs from liquidating the distressed securities and dealing with follow-on failures of other institutions, she said.

By law, the NCUA has seven years to recoup losses and Treasury has already granted a three-year extension.

Fazio said he expects credit unions will pay a 10-basis-point assessment on assets, which will be paid for out of the 30- to 60-basis point return that most credit unions earn.

“The vast majority of credit unions are still considered very well capitalized,” Fazio said.

Mortgage Bonds

The new bond issues will be comprised primarily of debt linked to residential mortgages. The pool includes $34 billion in securities backed by home loans. An additional $5.45 billion is tied commercial-property debt and $8 billion is linked to student loans and other household borrowing, NCUA said.

The program is similar to one the Federal Deposit Insurance Corp. is using to dispose of assets from failed banks. The FDIC, which in March raised cash in the bond market for the first time since the early 1990s, sold $1.5 billion of bonds tied to home loan securities that month.

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