ALEXANDRIA, Va.–When might credit unions start seeing rebates on the assessments paid to create the Corporate Stabilization Fund in the wake of the financial crisis?
No time before 2017, and likely not until 2021, according to NCUA, which has fielded that question frequently from credit unions, all of which were hard hit in paying those assessments in 2009 and for several years afterward.
If there was good news out of the July 23 NCUA board meeting it is that there will be no assessments this year or anytime in the near future, with the performance of the assets underlying the Corporate Stabilization Fund performing better than expected. The board meeting also included some tantalizing discussion of the prospect of NCUA distributing resecuritized assets to each credit union and allowing them to decide whether to sell or hold, although prospects for such a plan do not seem likely.
Credit unions are approximately halfway through the estimated life of the Corporate Stabilization Fund, created six years ago and funded with the painful assessments for credit unions to pay the costs related to failed corporate CUs. NCUA is estimating the Fund will be in existence for another six years, with the fund expected to likely terminate in 2021.
Positive Net Position
The Stabilization Fund has recorded a positive net position for the last year and according to the most recent report its performance continues to improve.
The NCUA Guaranteed Notes’ (NGN) remaining balances of $15.2 billion are backed by legacy assets with a market value of $16.7 billion, with NCUA saying that as long as the legacy asset values hold relatively steady on no additional funding will be needed to pay back NGN investors.
Before credit unions can see any refunds on their assessments, the NGN investors must first be repaid, including the U.S. Treasury, which is owed more than $2.5 billion.
NCUA’s Director of Examination and Insurance, Larry Fazio, said during the board meeting that Treasury will most likely be repaid in 2017. The next maturities take place in 2020 and 2021, with NCUA estimating a surplus that will range from $700 million to $2.5 billion.
With the Stabilization Fund set to expire in June of 2021, there will be no rebates to credit unions ahead of that date, said Fazio.
What To Keep in Mind
“We must keep in mind that a considerable number of legacy assets have terms that may extend beyond 2021,” said Fazio. “So it is also possible that some legacy assets may need to be re-securitized with cash available at that time.”
In addition to the legacy assets, primarily mortgage-backed securities, performing better than had originally been projected, NCUA has also recovered $1.7 billion to date as the result of lawsuits it filed against Wall Street firms and banks that sold MBS to the corporates. NCUA still has 15 such lawsuits pending.
Matz used the board meeting to say it’s time “dispel the myth” that the five corporates that failed–U.S. Central, Western Corporate, Southwest Corporate, Constitution and Members United–could have survived, and said those holding that position need to come to NCUA to get a briefing.
Fazio added that none of the corporates that were conserved would have been viable or even survived today had NCUA not taken action.
“The improvements in performance of the distressed securities have not been significant enough to have made any of the five failed corporates viable,” said Fazio. “The distressed securities incurred approximately $8.9 billion in realized losses through the end of the fourth quarter of 2014. The level of realized losses attributable to each failed corporate evidences all of the five corporate credit unions were insolvent or critically undercapitalized.”
Fazio and NCUA estimated that as a result 885 natural-person CUs would have been insolvent and 1,200 would have been critically undercapitalized.
What About Resecuritizing Assets And Distributing to Credit Unions?
Following Fazio’s presentation to the board, Board Member Mark McWatters asked about the forecast the Office of E&I is making regarding the performance of the legacy assets. Fazio said forecast does not include a recession or near-recession.
“One thing I want people to think about is the range (of valuations) is somewhat dependent upon what happens to the legacy assets,” said McWatters. “Some say sell, some say hold. What about a strategy of resecuritizing the legacy assets into marketable securities and then distributing the marketable securities to credit unions that can then decide to hold or sell?”
Fazio responded by saying, “If we were going to do that it would only be after we repaid Treasury. Then what’s left over would be the refund part to the credit union. Theoretically we could securitize those, and we would have to explore, and are exploring, whether or not we legally we could do a distribution in kind rather than a cash distribution. But obviously, in terms of the theory, the intuitive appeal is that credit unions that want their money now could sell into the marketplace and others could ride it out to see if they could get a value over time.”
- The board also voted 3-0 in favor of new timelines for stress-test rules, agreeing to 90 days. Matz said the change shows that “NCUA really does listen to the concerns of commenters and stakeholders,” as does the decision to keep confidential the results of any stress testing, in the same way the agency doesn’t publish CAMEL codes.