By Ray Birch
ARLINGTON, Va.—Asset securitization could do a lot for the future of federal credit unions, but how much of an impact it will have depends largely on the guidance NCUA provides on the practice, asserts one analyst.
At its June board meeting NCUA announced it is crafting guidance on asset securitization by federal credit unions. In June, the agency also issued a legal opinion letter recognizing federal credit unions' authority to issue and sell securities, an incidental power granted under the Federal Credit Union Act, the agency stated.
NAFCU Regulatory Affairs Counsel Ann Kossachev told CUToday.info the expanded authority cold become another tool for CUs to drive their business, adding that if outlined correctly by the agency, asset securitization could prove to be a big boost to the movement.
“Asset securitization could mean increased liquidity for federal credit unions,” said Kossachev. “Credit unions would be creating securities and creating a secondary market for their assets. That means investors could provide much-needed liquidity to credit unions so they can then provide more loans to their members. I think it could work wonders for the industry and NAFCU would like to see that happen. But it really depends on what the guidance from NCUA looks like.”
Recognizing that outlining how CUs can proceed with securitization is a big undertaking for NCUA, Kossachev insisted that the playing field among all credit unions who undertake asset securitization must be level. NAFCU recently outlined its views on the matter in a letter to NCUA.
“The level playing field is the first thing that must happen,” said Kossachev. “Credit unions need to have some method for aggregation of their securities. NCUA needs to expand the eligibility of loans beyond those originated by the securitizing credit union, include purchased loans needed to complete a pool and allow the aggregation of loans by credit union service organizations.”
Most Portfolios Too Small
Kossachev’s point, she said, is that most credit unions’ loan portfolios are too small to create securities that are large enough to be attractive for investors. She emphasized that if NCUA’s guidance does not allow for some form of aggregation, that securitization will not take place at most CUs.
“As it stands only the largest credit unions would engage in securitization because they are the only ones who would have pools large enough to securitize,” said Kossachev. “That is the big issue—there aren’t enough credit unions currently that could start issuing and selling securities on their own.”
Asked to make a rough estimate on the asset size required to begin issuing securities without an aggregation tool, Kossachev said the credit union’s assets would “definitely be in the billions of dollars. If I had to pick a number, I’d say above $10 billion. So, a really big credit union.”
Ann Kossachev
Kossachev said CUSOs could play a critical role.
“Not only do we see CUSOs as loan aggregators to create larger security pools, but also potentially serving as originators of securities and selling securities,” she said. “Something like this would be a big benefit to the industry.”
NAFCU, too, believes that NCUA’s guidance should allow for credit enhancements for investors, some form of incentive or rebate that would encourage investors to purchase the new credit union securities.
“These would be new securities on the market, so investors might need a little incentive to encourage them to purchase,” said Kossachev. She also noted that investors would likely be attracted to CU securities due to the typically high-quality loans that would be in the pools and the resulting lower risk.
NAFCU is also asking NCUA guidance to provide flexibility in the levels of residual and retained interests in securitized assets that a credit union may hold; to authorize credit unions to have special purpose vehicles with the authority to enter into derivative transactions, and to provide additional clarifications on the types of securitization transactions in which credit unions may engage.
CUs Have Had The Power
Kossachev pointed out that NCUA in June of 2017 stated in its legal opinion letter that credit unions have had this “incidental” power to issue securities under the Federal Credit Union Act. The opinion letter removed the need for an asset securitization proposal that was issued in 2014, and had yet to be finalized. However, that proposal suggested NCUA was not overly favorable about CUSOs playing a role in securitization, and the agency was not allowing credit enhancements.
“We need NCUA’s guidance to allow for both of these things,” insisted Kossachev.
While CUs currently have the power to issue securities, NCUA’s legal opinion letter states that credit unions should begin applying to receive explicit authority to issue securities.
“So, my understanding is there will be an application process, but I have no way to know how critically NCUA will scrutinize each application,” Kossachev said.
Guidance Needed
Kossachev again emphasized that guidance from NCUA is needed soon and that CUs won’t be able to make any assessments on the feasibility of entering into securitization until that happens.
“Without guidance from NCUA no credit union in their right mind would forge ahead here,” said Kossachev. “Entering into asset securitization requires an extensive amount of due diligence on the credit union’s part—why this makes sense for them or not.
“This is risky, and unlike banks, credit unions don’t have holding companies,” continued Kossachev. “So where are they going to make this happen? Where will the assets be held once they are securitized and before they are sold off to investors? Will the assets be on credit unions’ balance sheets? It is unclear now. There is no clear road ahead without NCUA guidance, I guess an outline, so to speak—step one, step two, step three, this is how you should proceed.”
One of the other questions credit unions will have to answer once NCUA provides guidance is will the expense of stepping into asset securitization be outweighed by business gains.
“I am not sure if it will mean credit unions will have to hire more staff to deal with this specifically, or hire outside council or work with a CUSO,” said Kossachev, adding a big educational ramp-up is ahead for most credit unions. “NAFCU will provide as many resources as possible, but there is only so much we can do and this is so dependent on each credit union, on each credit union’s loan portfolio, and what is the risk in their portfolio. This is a very case-by-case situation and each credit union will have to do a lot of evaluation to determine the feasibility—whether this is worth it—of forging ahead with this effort.”