Hill Credit Unions Chip In for Bailout
The House and Senate credit unions appear positioned to survive the economic crisis that has already claimed other financial institutions, despite being on the hook for millions of dollars to help bail out their brethren.
Financial statements issued by the Congressional Federal Credit Union and the United States Senate Federal Credit Union show that both are well-capitalized and enjoy increasing deposits.
That’s good news for the more than 70,000 current and former Congressional employees who trust the two credit unions with hundreds of millions of dollars.
But it doesn’t mean the organizations are immune to a world of skyrocketing unemployment rates, crashing home values and depreciating investments.
Like their peers, they saw a sharp rise in loan defaults and bankrupt members in 2008, and officials are preparing for those numbers to rise in 2009.
Both credit unions also are required to pay out millions of dollars to help the National Credit Union Administration seize two corporate credit unions.
“It leads one to think, What’s next?’ Not only is it the what’s next, I have no control over this. I didn’t make these decisions,— said Susan Enis, CEO of the Senate credit union. “It’s annoying that we have to pay this because we had nothing to do with these corporate credit unions’ downfall.—
The NCUA, the regulating body of credit unions, recently seized the U.S. Central Federal Credit Union and the Western Corporate Federal Credit Union because of large losses. Like many now-failing financial institutions, they had bought mortgage-backed securities, which have since plunged in value.
The corporate credit unions’ only members are other credit unions, but neither the House nor the Senate unions put any of their money toward those investments. Still, the Congressional credit union is required to contribute $4.2 million to the bailout, while the Senate will dole out $2.7 million.
Officials say the one-time payment will minimally affect their bottom line and won’t result in raised rates or fees.
Both institutions enjoy a capital ratio well above the 7 percent that the NCUA defines as “well capitalized.— A capital ratio represents a credit union’s net worth divided by its total assets and is a measure of the institution’s financial stability.
The CFCU reported an almost 9 percent capital at the end of 2008, while the SFCU reported a 10.9 percent capital.
That’s not unlike other credit unions throughout the nation, which are now averaging a 10.9 percent capital, said Bill Hampel, chief economist of the Credit Union National Association, a trade association.
Since credit unions are owned by the members, their investments tend to be conservative. They also only lend what they bring in, Hampel said, rather than going to a third party for an influx of cash.
“They’re actually doing very well as a group,— he said. “The Senate and Congressional credit unions didn’t make crazy subprime loans. Their loans were affordable in the first place.—
Congress’ credit unions also serve a specific niche that brings with it a unique set of benefits and drawbacks.
Their members are employees of the federal government, a largely recession-proof area of the economy. That helps during the current economic environment, when many people are losing jobs and thus can’t keep up with mortgages or credit card payments.
In Congress, Members and staffers might have houses that crashed in value, but they can afford to sit tight and keep up with their payments. They are less likely to walk away and force the credit union to recoup the loan on a foreclosure.
But every two years, an election results in hundreds of staffers suddenly losing their jobs. And following the 2008 elections, the Republicans who lost their positions on Capitol Hill didn’t have a presidential administration willing to find them new jobs.
Charles Mallon, CEO of the Congressional credit union, said more members thus end up delinquent on their loan payments in the beginning of a new Congress.
And this year, the recession and the election might have created the perfect storm. At the end of 2008, the number of members who were more than two months late on their loan payments was higher than it had been in years.
As of December, 1.9 percent of loans at the CFCU were delinquent, an almost 50 percent increase from the same time in 2007. It’s also significantly higher than the 1.22 percent average of similar-sized credit unions.
Mallon conceded that he expected an increase in late payments and defaults but said the credit union has adapted to a portion of its membership being displaced every election.
“As such,— he said, “the credit union had long ago developed a number of products and loan modification options available for members that find themselves in unexpected financial hardships.—
The SFCU, however, is in better shape. Though delinquent loans increased more than 100 percent — from 0.17 percent in 2007 to 0.35 percent in 2008 — it’s still far below its peers’ average of 1.39 percent.
Both the House and Senate credit unions make loans that are on the safer side, mostly sticking to fixed-rate and adjustable-rate mortgages.
But their young membership also means they give out many unsecured credit card loans; in turn, those young members are more likely to default on the loan.
Enis and Mallon said they expected more of those credit card bills to go unpaid, especially for members who might have taken out subprime mortgages at other institutions.
After all, cash-strapped people tend to make payments for their home rather than their credit card, Mallon said. The credit card loans are also usually under $10,000, a small amount when compared to mortgages.
Credit card loans account for 12 percent of all loans at the Senate credit union and about 15 percent at the Congressional credit union. But they make up a big chunk of those loans never paid and absorbed by the union — 29 percent at the SFCU and almost 44 percent at CFCU.
Enis said the union tries to help members who are in trouble, working with them to adjust payments and keep their heads above water. But if the recession deepens, more and more people will stop trying.
“More members are likely to give up and either declare bankruptcy or walk away on their debts,— she said.
Both Enis and Mallon say they are preparing for an increase in the number of members who walk away from their loans. Since 2006, both credit unions have had to pay out more and more to cover loans that were never paid off.
In 2008, the Senate credit union put more than $2 million into a reserve that covers such abandoned loans — more than 150 percent than it contributed in 2007.
“Because of the pressures in the economy, we became more aggressive,— Enis said, explaining that the SFCU changed the formula to average loan losses for the last six months rather then the last three years.
The Congressional credit union, on the other hand, decreased the amount it put into its loan loss reserve by 11 percent. But Mallon pointed to a reserve that actually increased significantly — and a near standstill on new loans.
That still leaves relatively low reserves, with both unions carrying a cushion of less than 1 percent of all loans. But they say it’s a reflection of how much money they actually think they’ll lose. In short: The number of unpaid loans might increase significantly, but it was low to begin with.
The health of the larger credit union industry — and the potential payments the House and Senate groups will have to make to keep it afloat — remains their primary worry.
The Credit Union National Association is hoping to convince the NCUA to allow credit unions to pay in installments, rather than all at once, for the seizure of the two corporate credit unions. That way, the credit unions won’t suffer a one-time hit to their bottom line, which could cause them to scale back loans and investments, Hampel said.
Enis and Mallon said they supported that effort. But they also claimed the one-time payment wouldn’t affect their members.
“I don’t think members are going to be impacted. I’m not changing rates or fees. I’m not trying to recoup $4.2 million this year or next year or the next year,— Mallon said.
But he added: “It’s the second shoe to drop. What is it and where is it going to come from?—