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Credit-union members have little reason to panic

01:00 AM EDT on Sunday, August 24, 2008

On the same day last week that my column about deposit insurance at credit unions ran, The Wall Street Journal had a front-page story on the troubles that corporate credit unions are having with mortgage-related securities.

The headline — “Mortgage-Market Trouble Reaches Big Credit Unions” — may have caused some credit-union members to panic about the health of their institutions and the safety of their money.

Stay calm. There’s no imminent collapse of credit unions, and your insured deposits are fully backed by the federal government.

Corporate credit unions are credit unions for credit unions. Individuals aren’t permitted to join a corporate credit union.

Corporate credit unions offer business services to so-called “natural person” credit unions, which are the ones consumers can join.

They also provide investment services and payment processing services for other credit unions, which are their members.

There are 31 corporate credit unions nationally, and they range in size from $7.3 million in assets to $35 billion.

They’re regulated by the federal National Credit Union Administration, as are consumer-member credit unions.

There’s no doubt that the troubles surrounding mortgage-backed securities have also hit credit unions.

“They have to,” said John J. McKechnie III, director of public and congressional affairs at the NCUA. “They’re ripples in the water.”

In Plano, Texas, Southwest Corporate Federal Credit Union had paper losses of $679 million as of the end of May, primarily from mortgage-related securities. Its assets totaled $12.2 billion.

It’s important to remember that they’re “paper losses.” Gains or losses become “realized” only when the security is sold. However, that paper loss is a loss in value.

“We plan to hold the investments until maturity as we’ve historically done,” said John P. Cassidy, president and chief executive officer of Southwest Corporate. “We view this as very much of a manageable situation.”

The problem lies with the lack of liquidity in mortgage-backed securities, he said.

Liquidity refers to the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price.

“There’s very little trading going on in the area of fixed-income securities, particularly in the mortgage backed-securities arena, simply because there’s a general level of uncertainty with anything to do with mortgages right now,” Cassidy said. “There’s not much demand for those securities.”

So that lack of demand has resulted in many financial institutions having to record unrealized losses on securities they’re unable to sell.

Cassidy defended the quality of the credit union’s investments.

“We feel the asset quality of our securities remains very high, despite the fact that these fair values that are on our financial statements are much lower that what we feel the value is,” he said. “Still, the overwhelmingly majority of our securities, and specifically our mortgage-backed securities, are still rated AAA.”

Nationally, 78 percent of all the securities held by corporate credit unions are rated AAA — the highest rating — and 97 percent are rated BBB or better, McKechnie said.

As a regulator, McKechnie sent an emphatic message to members of consumer credit unions.

“The credit union members who have their money in deposits are still insured for up to $100,000,” he said. “Despite the turmoil [that people have read about], credit unions are safe. Their system is well structured to withstand some of these conditions.”

Pamela Yip is a personal finance writer for The Dallas Morning News and can be e-mailed at pyip@dallasnews.com

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