Interest Rate Roundup

Monday, August 11, 2008

Credit unions take their mortgage lumps; Another mortgage insurer reports big losses

This mortgage crisis is an equal opportunity one. It doesn't matter if you're a non-bank lender, an S&L, or a commercial bank ... chances are, you're taking hits due to the unravelling of the housing and mortgage markets. Heck, the Wall Street Journal is reporting that even credit unions are joining in the "fun." From a story this morning ...

"Five of the nation's largest credit unions are reporting big paper losses on mortgage-related securities, a sign that housing-market distress is spreading even to the most risk-averse financial sectors.

"The federal regulator overseeing credit unions says the losses are likely to be reversed when mortgage markets stabilize, and that the institutions are sound and adequately capitalized. But some outside observers are concerned that the credit unions are underestimating the depth of their mortgage-market problems.

"This is a serious situation," says Gerald Hanweck, a finance professor at George Mason University, who studies the banking industry and is a visiting scholar at the Federal Deposit Insurance Corp. Mr. Hanweck believes the five firms have sufficient access to funding to handle a deeper downturn, but he worries that perceptions of added risk could lead to a run on one or more of them.

"Credit unions are not-for-profit, member-owned cooperatives that take deposits and lend money like banks. The mortgage problems are focused on so-called corporate credit unions, which are key players in the industry. They don't deal directly with consumers, but provide investment services and financing to regular credit unions, which do.

"The five corporates showing big mortgage-related losses, according to federal regulatory filings, are U.S. Central Federal Credit Union; Western Corporate Federal Credit Union; Members United Corporate Federal Credit Union; Southwest Corporate Federal Credit Union; and Constitution Corporate Federal Credit Union. Together, they reported about $5.7 billion in "unrealized" losses as of the end of May, the filings indicate. Unrealized losses happen when the market value of a security falls, even if it hasn't been sold."

Meanwhile, another mortgage insurer -- Radian Group -- reported a large quarterly loss. All of these guys, who help cover the losses that lenders suffer when high LTV borrowers default, have seen claims surge. Both the frequency of defaults and the severity of associated losses have been climbing. Here's more from Bloomberg:

"Radian Group Inc., the third-largest U.S. mortgage insurer, lost $392.5 million as it increased its expectations for future claims. The company said it will fold its bond insurance unit into its mortgage guarantor to increase capital in its primary business.

"The second-quarter net loss was $4.91 a share, compared with profit of $21.1 million, or 26 cents, a year earlier, the Philadelphia-based insurer said today in a statement.

"Mortgage insurers help lenders make up for losses when borrowers default. The companies have borne record claims and ratings cuts as home prices fall at a 16 percent annual rate. One in every 171 households faced some kind of foreclosure action in the second quarter, more than double the rate a year earlier, according to RealtyTrac Inc., a seller of default data.

"Adding the bond unit's assets to the mortgage business "benefits our shareholders and allows Radian to continue to take advantage of market opportunities,'' Chief Executive Officer S.A. Ibrahim said in the statement.

"Radian declined 8 cents to $2.66 at 9:43 a.m. in New York Stock Exchange composite trading. A year ago, the stock sold for $19.60 a share.

"The company boosted its claims predictions and set aside an additional $421.8 million to pay for them. Including this "premium deficiency reserve,'' and $458.9 million added to regular reserves in the quarter, Radian has allocated $1.43 billion this year for policy losses. That's a fourfold increase over the same period last year."


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