The NCUA's recent asset securitization proposal, which would allow credit unions to bundle the loans they originated and sell them as securities on the secondary market, is tangled in so many tripwires that it severely limits the number of credit unions that can participate. So says many of the credit union executives and industry experts who submitted letters to the NCUA during the comment period that closed Aug. 25.
Moreover, the NCUA's lack of experience and oversight in the secondary market further hamstrings credit unions trying to attract investors without violating what some experts believe are crippling restrictions. If the proposal is adopted as presented, credit unions may wind up playing a zero sum game, according to Chris Howard, vice president of research for the Washington-based Callahan & Associates.
“What's right with the proposal are the objectives that we can all agree on,” Howard said. “What's wrong with the proposal is that it's about credit unions interacting with other parts of the economy. You can't bring two economic sectors together effectively when you focus on just one of them.”
The NCUA's lack of experience with and authority over the secondary market raises concerns about the agency's abilities to draft a rule that enables credit unions to fully take advantage of securitization in ways that will be effective, Howard said. NCUA's traditional focus on avoiding risk poorly serves the intent of the proposal, since the agency doesn't fully understand risks associated with securities.
“This is really a market driven by investors,” said Callahan EVP Jay Johnson, who with Howard coauthored a comment letter to the agency. “This is not a market that (the) NCUA is all that familiar with.”
“There was a point in the proposal in which (the) NCUA said that this is unknown risk, but if you unpack it you'll see that it's fundamental risk. It's nothing to be afraid of and should be dealt with head-on,” Howard said.
“But they don't have a lot of experience operating in securities at this juncture,” he added. “It's a learning process for them just as it will be for credit unions entering into this process.”
Read more about the NCUA asset securitization proposal and why Johnson and Howard feel it has no practical value as written in the Oct. 1 issue of Credit Union Times.
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