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Secondary Marketing FCU

Credit unions want into secondary mortgage market

September 6, 2006

By LISA D. BURDEN
WASHINGTON correspondent for MortgageDaily.com


Credit unions want to become secondary mortgage market players.

The National Credit Union Administration wants to allow federal credit unions to enter into investment repurchase transactions involving first-lien mortgage notes.

Some say the move would put the credit unions in competition with industry players such as Countrywide and Bear Stearns.

John McKechnie, director of public and congressional affairs for NCUA, said federal credit unions are looking at different ways to invest member money and that an increasing number have indicated an interest in the transactions.

The Federal Credit Union Act authorizes federal credit unions to invest in certain mortgage-backed and mortgage-related securities. NCUA has proposed allowing the purchase of mortgage notes -- even when nonmember mortgages are part of an investment repurchase transaction.

In a statement soliciting comments, NCUA's board wrote that it recognizes that the proposed amendment alters its earlier approach limiting the purchase of nonmember loans to those needed to complete a pool for sale on the secondary market.

Mortgage note repurchase transactions involve loans granted and serviced by a third-party that agrees to repurchase the securities at a set price at the end of a specific term.

McKechnie said adoption of the proposed amendment would not lead to the credit unions competing against Fannie Mae or Freddie Mac, Instead, the credit unions would be competing against banking institutions such as Bear Stearns and Countrywide. The market has room for various players, he said, although he added that banks probably would not welcome the additional competition.

By permitting federal credit unions to invest in mortgage loans as a part of a repurchase transaction, NCUA is not permitting the credit unions to purchase first-lien mortgage loans of nonmembers, the organization said in its written statement.

When NCUA implemented the Secondary Mortgage Market Enhancement Act of 1984, investment repurchase transactions were not prevalent in the home loan market. The act amended the powers of federally chartered financial institutions and preempted state law to authorize investments in mortgage-backed securities.

The secondary act also amended the Federal Credit Union Act to allow federal credit unions to invest in certain mortgages and privately issued mortgage-related securities.

Broadening federal credit union authority to invest in mortgage notes furthers the secondary market and purposes of the secondary act, NCUA explained.

Permitting federal credit unions to buy nonmember mortgage notes outright is inconsistent with the purposes of the act, the association said. Additionally, the purchase of nonmember mortgage loans presents a greater credit risk as an investment because mortgage notes do not need to be rated and NCUA could not set standards to manage the risks of these investments effectively. NCUA said it believes, however, that federal credit unions can safely manage repurchase transactions.

To address safety and soundness concerns, the proposed amendment establishes a credit concentration limit, minimum credit rating, requirement for an independent assessment of market value, a maximum term and custodial requirements for the transactions. The rule would limit aggregate investments in mortgage note repurchase transactions to 25% of a federal credit union's net worth with any one counterparty and to 100% of its net worth with all counterparties. A counterparty is someone who repurchases mortgage-backed securities.

The proposed 25% concentration limit is similar to the limit governing a national bank's investment in a mortgage note repurchase transaction.

It is unlikely a large number of federal credit unions will swarm to the market, McKechnie said.

One credit union, Alaska Federal Credit Union, has filed a comment letter declaring itself "highly supportive" of the proposal. "This authority will allow credit unions the opportunity to generate additional investment revenue without material additional risk," Alaska FCU wrote in its four-page letter.

The risks associated with taking whole loans as collateral are the same risks a lender assumes when accepting any type of collateral in connection with a lending transaction, Alaska FCU explained. Whole loans are individual mortgage loans that meet the requirements of the secondary act.

Alaska FCU said it has been involved with permissible securities lending activities since 1988.

"Based on our experience and knowledge of the market, under current market conditions a federal credit union participating in a whole loan securities lending program could expect to receive a net return between 10 and 15 basis points of the value of the securities loaned," Alaska FCU wrote. "Participants may, at times, receive up to 40 bps or more for certain securities in demand by the market. As you can see, the authority to use whole loans as collateral provides credit unions a good opportunity to leverage their investment portfolios and return greater benefits to their membership."


Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: [email protected]



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