As credit unions inch their way up to 2.5 percent of total market
share for residential mortgages, the valuation and volatility of
their mortgage portfolios begin to play a larger role in their asset/liability
management. Due to recent fluctuations in the market, credit unions
also are beginning to pay more attention to various hedging strategies.
Many institutions find that using derivatives to hedge their mortgage
holdings is complex. The complexity of hedging mortgages with any
strategy is due to the mortgages themselves. When interest rates
change, the big questions are how consumers, mortgage bankers and
Wall Street behave, and how these behaviors impact mortgages.
Proof that managing a portfolio of mortgages is challenging can
be found by looking at major Wall Street firms' published duration
estimates. (Duration is an estimate of the change in market value
for a 100 b.p. change in yield.) An unscientific survey of four
major dealers yields a range of 4.3 to 6.7 percent for FNMA 5.5
percent MBS, as of the market close on Aug. 1, 2003.
Dealer prepayment forecasts provide more proof that managing mortgage
portfolios is challenging. The median forecast is widely regarded
as an effective tool for estimating prepayments, which in turn,
helps estimate cash flows on mortgages and mortgage products. On
Aug. 4, 2003, the median dealer prepayment estimate for FNMA 6 percent
MBS was 437 PSA (100 PSA is 6 percent CPR). Using the median estimate
may seem reasonable, but consider the wide range of PSAs on that
day - Wall Street experts' yields ranged between 230 PSA to 995
This year has been interesting for mortgage holders. The 10-year
U.S. Treasury note, which began 2003 yielding 3.82 percent, dipped
as low as 3.11 percent on June 13 before shooting up to the mid-4
percent range in mid-August. FNMA 5.5 percent MBS, as a result of
the rally, traded at nearly a 1.04 dollar price in mid-June. In
that curve environment, the FNMA 5.5's duration and average life
shortened to approximately 2.3 percent and 1.7 years, respectively.
By mid-August, however, the dollar price had declined almost five
points, trading at a discount. Its duration estimate had more than
doubled to 5.9 percent, and its weighted average life ballooned
to 8.2 years. Mortgage holdings went from short-term to long-term
on a pretty short notice.
The decline in the dollar value and the extension of the mortgage
life has an even greater impact on mortgage portfolios when they
include jumbo mortgage loans. Many credit unions are looking at
alternatives to help ease the challenges of managing mortgage loan
portfolios. In some cases, credit unions don't offer jumbo mortgage
products and must send their members to competitors for these services.
A better alternative to managing mortgage portfolios is originating
and selling them immediately to the secondary market.
When looking for an investor outlet, credit unions should consider
- Does the investor provide delivery flexibility?
- Does the investor protect the credit union's position as the
primary financial institution?
- What servicing options does the investor offer?
For credit unions exploring investor outlet alternatives for selling
jumbo mortgages, a smart choice is an investor familiar with the
credit union community and offering great flexibility in the market.
NLAC, LLC is a corporate CUSO offering loan services through corporate
credit unions. Through NLAC, credit unions can deliver jumbos either
loan-by-loan or in bulk, and can select servicing-retained, servicing-released,
and sub-servicer options. And NLAC never cross-sells, so credit
unions maintain their member relationships and remain their members'
primary financial institutions.
This level of confidence credit unions want - and expect - from
their investor outlet is available from NLAC. Contact your corporate
credit union, call (888) 872-0440, ext. 6074, or visit www.nlac.org
for more information