Managing the Mortgage Portfolio

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.

 

By My Credit Union

 


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 PSA.

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 the following:

  • 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

 

This sponsored content article is provided to the credit union community for shared insights and knowledge from a recognized solutions provider in the industry. Please note that the views and opinions offered here do not reflect those of Callahan & Associates, and Callahan does not endorse vendors or the solutions they offer.

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Sept. 15, 2003


Comments

 
 
 
  • Could have said the same thing in about 1/2 the space
    Anonymous