The nation’s housing market is showing promise. According to The Washington Post, in December builders broke ground on the most new housing developments in four years. This, and interest rates on mortgages are expected to remain near all-time lows through much of 2013, is attracting once-skeptical buyers to get back into the game. More and more credit unions are offering shorter-term 15-year mortgages to appeal to their membership while also alleviating some of their interest rate risk. However, for some credit unions, the 30-year mortgage may be the safer bet. Why?
At last week’s Callahan & Associates 2013 Investment Forum in San Diego I witnessed an interesting exchange between a presenter and an attendee. The presenter was explaining his credit union’s policy which allows the credit union to hold 15-year mortgages on the balance sheet, but requires it to sell the 30-year product off to other institutions. According to the presenter, the policy is intended to limit the interest rate risk that is intrinsic in 30-year loans.
The audience member raised an idea counterintuitive to the presentation; the 15-year product actually contains more interest rate risk than the 30-year. In his credit union’s experience, 15-year loans often last longer than the 30s. In their case 15-year buyers tended to be older and more established compared to 30-year borrowers, who are younger and more likely to switch jobs or start a family, which would require changing houses and selling the mortgage.
The presenter agreed and emphasized the importance of looking back at your credit union’s data to better understand the situation in your market. Since I started in the credit union industry, I assumed that the risk for 30-year was greater than 15-year, but in reality, for certain institutions, that might not be the case.
Credit unions reluctant to portfolio 30-Year mortgages due of their inherent interest rate risk will be deploying very different ALM strategies if empirical data shows the 15-Year product in fact has the greater average life.