Commenters Call Mortgage Note Repurchases Helpful But Redundancies Should be Eliminated in Reg; Maturity Should Be Longer
ALEXANDRIA, Va. -- The handful of commenters on NCUA's proposed rule on federal credit unions' permissible investments (Parts 703 and 704) generally said they liked the idea of this new authority for credit unions, but would like to see less regulatory redundancy.
NCUA's proposal would allow credit unions to participate in mortgage note repurchase transactions under certain restrictions, some of which the commenters' found duplicative or lacking in flexibility.
Alaska USA Federal Credit Union President William Eckhardt stated in his comment letter that additional underwriting standards are not necessary because it is "already embedded in the provisions of the Secondary Mortgage Marketing Enhancement Act as incorporated into the Federal Credit Union Act. The underwriting criteria are those established to make the mortgage notes eligible for sale to the secondary market."
NAFCU President and CEO Fred Becker also noted, "One condition in NCUA's proposed rule for a federal credit union wishing to invest in a mortgage note repurchase transaction prohibits counterparties from having outstanding debt with long-term and short-term debt ratings below certain thresholds. Because counterparties already have the highest short-term credit ratings, NAFCU believes that risk is already appropriately addressed."
Additionally, CUNA Senior Assistant General Counsel Jeff Bloch said that the caps of 25% of the credit union's net worth with any one counterparty and 100% of its net worth with all counterparties are inconsistent and limiting. "Part 703 of NCUA rules authorizes an FCU to invest in 'investment repurchase transactions' as long as the securities the credit union receives are permissible investments, they or their agent obtain possession or control, the securities are valued daily, and the FCU maintains adequate margins that reflect a risk assessment of the securities and the term of the transaction," he wrote. "Part 703 also requires credit unions to develop investment policies that outline how the FCU will manage credit risk, including specifically listing institutions, issuers, and counterparties that may be used (or criteria for their selection), as well as limits on the amounts that may be invested with each.
"The proposed rule classifies mortgage notes used in repurchase agreements as permissible investments and, therefore, the current rules described above should be sufficient. The current rules appropriately place the responsibility on the credit union and its board of directors to conduct risk assessments and adopt investment policies that clearly define their understanding of the investment activity, as well as factor in safety and soundness considerations."
Roundstone Advisors provided some real life experience with its comment letter. The firm's managing director and founder, Sean McNamara, wrote, "The purpose of our comment letter is to provide some suggestions to the proposed rule based on our actual working knowledge of the whole loan repurchase market. We believe the final proposed rule should ameliorate all possible risks for FCUs inside the framework of industry standard practices and operational procedures. If the final amendment contains restrictions or operational procedures beyond what the marketplace participants are accustom to, FCUs will not find any counterparties to transact with."
Roundstone Advisors, LLC is a registered investment advisor and independent third party securities lending agent specializing in fixed income instruments. Commenters were fairly uniform is saying the 30-day cap on maturities for the investments was not long enough and should be extended to anywhere from 45 to 90 days.