ALEXANDRIA, Va. — In response to problems in the subprime mortgage sector, NCUA has issued guidance to corporate credit unions regarding the potential impact on mortgage backed securities.

The letter (No. 2007-02) highlights credit quality and market value concerns with mortgage backed securities with underlying subprime or nontraditional mortgages and/or structured with an available funds cap. Credit losses or interest shortfalls can negatively impact the value of an MBS with an AFC, the agency warned.

"[A] transaction may use excess spread for credit support and pass through a floating rate subject to a cap equal to the weighted average interest rates on underlying loans," the letter signed by Office of Corporate Credit Unions Director Kent Buckham stated. "If a shortfall occurs because of a credit loss, the amount of interest currently distributed will be reduced to the amount payable based on available funds. A transaction may provide for the shortfall to be carried forward and paid at a later date if there is excess cash. Note a transaction might provide for payment of any carry forward amount only if there is excess cash after building over collateralization to a target level. Further, a transaction may not cover a carry forward amount after specified dates or events."