Credit unions will have to find another place to invest up to $1 billion worth of agency mortgage backed securities, according to an industry expert.
Freddie Mac and Fannie Mae announced yesterday they will transfer up to $200 billion delinquent loans backing MBS onto their balance sheets. The move will conform to 2009 accounting standards and reduce losses.
However, it will mean a loss of credit union interest income due to prepayments, said Andrew McGeorge, senior portfolio strategist at CNBS, LLC. He said natural person credit unions keep approximately 20% of their investments in agency MBS, about $55 billion worth.
The buy-out could double pay down rates over the next couple of months, but should return full principal to investors, he said.
Though the increased prepayments could affect ALM modeling, McGeorge said the outcome will depend upon where credit unions choose to reinvest the cash. He predicted funds will likely be reinvested into corporate certificates, bank CDs or callable agency notes.
"Agency mortgage securities are relatively unattractive right now due to the Fed's intervention in this market," McGeorge said. "Investors should be cautious about simply rolling this principal windfall into new mortgage backed securities."