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WASHINGTON – Consider it the case of `what’s been going down for awhile can’t go down forever.” With mortgage interest rates being at their lowest in 40 years – currently at 6.5% for 30-year fixed – CUNA Senior Vice President and Chief Economist Bill Hampel forecasts that, “From a credit union perspective, this round of mortgage refinancing may easily be the last one credit unions will see for a long time.” With that in mind, Hampel strongly advises credit unions to do their asset liability management modeling and think about the risks and shocks that they’ll feel when rates begin to go on the upswing. “Considering how low mortgage rates are now, there’s a good chance these rates will be the lowest credit unions will see for awhile, they can’t go much lower,” says Hampel. That doesn’t mean there won’t be more refi booms such as the one credit unions and other lenders have experienced this past year because of record-setting low interest rates, but as the underlying mortgage rules get close to zero, the likelihood diminishes. One feature that’s made the latest refi boom so unique is that continuously lowered interest rates have allowed consumers to refinance loans they only recently refinanced. But once mortgage rates begin to rise again it’s unlikely any recently refinanced loans will be used to pay off any outstanding mortgage. Hampel said he could say with certainty that, “there’s a much greater chance mortgage interest rates will rise 300 basis points than they will fall. There’s plenty of room for mortgage rates to rise and little room for them to fall.” With that in mind, he added that, “Credit unions need to look at the 300 basis points scenario and be able to sleep with that.” The CUNA economist explained that mortgages are considered to be short term assets because they have a high likelihood of being prepayed – the average 30-year mortgage loan is usually paid back within 7 – 12 years, and that’s usually due to homeowners’ moving and selling the house. But with the record low mortgage interest rates over the past couple of years, the prepayment speed has been quickened. That will change when interest rates start to go up. Now is a good time for credit unions to look at their ALM modeling and know what to guard against when mortgage rates begin to rise. It’s also a good time to move any of the fixed rate mortgages they’ve been holding in their portfolio on to the secondary market. Looking ahead to the coming months, Hampel says credit unions are overall in pretty good shape to contend with rising mortgage rates. According to CUNA, CUs’ fixed rate mortgages only account for about 13% of their total assets. Hampel compares that to the 80% S&L’s had in fixed rate mortgages in the 1980s preceeding their debacle. Even so, Hampel advises CUs to “do your ALM modeling.” -

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