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NAPLES, Fla. – With mortgage rates hitting 36-year lows and continuing to fall, interest rate risk management has taken on new challenges for credit unions. What mortgage loans should CUs hold in their portfolio? Which ones should they sell on the secondary market? Are there other options? Robert Petersen, senior analyst security sales for Freddie Mac discussed some of the options facing credit unions in the current and predicted mortgage rate environment in a breakout session on “Mortgage Portfolio Analysis and Interest Rate Risk Management” during CUNA’s recent Lending Council Conference. Credit unions should always want to be in a position where they have options on what to do with the loans on their books, said Petersen, and they’ll have those options and opportunities as long as they’re in tune with the risks involved. The refinance boom has caused a compression in interest rates, said Petersen, and “it won’t take much for interest rates to spring up quickly.” He cautioned that, “Unless credit unions have a handle on interest rate risks when that happens, credit unions will get saddled with low yields and wind up taking a financial loss trying to get rid of assets.” Most credit unions think of selling low-yield loans on the secondary market as a way to avoid getting stuck holding them when interest rates start to turn up. But there’s another option CUs should consider, said Petersen, selling loans through securitization. Instead of just selling loans for cash, selling mortgages through securitization and converting them to mortgage-based securities will give credit unions liquidity and the leave the door open for them if they choose at some point in the future to buy back the security and use the money to make more loans. “Liquidity in this market is a premium,” said Petersen, and credit unions want to do whatever they can to make sure they have that. So why haven’t more credit unions sold their mortgage loans through securitization? Among the reasons Petersen cited were: inexperience; they’re comfortable selling the loans for cash on the secondary market; it’s too `Wall Street’; they don’t understand the regulatory impact. “It’s up to each credit union to figure out which loans have the greatest potential to be refinanced, extract that loan before it prepays and sell it as securitization,” advised Petersen. It’s an individual decision each credit union has to make on their own, and it’s another choice they should consider. -

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