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ALEXANDRIA, Va.-Credit unions with loan portfolios that are heavily concentrated in fixed-rate mortgages should work to diversify, NCUA Chairman Dennis Dollar warned in a recent Letter to Credit Unions (03-CU-15). Due to historically low interest rates earlier this year, credit unions’ share growth boomed while demand for mortgage lending also skyrocketed. Of credit unions holding first mortgages, nearly 10% have a concentration in the area of 25% or more of its assets. “This ratio, although not within itself an indicator of a poorly managed mortgage portfolio, has more than doubled in the past ten years,” Dollar noted. “.If the risk is not managed effectively, this degree of concentration in fixed, low-rate first mortgage loans represents potentially high exposure to rising interest rates.” While the agency does not have a fixed recommendation for mortgage loans relative to the rest of the lending portfolio, “NCUA will not permit an institution to continue an inherently high risk strategy when measures of fair value indicate net worth is approaching a dangerously low or even negative position as measured for plausible interest rate scenarios (e.g., an upward stress in rates of 300 basis points or other shock scenario),” the letter read. Credit unions with high concentrations of fixed-rate mortgages in their portfolios should ask themselves: Does my balance sheet have such a risk exposure? If so, what action should I take to lower the risk to a prudent level? NCUA examiners should be asking the same questions also. “We strongly caution credit unions to avoid a strategy of `wait-and-see’ on interest rates when holding excessive risk in portfolio,” Dollar wrote. -

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