Volatile energy prices will continue stoking the market's inflation worries, which in turn will continue to drive interest rates-including mortgages rates-higher. Bond-market traders are already pushing up bond yields, so we expect long-term and short-term rates to keep rising gradually, perhaps more so for short-term borrowings.

Consequently, we're forecasting significantly higher mortgage rates and less mortgage activity for the rest of the year. Specifically, we now expect the 30-year fixed mortgage rate to average 6.7% in the fourth quarter and the introductory rate on the 1-year adjustable rate mortgages to hit 5.8%. We see the yields on 10-year and 1-year constant maturity Treasury notes averaging between 5.0% and 5.2% for the rest of the year.

Housing starts and home sales will likely drop about 7% to a still very healthy 1.93 million units and seven million units respectively. At the same time, average home value appreciation growth rates are likely to slip from the double-digits of the last two years to about 7.5%.

At the same time, overall originations are likely to shrink 14% from $2.8 trillion last year to $2.4 trillion in 2006. Refis are on track to slip from 44% share in 2005 to 34% in 2006 of total mortgage applications and cash-outs will be the main driver of refinance activity. In fact, borrowers are expected to convert an estimated $170 billion worth of home equity into ready money.

So given the challenges of the next seven months what can you do to keep your credit union's mortgage operations competitive, profitable and securely positioned as your member's first stop for home financing?

Here are two suggestions to help you tap new opportunities and get more value from your mortgage operation in 2006.

Mass Customize Your Products. America's consumers expect the benefits of mass customization in cars, houses, clothing and mortgages. Consequently, your members expect you to have a wide array of products so they have the flexibility to select the one that fits their particular financial situation.

In the current interest rate environment, fixed-rate mortgages are coming back into vogue. So credit unions should look at the new 40-year fixed-rate products now coming available.

Not that ARMS are out the window. Despite this year's rise in rates, we still expect one out of three borrowers in 2006 to select an ARM and to see continued consumer demand for niche products like interest-only mortgages. Credit unions should be able to offer these types of products.

Sell Your Mortgage Portfolio. Consider selling your mortgage portfolio. As interest rates rise, one to four unit mortgage holdings can become a potentially serious drag on earnings since credit unions will have to set aside more capital against risk as loan durations lengthen.

Not surprisingly, our portfolio sales group is seeing a significantly rising tide of calls for portfolio sales assistance analysis from credit unions and other lenders looking to restructure their balance sheets and ensure a steady stream of liquidity for new member loans.

What's the bottom line? It's a given that the mortgage origination market is cooling off, opportunities are trending down and the margins for error are getting tighter. Now the challenge over the rest of the year is to have a game plan that gives you the liquidity, speed, and capacity to meet a wide range of member needs in an increasingly uncompromising marketplace.