ALEXANDRIA, Va. – The NCUA Board voted to approve for public comment a proposed regulation to allow federal credit unions to invest in mortgage note repurchase transactions.
The proposal would modify NCUA's investment rule to allow for investments in mortgage-backed securities when the instrument is made up of first-lien notes. These investments are exempt from Securities and Exchange Commission registration, NCUA Staff Attorney Moisette Green noted. NCUA issued the proposed rule with a 60-day comment period.
Several requirements would be placed on these investments under the proposal. The aggregate amount of the investments with any one party would be capped at 25% of the credit union's net worth and 100% of its net worth with all counterparties. When the federal credit union purchases the securities, the counterparty cannot have debt with a long-term rating lower than an A- or its equivalent or a short-term rating below A-1 or its equivalent. The federal credit union must also get a daily assessment of the market value with an independent qualified agent. The maximum term on these investments would be 30 days based on other banking regulators' supervisory approach. All mortgage note repurchase transactions would be under tri-party custodial agreements. Finally, the federal credit unions must obtain an undivided interest in the securities.
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"I'm pleased to see this exploration into new investments," NCUA Chairman JoAnn Johnson said. The proposal grew out of an ongoing pilot program.
The agency is seeking comment on how the investor can easily identify the underlying loans in a mortgage note repurchase agreement and is it enough to have a tri-party custodial arrangement? What should be the minimum underwriting noted in the rule? Should the rule contain quality requirements and monitoring? Given that these investments are typically short-term, should the agency exclude long-term requirements?
Association of Corporate Credit Unions Executive Director Mike Canning said his members are eager to get working on the issue. [email protected]
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