ALEXANDRIA, Va. — The NCUA Board voted to give federal credit unions the authority to participate in repurchase transactions in which the instruments are comprised of first-lien mortgages at its monthly board meeting last week.

Federal credit unions have been permitted by the Federal Credit Union Act to invest in mortgage-backed and mortgage-related securities pursuant to the Securities Act of 1933, but NCUA has limited that authority through regulation. The current rule only permits federal credit unions to purchase mortgages notes of its members or those needed to complete a pool.

However, when the final rule becomes effective, 30 days after publication in the Federal Register, federal credit unions will be permitted to invest in mortgage note repurchase transaction with six conditions of credit concentration, minimum credit ratings, independent assessment of market value, maximum maturity, custodial requirements, and undivided interests in mortgage notes.

Three of these provisions in particular drew comments from the public. Some commenters felt restrictions of 25% of net worth cap on investments with one counterparty and 100% of net worth cap with all counterparties were too confining. After consideration, NCUA kept that portion of the final rule the same as the proposal “for purposes of safety and soundness” and pointed out it was in-line with the national banks.

NCUA’s final rule, like the proposed regulation, required the counterparty’s credit rating be no lower than A-, the third highest investment grade. However, NCUA did modify the requirement by allowing a third-party with the required credit rating to fully guarantee the transaction of the counterparty if it does not meet the requirement, reflecting common market practice where a parent company guarantees transactions for its subsidiaries.

Finally, the agency did heed commenters’ requests to extend the proposed 30-day term of a mortgage note repurchase transaction to 90 days. –