ALEXANDRIA, Va. — In response to problems in the subprime mortgage sector, NCUA has issued guidance to corporate credit unions regarding the potential impact on mortgage backed securities.
The letter (No. 2007-02) highlights credit quality and market value concerns with mortgage backed securities with underlying subprime or nontraditional mortgages and/or structured with an available funds cap. Credit losses or interest shortfalls can negatively impact the value of an MBS with an AFC, the agency warned.
"[A] transaction may use excess spread for credit support and pass through a floating rate subject to a cap equal to the weighted average interest rates on underlying loans," the letter signed by Office of Corporate Credit Unions Director Kent Buckham stated. "If a shortfall occurs because of a credit loss, the amount of interest currently distributed will be reduced to the amount payable based on available funds. A transaction may provide for the shortfall to be carried forward and paid at a later date if there is excess cash. Note a transaction might provide for payment of any carry forward amount only if there is excess cash after building over collateralization to a target level. Further, a transaction may not cover a carry forward amount after specified dates or events."
Recommended For You
The guidance letter also directs corporates to letter No. 2003-01 for policy requirements for credit concentrations and credit monitoring.
"Problems recently reported with underwriting and servicing of many sub-prime and non-traditional loans intensify the need for adequate monitoring of MBS by management, since such loans may have been securitized," the letter read.
To ensure prompt identification of risks, corporates should require appropriate pre-purchase analysis and ongoing monitoring of MBS to control material exposures to credit risk, market value risk arising from AFC, and concentration risk to a single originator or servicer.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more inforrmation visit Asset & Logo Licensing.
