ALEXANDRIA, Va. – NCUA's proposed regulation regarding mortgage note repurchase transactions for natural person credit unions could allow credit unions a bit more wiggle room as net interest margins continue to compress.
By law, credit unions have had the authority for the last 20 years to participate in the transactions, but NCUA has never codified it in rules because there did not appear to be a need or interest, according to NCUA Senior Investment Officer Jeremy Taylor.
Why now? "There is a slight but discernible spread over the Fed Funds on these transactions, which would be from one-eighth to 20 basis points on these," he said. The length to maturity determines the difference in spread with longer being a greater spread, Taylor explained. The agency has proposed maturities of up to 30 days.
As for credit unions' interest in the new product, Taylor said, "Size will matter to a certain degree. Is it only for the largest credit unions? No." He said that a knowledge of repurchase transactions generally will help, as well as credit unions accustomed to pricing mortgages, which will give them a level of comfort with the third-party pricing requirement in the proposal. "They work exactly the same as a security repurchase transaction except the asset being purchased and resold is a loan or pool of loans rather than a security," Taylor said.
The way the process works is a credit union can buy a certain dollar amount of a loan or pool of loans during the 30- to 90-day window the large brokers like Bank of America have to hold the mortgages to get them securitized. Brokers are looking for money to fund the loans they purchased until they are ready to be sold on the secondary market.
Once the investment reaches maturity, credit unions are free to reinvest.
Tammy Cantrell, Corporate One's senior vice president of asset liability management, called the proposal "a real positive for natural person credit unions.We plan to be involved." She explained that corporates could help credit unions perform the "spread trade."
She added that these products carry very little risk for credit unions as these are typically brand new mortgages and since they are in the process of being securitized for Fannie Mae and Freddie Mac, they are conforming. Additionally, the broker-dealer would have to default first.
Corporate One plans to submit a comment letter to NCUA. -scooke@cutimes.com
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