Credit unions are starting to feel the hurt on their mortgage-backed investments from the home loan refinancings of the past 18 months.
Losses on Fannie Mae-backed interest-only strips, collateralized mortgage obligations derived from interest streams on pools of mortgages, eliminated the capital of a small New York credit union earlier this year, forcing it to merge with a healthier institution.
The losses experienced by Syosset, N.Y.-based Tobay CU, estimated at more than $1 million, are indicative of losses being felt by several other credit unions on mortgage-backed derivatives, according to National Credit Union Administration officials. Seeing the losses mount due to accelerating mortgage prepayments, NCUA examiners called on the $17 million credit union to either sell off the investments or to mark them down to market value. showing the losses on its books. The markdown ate up all of the Tobay's capital and forced it to merge last July with nearby Nassau County CU.
Although credit unions are limited in their investments in IOs or POs for use only as hedges and by passage last year of a three-part CMO suitability test, many credit unions still hold these instruments. And mortgage refinancings of the last 18 months, which have upset the prepayments schedules and reduced yields on most of the instruments, have eroded book values.
As part of the Tobay case, the NCUA board Nov. 15 issued a cease-and -desist order and a $35,000 penalty against Redstone Securities, the Plainview, N.Y., brokerage which sold Tobay the instruments, and a cease-and-desist order and $10,000 penalty against Frank Intagliata, the broker who sold the instruments. The orders against Redstone and Intagliata were issued because intagliata allegedly charged excessive commissions on the sales to Tobay.
