Commercial MBS Market Beckons ForCUs

WALL STREET - (06/07/04) -- A year after NCUA opened the door tothe commercial mortgage backed securities market, credit unionshave been slow to enter. But at least one credit union has steppedin and found the CMBS market inviting. Christopher Sullivan, chiefinvestment officer for United Nations FCU, said he has investedabout $15 million of his $1.1 billion portfolio in the CMBSs, whichare created from a pool of commercial loans, and is satisfied withthe results, so far. The returns can be rewarding, while making fora good diversification play, said Sullivan. For example, some CMBSswith an average life of around five years are yielding a 4% return.Another issue held by the credit union, with an average life ofaround three years, is yielding 3.77%. There is broad protectionfor the purchaser. First, NCUA rules require the securities beTriple A-rated. And, unlike the residential MBS market, thepurchaser is generally protected from prepayments because theunderlying loans have severe penalties for prepayments. And thepurchaser of the first tranche is protected from defaults, whichare absorbed by the lower quality tranches. "This will be a productwe will be returning to," Sullivan told The Credit UnionJournal.