How to Make Money from the Mortgage Market Meltdown

WALL STREET – Credit unions may be able to earn some money in the mortgage market while waiting to see whether the Fed acts on interest rates next week, according to market participants. In fact, spreads have widened in the market for mortgage-backed securities over the past three weeks, especially for highly rated agency paper, according to Christopher Sullivan, chief financial officer for United Nations FCU. The $2.5 billion credit union has boosted returns on its $1.2 billion in investments by picking some well-situated mortgage bonds, including a 5/1 Ginnie Mae ARM yielding 5.7% and a 10-year Freddie Mac ARM yielding 6%. The credit union is holding taxable municipal bonds yielding 5.46%. Sullivan also holds about $120 million in floating-rate securities, most of it bank notes or CDs indexed to LIBOR and yielding 5.62%. Although prices on U.S. Treasury bonds have rallied in recent weeks with the so-called flight to safety, mortgage-backed securities still are paying a hefty premium to Treasuries. Observers are wondering whether the Fed will trim short-term interest rates when it meets Sept. 18.