WALL STREET -
Market changes are eliminating some market competition and positioning credit unions as a safe alternative for homebuyers. In the investment market, meanwhile, spreads on highly rated securities have widened in recent weeks, offering premiums to credit unions and other investors with available liquidity.
"Credit unions have been late to the game in buying mortgage-backed securities, and they're just now getting comfortable with it," said WesCorp FCU VP-Economic and Market Research Dwight Johnston, who explained that that has limited credit unions' exposure to the current market turmoil, on the investment side.
But with fears mounting in the subprime market, there are some good buys in highly rated paper, Johnston said. He explained that the rates on agency bonds, those issued by Fannie Mae, Freddie Mac or Ginnie Mae, have risen around 10 basis points in recent days, while those on Treasuries have declined, as investors have sought a safe refuge. In addition, "if you're into private label, there are some extremely well-structured paper," he said, noting some private label MBSs are offering LIBOR plus as much as 80 bps.
"If you've gone into this environment relatively liquid you should look for opportunities to stabilize your portfolio with agency pass-throughs. There's opportunity out there. You have the ability to make a lot of spread, versus your cost of funds," advised Ray Amarino, of CU bond house First Empire Securities.
Amarino, whose firm deals with more than 2,000 CUs, is confident that credit union exposure to the subprime turmoil is limited. He noted that the major affects in the mortgage backed market has been on subordinated tranches or non-Triple A-rated pieces of the mortgage bonds. "Triple A pieces have not been downgraded, and credit unions don't get involved in subordinated bonds," said Amarino, who stressed the vast majority of CU bonds are agency-issued, and therefore, insured. "We have not sold any subprime paper to credit unions, or banks, for that matter. We just don't traffic in that kind of paper."
While credit unions hold as much as $100 billion in agency securities, the vast majority of that is in straight debentures issued by Fannie or Freddie, and not mortgage-backed securities, according to several market observers.
Bruce Fox, Southwest Corporate FCU CFO, noted that spreads have widened in short-term investments, suggesting credit unions should go out a little longer, maybe 60 to 90 days, to pick up some yield. By going out a little longer, credit unions can protect themselves from an expected move by the Fed to cut the overnight rate, he suggested. "We're seeing it now at Southwest. More money is moving to longer investments," said Fox.
Some credit unions are picking up yield just by playing it safe, anyway. American Airlines FCU, for example, has the vast majority of its huge investment portfolio-$1.9 billion-tied up in bank issued certificates, which have rallied as a safe haven in recent weeks. Those CDs are earning the $4 billion credit union an average return of as much as 5.5%, according to Eli Vasquez, chief financial officer for the credit union.
"We've seen some spikes the last few weeks. Over the last week it's been as high as 5.5%, " said Vasquez, who stressed the average life of CDs is short, less than a year. This provides American with adequate liquidity to fund loans.
