The government has found that nearly a tenth of credit unions with collateralized mortgage obligations don't know how to manage the investments.

The National Credit Union Administration discovered this level of ignorance during special examinations of 304 credit unions with CMO holdings that exceeded reserves. Regulators went in to gauge the impact of rising rates on the investments. The agency also wanted to test credit unions' ability to manage the risk posed by CMOs.

"We had just over 100 credit unions where we weren't satisfied with the investment policies related to risk evaluation," said David Marquis, NCUA director of examination and insurance. "We asked our examiners to get all over their cases."

The NCUA, which began the exams late last year, still has about 50 credit unions under the microscope.

In the last six months of 1994, the number of credit unions with CMOs in their investment portfolios rose 5% to 1,179. But the dollar amount of the instruments fell 8% to $6.7 billion in the same period. CMOs represent 6.6% of credit union investments, an amount equal to 24.2% of the industry's capital.

In an interview Mr. Marquis attributed the dollar drop to credit unions plowing money into loans or less volatile investments. The mortgage-backed instruments have become undesirable property in a rising-rate environment, particularly with NCUA's implementation of mark-to-market accounting on Jan 1. Under the new rule, many - but not all - CMOs have to be considered "available for sale" and must be accounted for at fair value.

While the NCUA has ordered credit unions to shed CMOs that failed stress tests, such divestitures are a fraction of the decline, Mr. Marquis said.

NCUA's crackdown is expected to create a higher standard of risk management and investment strategy, sources said.

"It's a warning signal," said Wade C. Barnett, vice president and national manager of credit union financial services for CS First Boston. "Those credit unions that get the message are going to put in place interest rate risk measurement systems that help them do their job."

Meanwhile, a controversy erupted last week over the extent of the damage CMOs have done to credit unions' investments.

Last week, Veribanc Inc., a Wakefield, Mass., bank rating firm, reported that if the industry liquidated its portfolios, the net loss would be $3 billion. That's 10.35% of its capital.

NCUA officials and the Credit Union National Association blasted Veribanc's finding, claiming they exaggerate the negative impact that interest rate increases have had on CMOs held by credit unions.

Mr. Marquis said the accurate figure is a $2.2 billion hit, which represents 8.2% of the industry's capital.

Mr. Marquis added that the rating firm exaggerated the concentration of derivative securities in the industry. Veribanc reported that the instruments represent 10.7% of total invesments, an amount equal to 56% of their capital.

The correct numbers are 6.6% and 24.2%, respectively, he said.

"Veribanc's numbers are way off," Mr. Marquis said. "Veribanc based its report on preliminary data."

"I've been having conversations with CUNA people, and their position is is that it's preliminary data so you shouldn't do anything with it," said Warren Heller, research director of Veribanc. "But sitting on our hands is an unacceptable alternative.

"(We) are trying to come to agreement, on the basis of the best data we have, what's the extent of securities losses in the industry," Mr. Heller said.

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