The National Credit Union Administration Board has allowed Hawaii's corporate credit union to hold onto a collateralized mortgage obligation that failed a recent stress test.

The board decided at its Sept. 28 closed meeting that Pacific Corporate Federal Credit Union was sufficiently liquid to hang onto a CMO that violated federal rules, agency and industry sources said.

The repayment schedule of the mortgage derivative extended to about seven years when subjected to an interest rate shock test in spring, sources said. NCUA regulations ban corporates from holding CMOs that mature in longer than five years.

"I see no problem with the request of a waiver or the granting of the waiver," said Thomas Toyofuku, chief executive of Honolulu-based Pacific Corporate. "There's nothing we should be overly concerned about." He declined to comment further.

"We decided they had the wherewithal to keep it without doing violence to the instituion," said an agency official.

The mortgage derivative had a book value of about $3 million. As of June 30, Pacific Corporate had $303 million in assets and a $299 million investment portfolio, according to figures from Callahan & Associates, a Washington-based consulting firm.

The Aloha State's corporate is quite liquid, with more than 70% of its investments maturing in less than a year, according to Callahan.

The regulator decided that the security was small enough that it wouldn't present a threat to the institution, an agency source said. Also, the security had passed a more recent shock test.

Corporate investment in CMOs has been a sore point with the regulator and a source of bad publicity for the industry ever since Capital Corporate (Cap Corp) Federal Credit Union, Lanham, Md., collapsed earlier this year because of its speculative investment strategy.

The corporate ran into a liquidity crunch because its CMO-heavy portfolio had been devalued by last year's interest rate increases and depositors were demanding money.

The Senate held hearings on the failure of Cap Corp in February and March, and lawmakers were alarmed by General Accounting Office figures that showed, based on Dec. 30 numbers, some corporates had suffered unrealized losses on CMOs that represented a good chunk of their capital.

Cowed by the Senate and anxious to prevent a repeat of Cap Corp, the NCUA issued a proposal that severely cracked down on corporate investments. It was withdrawn for a rewrite after the NCUA received more than a thousand comment letters opposing it.

As of June 1995, less than 20% of Pacific Corporate's portfolio was in CMOs, according to Callahan. That's down from nearly 23% at the end of 1994.

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