The National Credit Union Administration last week outlined the steps institutions should take when mortgage securities are severely devalued by rising interest rates.
In a letter the regulator said it has found that many credit unions with high concentrations of collateralized mortgage obligations and real estate mortgage investment conduits had little understanding of the securities.
"I have placed a high priority on examining credit unions that hold high concentrations of investments that may pose a significant risk to safety and soundness," said the letter from Executive Director Karl Hoyle.
According to the letter, credit unions must periodically apply a three- part high-risk-securities test to CMOs and Remics.
If the security fails any one of the tests, the credit union must either immediately sell it or, within five days, develop an action plan detailing how it plans to handle the instrument.
An examiner would then decide whether divestiture is still necessary.
In a review late last year of 300 credit unions with CMO holdings exceeding their capital, the administration found that 57% were holding at least one security that failed the stress test, 29% tested investments only infrequently, and 39% of the managers didn't understand risks posed by CMOs or Remics.