A Win-Win in the First Mortgage Marketplace:

Is the anticipated and often forecasted rise in interest rates actually occurring? While there has been recent uneasiness in the marketplace coupled with speculation that the yield pressure on the 10 year government bond is pointing to higher interest rates on first mortgages; it is difficult to find one source that will make the call...higher rates are here to stay! The reality, as hard as it is to believe, is today, applicants and the public in general view a fixed rate of 3.750% to 4.000% on a 30 year mortgage as high.

While it is difficult to pinpoint one or two major factors that contribute to the feeling the rates will continue to trend upward. The recent news pointing to an improving economy and decreasing unemployment numbers added to the especially positive news that the stock market closed at a record high, may all be considered direct causes in the trending towards higher yields. What do you believe...are these positive steps sustainable or as some believe, just temporary blips in an otherwise unpredictable economy? Can the economy continue to improve, fueling the long anticipated recovery or will the positive news, as in the recent past, prove to be short lived? Regardless of which side of this debate you find yourself, everyone believes interest rates have to eventually go up and when that begins to happen; is your credit union prepared to thrive in a rising interest environment?

To help put this question into the proper context...do you remember the points in time when 6.000% was considered a low and high rate for a 30 year fixed rate mortgage? Meaning whenever you look at interest rates, they are considered, at that time, as being at the market rate. Have you asked yourself how much income you could have generated if you managed your way through the recent protracted low mortgage interest rate market? In order for this statement to have impact, look back over the last four years and try to remember the number of times the interest rates were predicted to increase and as a result you crafted your strategic plan for the upcoming year accordingly. If we are to learn from these experiences and prevent history from repeating itself, we must be prepared for both a rising interest rate market and for the possibility the rates will to continue to remain at historic lows!

How, you ask, can you be prepared for either higher rates or sustained low rates? Although there is no risk free solution; the answer may not be as difficult as you think. If recent history has taught us anything, it is to expect the unexpected. Did your ALM policy provide you with the flexibility to manage your interest rate risk and at the same time earn income in a rate transition? Those of you that had a flexible ALM policy which allowed you to work with the low fixed rate long term real estate loans; enjoyed the economic benefits...while most others saw low rates only as a liability and an income generating challenge.

Does this mean you have to change the way you manage risk? Does it mean your ALM policy may be outdated? The answer is yes to both of these questions if your ALM policy is not structured to allow you to portfolio, for shortened periods of time, long term fixed rate first mortgages at current market rates. What does this mean? Simply stated, create a policy that allows you to manage the short term risk of low interest rate long term mortgages that clearly stipulates the thresholds that trigger when to liquidate the loans. If thresholds are based on historic market performance, the liquidation process will deliver a dollar for dollar return on the outstanding balances sold, cover selling expenses and in many cases generate a gain on sale for your credit union. The process, while not completely risk free, has been used by many credit unions throughout the recent extended low interest rate environment and allowed them to truly use these loans to benefit their members and their credit union.

Well then, how do credit unions develop such an ALM policy? The answer is through collaboration, for unlike other financial institutions, credit unions are willing to help one another. You are sure to know some credit union that has successfully made it through the recent rate market properly using, long term...low interest rate first mortgages to not only help their members purchase and refinance their homes but also generate record income. Pick up the telephone and speak with somone...it does not get any better for a credit union when your ALM policy allows you to operate in such a true people helping people...win - win manner.