ALEXANDRIA, Va.-In a brief meeting last Thursday, NCUA issued a proposed rule to allow federal credit unions to invest in exchangeable collateralized mortgage obligations (CMOs). If the rule becomes final as proposed, it will permit all federal credit unions and corporate credit unions to invest in exchangeable CMOs that represent interests in one or more stripped mortgage backed securities (SMBS) subject to safety and soundness limitations. The two conditions are: * To an exchangeable CMO representing one or more interest only (IO) CMOs, the notional principal of each IO must decline at the same rate as the principal on one or more non-IO CMOs included in the combination. The same applies to principal only (PO) CMOs. The aim is to mitigate risks related to IO and PO SMBS. * At the time of purchase, the ratio of the market price to the remaining principal balance is between .8 and 1.2, meaning that the discount or premium of the market price to par must be less than 20 points. In addition, the proposed regulation prohibits credit unions from exercising their right to exchange the CMO if it represents an interest in one or more impermissible SMBS. It also adds a definition of CMO mirroring the one in the corporate credit union rule. The regulation also makes some technical corrections and clarifications. NCUA Chairman Dennis Dollar emphasized that permissible credit union investments will and should continue to be conservative and the agency will maintain a tight definition of what is allowed. Board Member Debbie Matz added that she is interested in hearing from commenters on whether credit unions should have to meet certain criteria to be able to invest in CMOs or if it should start as a pilot program and whether there should be aggregate limits placed on the investments. The NCUA Board also unanimously approved a community charter application out of the new Region IV Austin office. (As of the first of the year, the agency cut back to five regions from six.) Austin Telco Federal Credit Union applied to serve the entire Austin-San Marco metropolitan statistical area with a population of 1,249,763. The credit union plans to increase its marketing budget and use television, radio, newspaper, press releases, banners, posters, and direct mail advertising to bring in members from around the entire community. Austin Telco already offers free checking, small loans, risk-based loans, and bilingual staff at every branch. The credit union has six offices and plans to add three more. NCUA Vice Chair JoAnn Johnson pointed out that Austin Telco currently has an 84% penetration rate. Finally, NCUA Chief Financial Officer Dennis Winans presented the board with preliminary year-end numbers for the National Credit Union Share Insurance Fund. He added that Deloitte and Touche should have the audited numbers by the end of February. Winans said the agency would stop reserving funds now for the insurance fund since the unallocated reserves have reached $62 million; total reserves came to $77 million. NCUSIF had been reserving $1.5 million a month until the fund reached $60 million in reserves. The decline in interest rates over the last couple years led the NCUSIF's net income down to $29 million from $116.6 million for 2002. The 2003 net income came in at nearly half the $56.1 million budgeted. However, the fund has about $3.9 billion in investments that mature in the next year or less, so the agency should be able to take advantage of the anticipated uptick in interest rates. The NCUSIF will end the year with its equity ratio at 1.25%, but by year-end 2004, it could fall to 1.24%. Winans warned, "When that number falls below 1.25%, we need to consider all the options available to us." That could include a premium. "We knew the end of the year report would not be as pretty this year as it was last year," Dollar said. However, he pointed out that several factors go into the calculation and with rising interests rates and shrinking share growth, coupled with potentially fewer credit union liquidations and smaller losses, premium assessments are not a definite. Each year since 2000 the number of credit union failures has decreased, going from 29 in 2000 to 13 in 2003. Additionally, the cost of closing those credit unions last year amounted to $9.7 million as opposed to $16.3 million in 2002 when 15 credit unions failed. [email protected]