DALLAS — While much discussion regarding subprime lending has focused on direct loan portfolio risk, little has been said about another type of balance sheet exposure: mortgage-backed investments, which gained in popularity during the real estate boom.

For the record, there's very little, if anything, to worry about, according to Angela Calvert, partner at ALM First Financial Advisors.

“The vast majority of mortgage-backed paper is issued by Fannie Mae and Freddie Mac, which to date, have never defaulted on a mortgage investment. There's an implicit guarantee involved with such a transaction, so really, you have two lines of defense. One is the mortgage itself, and the other is implicit guarantee by the agency. If they underwrote that pool of mortgages, they are guaranteeing that pool from default,” Calvert said.

Credit unions that invested in private-label securities may experience losses, but Calvert said it would be rare for a credit union to have such an investment in their portfolio.

According to research by California Credit Union League Economist Terrin Mendivil, if statistics in California can be compared to the rest of the country, risk to credit unions is minimal.

Mendivil said that, according to NCUA statistics, only 6% of California credit unions' investment portfolios were invested in mortgage pass-through securities as of March 2007. An additional 6% is in collateralized mortgage obligations (CMOs) or real estate mortgage investment conduits (REMICs).

“I'm unable to determine which level of risk credit unions purchased, though my guess would be the least risky,” Mendivil said. “Most of the news stories about MBS losses are focused on the most risky tranches (AKA investment pools), but it does have the potential to spill into the less risky tranches.”

Mendivil said California credit unions did purchase commercial mortgage backed securities, but they only amount to about 2% of investment portfolios.

Calvert pointed out that the threat of a loan going bad is not the only kind of loss credit unions might experience due to subprime mortgages. Credit unions may also be exposed to risk due to price fluctuations and a loss of liquidity.

“Liquidity becomes an issue when people no longer want to purchase in that investment class,” Calvert said. “It can be difficult to get a bid on subprime pieces. Sometimes, you can't get a bid at all.”

The investment expert explained that if a credit union must liquidate such an asset, and can't get a bid, it has a negative effect on capital.

“As bids go away in the mortgage market, it widens spreads, which makes prices decline. So, a security you held a couple of years ago has probably decreased in value, because there is less demand,” she said.

How much have prices declined? Calvert said a triple-rated CMO, a typical credit union investment, was trading at a spread of 75 to the curve in the height of the mortgage boom. Recently, such investments closed at 98 to the curve.

“This example is typical of what has happened. There are concerns with outstanding loans, that even a qualified buyer will not be able to make payment, especially if the rate adjusts upwards. In fact, we've seen spreads widen more in adjustable rate products,” she said.

Additionally, she said, a nationwide decrease in home values will hurt the U.S. economy, affecting both lenders and investors.

“I think for the past couple of years, people taking equity out of their homes funded economic growth. There are two major concerns with that: first, what was stimulating the economy in 2006 is not happening this year; and, an even bigger concern for lenders, is that people who took equity out of their homes may be left upside down on their loans.”

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