"In my opinion, it's something to always keep our eye on, but nothing to be concerned about right now," Cunningham said.

Turner went a step further, saying the mortgage market is strong.

"There's considerable strength in the current mortgage sector of the economy, but no one seems to want to share that," Turner said, pointing out the "half-full" side of the delinquency ratio: 98.7% of all mortgage borrowers are current.

Turner also noted that from a risk standpoint, an originator's exposure is relative to its underwriting standards. Credit unions tend to retain more loans than other institutions, so, as an industry, exposure is low because underwriting standards are high.

"There are parts of the country that aren't as economically healthy, so there's no question there is risk in some places," Moore said. "But, most credit unions do a great job of monitoring and managing that risk."

What about interest rate risk?

When ALM analysts quantify interest rate risk, they compare an equity's market value against potentially higher or lower rates, "shocking" the accounting equation one to three percentage points in each direction.

"Surprisingly, few of our members have concerns about their mortgage exposure," Moore said. "We serve 2,200 credit unions across the country, and if our members are any indication, credit unions are pretty comfortable."

Turner said credit unions with total ARM mortgage holdings of 11% or less of total loans shouldn't be concerned about interest rate risk; and from what he's seen, the nonprofits have nothing to worry about.

California-based Cunningham said he's spoken with several clients about interest rate risk, but after running the numbers, he doesn't see any industry red

flags, either.

"I think it's important to note that the industry as a whole is extremely well capitalized, with a net worth ratio of 11.34% as of March. A strong capital level helps support risk," he said.

Cunningham said credit unions "reaching for yields" should keep the closest eye on interest rate risk.

"Reaching usually involves talking about maximizing earnings on something, whether it's buying a particular investment or making a certain type of loan," he said. "The reason you're getting a higher yield is because you're taking on more risk."

Moore said his members' concerns have centered on the possible spillover effect from failed subprime lenders, which could decrease mortgage investment liquidity; or, the risk to credit union-held second mortgages, which depend upon the stability of a subprime first.

All three men agreed that mortgage-backed securities, if purchased through government-backed agencies, could suffer some loss of liquidity, but not enough for concern.

Turner, expanding further on the liquidity question, pointed out that credit unions with a fixed mortgage portfolio with coupons averaging less than current convention rates could experience slow cash flow streams in an already difficult share growth environment.

"To ensure prudent liquidity profiles, credit unions should target their overall earning asset duration to between 2.2 to 2.5 years, with six-month balance sheet cash flow equaling 15 to 18% of total rate sensitive shares and equity capital," Turner said.

Risk to second mortgages is more difficult to

quantify.

"If we have a lot of credit unions that funded seconds without doing any homework regarding what the first was, there could be some danger there. The problem is, I don't think people have a real handle on how frequently that happened," Cunningham said. The WesCorp vp said only one of his members has admitted to owning a second behind a sub-prime first. However, in that case,

there haven't been any credit problems.

Corporates not only recommend ALM modeling to their members, they also rely on the tool to determine risk to their own institutions. The corporates not only assess and analyze their balance sheets regularly, they employ complicated and advanced methods.

Cunningham said WesCorp has three ALM teams: one that monitors the corporate's complex balance sheet, one that double checks the first team's results, and one that works with members. Each team shares ideas and findings with each other, increasing ALM modeling experience across the organization.

"Plus, we go outside and validate our own models, bringing in a third party every two years. Sometimes, you get so close to things, something might creep up, and like they say, you can't see the forest for the trees. It's reassuring to bring in an objective third party to give it a once over," Cunningham said.

Cunningham also suggested credit unions develop a model to measure short-term interest rate risk as effectively as

ALM modeling quantifies long-term risk.

"Comparing market value against interest rates won't tell us if the credit union will achieve its earnings target over next couple of years," he said.

WesCorp advises predicting net interest income out 12 to 24 months, and "shocking" yield curves up and down, to measure net income stream volatility and short-term risk.

Moore said Members United tracks its own risk tolerance on a monthly basis, comparing at-risk balance sheet entries against four risk categories: interest rate, credit, liquidity and operational efficiency.

"Ultimately, using the ALM model to determine risk tolerance based on interest rate movements should go beyond just a model," Moore said. "It should also incorporate credit, liquidity and operational efficiency, and should be a part of a credit union's processes and infrastructure."

While measuring operational efficiency against interest rate risk may seem overly ambitious, Moore pointed out that compressed margins make efficiency crucial. Plus, operations are one area in which credit unions have some control, he said.

Turner said he thinks all the bad publicity surrounding sub-prime mortgages present an opportunity for credit unions to gain market share.

"The industry has $250 billion in mortgages outstanding and relatively little delinquency. Fannie Mae has concluded that many borrowers could qualify for a more conventional mortgage, and the interest rate charged for one-year adjustable loan jumped this week from 5.84% to 6.51%, higher than prevailing fixed-term mortgage rates," he said.

Turner also had straightforward advice for credit unions concerned about risky mortgages: get rid of them.

"If a credit union is reasonably concerned about potential increases in delinquency, especially on higher fixed-rate coupons, they could consider securitizing the mortgages and hold them as MBS pass-throughs," Turner said. "This would carve off credit exposure and retain existing relative value of the marketplace."

"Another option would be to sell the mortgages outright through the secondary market but retain the servicing rights. This would retain the credit union's relationship with the member and still provide revenues to the institution."

–[email protected]