Securitization is a great strategic tool to consider using at your credit union. In our last few blog posts, we provided you with information on the different ways to participate in the NHA MBS securitization program. If some of you are still wondering why your credit union should participate, here are three important reasons.
1. It provides an alternate funding tool
The credit union system experiences many cash cycles related to membership needs, often following agricultural, commercial and residential cycles. This creates periods of time during the year in which liquidity can dry up and the credit union is in need of additional cash over and above the usual central line of credits they can access.
As a funding tool, securitization issuances can be planned around expected liquidity cycles to ensure that liquidity is available at strategic times of the year when cash levels are low.
2. It’s a balance sheet management tool
One distinct trend in credit union membership is a desire for low-rate long-term loans paired with variable-rate deposits. This creates interest rate risk for credit unions as they are forced to fund long-term assets with variable funding that could easily increase in cost, thus putting pressure on margin once rates eventually rise.
Securitization is a great option to mitigate these issues as it provides matched-term funding which locks in the initial margin at the onset of the transaction. This allows for the credit union to avoid ‘slowing the taps’ on mortgage business while still sustaining good balance sheet matching policies, ensuring sustainable profitability in all rate environments.
3. It helps to alleviate competitive pressures
Mortgage rate competition has become a major constraint in the banking industry as a whole. Combine low rates, new alternate lenders in the marketplace and financial institutions hiking up loan-to-asset ratios in order to sustain margins in this low rate environment and you get fiercely competitive mortgage rates. This can create problems, particularly when credit unions are funding these low-rate mortgages with similar term liabilities, which have to be offered at a pricey premium.
Issuing MBS helps to combat these issues, providing a low cost of matched-term funding. As the credit union can look up current market costs for MBS before setting a promotional mortgage rate, it is possible for executive to determine the level of margin they are comfortable with, setting competitive rates in a more strategic mindset. Additionally, if the credit union is particularly happy with the current cost of MBS but needs a few months to generate the volumes to securitize, there is also the option to hedge the transaction, locking in the current cost of funds.
There are many benefits to participation in securitization programs – I’ve just named a few here. The chartered banks have access to a variety of market instruments to generate funding in the marketplace, while primarily credit unions have equal access to one: the NHA MBS program.
CMHC has a mandate to foster competition in the marketplace and as a result, they ensure equal access to these programs for credit unions. If you want to improve the financial performance and manage your margin in a more strategic manner at your credit union – securitization is a great tool to add to your financial toolkit.
Tessa Jakubowski, Manager, Securitization, Residential Markets