Upon the completion of our December 2011 call report, I am once again shaking my head, wondering why the data that I have provided does not accurately reflect the actual amount of real estate loans that will actually reprice within five years. The number is correct according to NCUA call report instructions, which look only at the scheduled maturity date of fixed-rate mortgages and do not take into account the contractual cash flows from these mortgages that will be coming back over the course of the next five years. Because of this, the amount of fixed rate mortgages that are reported as repricing over the next five years is grossly understated and as a result grossly overstates the amount of real estate loans that reprice after five years.
This data is used by our regulator to analyze our interest rate risk; it is also used in peer-to-peer analysis, as well as in aggregate to analyze our industry and to develop policies and procedures. The SIRRT ratio cited in the recent Interest Rate Risk Policy and Program (NCUA 12 CFR Part 741) uses this data.
What is suggested? Simply this: for fixed-rate mortgages the amount of payments that the borrower has contractually obligated to repay over the next five years should be counted rather than the amount of mortgages that have a maturity date within five years. Prepayment factors should not be incorporated.
The impact of using the amount of payments that the borrower has contractually obligated to pay over the next five years rather than the amount of loans that are scheduled to mature over the next five years can be demonstrated by looking at our Dec. 31, 2011 call report data. Using the actual cash flows, which I believe to be the most logical number, shows $149 million in real estate loans that would be repriced within the next five years, and the remainder, or $70 million, would be considered long-term residential real estate loans. Instead, following instructions and reporting based upon scheduled maturity, we show $107 million in less than five-year residential real estate loans and $112 million over five years, a long term amount that is $42 million or 60% higher.
A simple amortization schedule will also demonstrate the difference. If you originated $10 million in 10-year fixed rate real estate loans today at 3.25%, the NCUA data would tell you that zero dollars of this would be considered to be in the under five-year repricing category, when in fact you have the ability to reprice close to $4.6 million within five years.
Our credit union, like others, has been managing interest rate risk for many years. We have a forecasting model and continuously do income simulations, NEV testing and rate shock tests. We do not rely on Call Report data to guide us. However, the NCUA uses data gathered on the call report to measure long-term assets and interest rate risk and to make decisions which impact credit unions. Therefore, I believe that the call report instructions should be modified in order to properly measure the magnitude of these long-term assets. This will become more important as our industry continues to help members by providing these loans.
Rich Putrelo, Controller
Pittsford FCU, Pittsford, N.Y.