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Funding-Strategy – Details

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15-Year Fixed Rate Mortgages at 3.00%

July 30, 2012

Mortgage rates are trending near record lows, and members posting aggressive mortgage rates may attract a larger market share and still make a profitable spread by relying on long-term advances as the funding source for originations. Many borrowers are taking advantage of low rates to shorten their loan terms, allowing them to pay down their loans and build equity at a faster pace. Fifteen-year fixed rate mortgage products are increasing in popularity as a refinance tool for seasoned 25- or 30-year fixed rate mortgages.

Retaining mortgage originations in the portfolio provides an annuity stream of interest income and adds organic growth to the balance sheet, rather than the one-time fee income generated by selling the mortgages into the secondary market.

If rates rise, it is likely the prepayments would slow, thereby extending the average life of the mortgage. If rates fall, prepayments would likely accelerate leaving excess funding to be reinvested at prevailing market rates. These strategies assume the rate changes ramp up evenly over the first 24 months, and then remain at that level for the remaining term.

Below are three examples of common funding scenarios for fixed-rate mortgages:

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