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Funding-Strategy – Details

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10-Year Fixed Rate Mortgages at 2.625%

January 15, 2013

Mortgage rates continue to trend near record lows. Ten-year fixed-rate mortgage products are increasing in popularity as a refinance vehicle for seasoned 25- or 30-year fixed-rate mortgages, and most members are willing to hold 10-year mortgages on the balance sheet. Members looking to hedge interest rate risk and mitigate volatility of the net interest margin could fund mortgage originations with long-term advances, which would provide an annuity stream of income and add organic growth to the balance sheet.

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 funding alternatives for 10-year fixed-rate mortgages.

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