Fannie Mae, partnering with three major cities and a unique mutual fund, unveiled last week a new way to leverage major federal funding to produce CRA mortgage-backed securities.
The first deals, with Dallas, Denver and New Orleans, are expected to produce about $50 million in Community Reinvestment Act MBS by August, according to Ronald Homer, CEO of Access Capital Strategies, which acts as advisor to the mutual fund, Access Capital Strategies Community Investment Fund. Moreover, Homer said, the number of cities should at least double or triple by the end of the year.
"Access Capital will provide the funds that will purchase the Community Reinvestment Act loans made by lenders, and Fannie Mae will guarantee the loans," said Franklin Raines, Fannie Mae's chief executive officer. This arrangement should help both lenders and investors meet CRA requirements, he added.
Fannie Mae's America's Community Fund and a number of other buyers, including Peter Lynch of Fidelity funds, are investors in Cambridge, Mass.-based Access Capital Strategies.
Besides providing eligibility for certain CRA credits, these securities are among the few CRA investments that are also eligible for Fannie Mae's risk-weighting of 20% for banks and thrifts, Homer noted.
As Raines noted, Fannie Mae securitizes and guarantees the loans, which are then bought by the ACS mutual fund. Further, the loans leverage such massive federal-funding initiatives as Community Development Block Grants and the HOME program, which are directed principally toward cities. Local funding, revenue bonds and some other sources can also can be used as part of these CRA mortgages.
"We hope that our efforts can serve as a launching pad for a national program as we work with Fannie Mae and Access Capital Strategies," said New Orleans Mayor Marc Morial.
Homer outlined how the program works. Each MBS deal would be tailored to perhaps three or four individual banks in each of the three cities. A bank in New Orleans might put $10 million in CRA loans into the first round of securitizations slated for August. The bank then could originate another $10 million in loans and sell them into a securitization. Meanwhile, ACS Community Investment Fund could sell the first $10 million MBS. The bank would then gain CRA credit for another $10 million in loans without having to hold the loans on its balance sheet.
Lending institutions can also gain CRA credit by investing in the ACS mutual fund, said David Sand, president of ACS. The investment-purchase share is matched with the investor's designated CRA target area and maintained throughout the life of the investment.
On the investor side, "we can tailor the investment to a specific geography and provide diversification of interest-rate risk coupled with agency credit-weighting," Homer said.
"We believe this is terrific investment vehicle for our depository-institution customers," added Julia Gould, a Fannie Mae vice president.
Any seller of CRA MBS "should be interested in the fund because it has better execution since it is willing to pay a premium because of the regulatory benefit to our customers," Homer said. "We'd love to talk to anyone with a CRA portfolio they're interested in selling."
Founded in June of 1998, ACS Community Investment Fund is a secondary-market purchaser of a wide range of community-development securities, including securities backed by home mortgage loans, affordable multifamily loans, commercial mortgages and small business loans.
Fannie Mae has established several CRA programs and securitized $3 billion in CRA mortgages since 1997. In 1999, the goal is $2 billion in the CRA sector.