A new pilot program started by Fannie Mae last week may give the market for mortgage-backed securities backed by Community Reinvestment Act-eligible loans the boost it has needed for a long time.
In an attempt to expand the secondary market for the very illiquid CRA-loan sector, the government-sponsored enterprise has made a commitment to purchase $2 billion of "MyCommunityMortgage" loans from a variety of mortgage lenders. The specially targeted loans will have specific variances custom-tailored for low and moderate-income borrowers, and Fannie intends to securitize a portion of them, depending on the demand from banks in different geographic areas for CRA mortgage-backeds.
According to a spokesman at Fannie Mae, over the next ten years, the GSE intends to purchase more than $530 billion in CRA-eligible loans as part of its "American Dream Commitment" program. For the pilot program - which will be evaluated at the end of the year - Fannie is teaming with several lenders and mortgage insurers and buying $2 billion of these special loans in an automatic process that encourages lenders to continue originating CRA product.
"This will speed up the process and it will bring technology in in a way that makes the approval recommendations process a lot more automatic," the Fannie Mae spokesman said. "We are confident that this will expand the secondary market for CRA loans. Lenders thought they couldn't sell to Fannie Mae. Now that they know they can, they are likelier to make more of these loans."
"Right now it is our belief that almost all CRA-eligible loans are held in portfolio and not sold in the secondary market," added Glen Corso, the vice president for investor relations at PMI Mortgage Insurance Co., one of the insurance companies teaming with Fannie Mae. "We think that not only are these loans good to originate, but by making a very viable secondary market option available for lenders, you'll see more of this type of lending done."
Most important, perhaps, is the fact that banks who have legally binding CRA requirements will no longer be constrained by their need to simply devote a small portion of collateral to CRA lending. Because Fannie Mae is now involved, banks can make as many CRA-eligible loans as they choose to. In order to do that, they can sell off those loans that exceed their capital limit.
As to how this new $2 billion commitment will translate to the projected growth of pools of MBS which Fannie Mae puts together, that is not completely clear. According to the spokesman, it is too soon to tell how much growth there will be as a result of this program.
"As for our CRA-eligible MBS holdings, we have a bit more than $500 million a year," the spokesman noted. "But that is a very demand-driven, focused market for us. It is a situation where a lender will call and say, Here are the geographic areas I need,' and we find loans that fit. It's a very tailored and customized business for us."
The CRA Credit
MyCommunityMortgage product options give flexibility to lenders by allowing variances that borrowers need to qualify for loans, often unique to particular communities. These variances apply to basic loan features such as loan-to-value ratio, borrower contribution, housing expense-to-income ratio, and others.
For example, the need for down payment assistance may be a critical borrower need in one part of the country, while the need for two to four family housing may be foremost in another part of the country.
"We started buying these loans a year ago," the Fannie spokesman said. "In the past, there was no streamlined approval process, and we decided that there are a number of features that could be standardized. Not only are these loans CRA-eligible, but they are special in what they offer."
According to PMI's Corso, lenders can either sell loans to Fannie Mae to place in its own portfolio, or place them into a mortgage-backed security guaranteed by the GSE.
The illiquid CRA secondary market will no doubt get a boost from this program, but one source wondered whether this would cut into the business of other banks who must, by law, buy a certain portion of CRA-backed MBS in order to meet federal requirements.
All depository institutions have a specific obligation to invest in low and moderate-income assets, and other CRA-eligible assets.
"If it is not certain that there is an adequate supply, then Fannie Mae's action may bid up the value of CRA-eligible assets in the near-term," said an MBS expert. "Every bank thrift and credit union has a legal obligation to provide credit in all of its lending areas."
"Theoretically, Fannie's program also hurts banks that buy these loans, as it doesn't allow them to take loans out of the system that they would have bought to get the CRA credit," another source said.
In other words, many banks can't originate enough of these loans, and need to buy them to get CRA credit for holding them in the secondary market.