Second Phase Of Secondary Market For Non-Conforming Mortgages Debuts

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Community development leaders joined representatives of Fannie Mae here last week to introduce the second phase of a pilot program developing a secondary market for non-conforming mortgage loans.

Self-Help Ventures Fund, an affiliate of the leading community development credit union, Self-Help CU, has already purchased more than $2-billion in high-risk or non-conforming loans and sold them to Fannie Mae under the pilot program launched in 1998. Self-Help, the North Carolina-based community development corporation, has pledged to buy another $2.5-billion in non-conforming home loans from 22 lenders, including two credit unions, under the second phase of the project.

According to Jim Blaine, president of North Carolina State Employees CU, which sold $310 million worth of mortgages through the first phase, the project provides liquidity in the market for loans which do not conform to the regular secondary market standards of Fannie Mae or Freddie Mac. "We make a lot of loans to what may be considered under-privileged people," said Blaine. "What Self-Help is trying to do is create a secondary market over and above what Fannie Mae and Freddie Mac will do. What Self-Help is trying to do is show there is a market for these investments."

Those loans sold by SECU into the project include the credit union's low-interest two-year ARMs; 100% loans to first-time homebuyers, or its 102% loan, which covers the purchase price of a home and closing costs, as well. These loans, which are geared towards low-income borrowers, do not generally fit the secondary market standards for Fannie or Freddie.

Loans 'Good Investments'

These loan products, according to Blaine, "eliminate the lack of a down-payment as a reason creditworthy people can't get into a home." The loans, he insists, are good investments because they are typically made to state workers, healthcare workers, or correctional employees who have stable jobs but may have little or no credit histories. "The charge-offs are next to nothing," he asserted.

Maurice Smith, president of North Carolina Local Government FCU, an affiliate of SECU, said the Self-Help program provides them with much-needed liquidity to continue their mortgage lending for their 100% loans to first-time homebuyers. "When we reach the $5 million threshold we sell the portfolio to Self-Help. Then we replenish our funds to make more loans," said Smith. "This frees up liquidity so we can keep serving our members."

Both credit unions, the only two participating in the program, maintain the servicing on the loans to retain the member relationship.

Under the program, Self-Help Ventures buys the loans from the different banks and credit unions. The non-profit Ford Foundation provides a grant to Self-Help to apply a guarantee on the loans, which are then sold to Fannie Mae for securitization and sale on the public markets, said Self-Help spokesperson Malcolm White.

The second phase of the program will concentrate on expanding home ownership to low-income rural families by targeting those areas of the country where these groups have migrated for job opportunities.

Loans 'Good Investments'

Self-Help introduced its secondary market initiative in 1994 and was assisted by a $50 million grant from the Ford Foundation in 1998, when the program took off. Since then, the program has helped banks meet their Community Reinvestment Act obligations by facilitating their lending to low-income borrowers. The biggest participants in the program have been: Bank of America, which has sold $505 million of mortgages to the program; SECU $310 million; BB&T Bank $280 million; and Centura Bank $210 million.

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