Secondary Market For Low-Income Mortgages Is Planned

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The National Federation of Community Development Credit Unions wants to build within three years a $15-million fund for buying credit union mortgages granted in low-income areas.

The fund, to be used to develop a secondary market for CU mortgages made within underserved communities, has received an initial boost with a $1-million commitment from the Community Development Financial Institution fund, said Cliff Rosenthal, the Federation's executive director.

"We intend to match that from our capital, seek other grants and loans to expand this secondary market," Rosenthal said. "We think the potential is much greater if we succeed in establishing a pipeline."

The secondary market for the mortgages made in low-income areas is projected to be in place and running by Oct. 1, and comes after accords with two mortgage service providers, CU Partners and PHH Mortgage Services.

"Our niche is mortgage lending in low-income communities," Rosenthal noted.

The consolidation of mortgage loans in low-income areas by credit unions is important because the "biggest secondary market is not interested in buying one loan here and another there...or they may be asking for a bigger reduction, or more discount," he told The Credit Union Journal.

The secondary market service will be created to assist CUs in making loans and managing assets and liabilities, he said, reiterating that in many cases the mortgage volumes at credit unions within low-income communities aren't big enough to interest Fannie Mae or Freddie Mac.

In cases where the credit union is holding a mortgage loan at a rate that is lower than the market, the National Federation would help the credit union minimize losses, he said.

The National Federation said that it would "ultimately" try to sell some of the mortgage loans in a package to Fannie Mae and Freddie Mac if volumes rise sufficiently.

"Hopefully by five years, maybe a lot sooner," he said.

The mortgage loans to be acquired would carry market rates.

"We are not interested in purchasing predatory loans unless we can reduce the rate," he said. The loans must conform to standards set by the CDFI Fund. The CDFI Fund was created by the U.S. Treasury to expand the capacity of institutions to provide capital in underserved markets.

The loans will be granted in markets where average earnings are "at or below 80% of median income," he said.

"We expect most likely that early purchases would be in the lesser-cost markets. We would probably start with smaller scale mortgages in low-cost areas," Rosenthal said.

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