First Union Corp. and Freddie Mac racked up a first on Monday by packaging CRA loans into mortgage-backed securities.
The $384.6 million deal was placed with institutional investors including several banks that can count the investment toward their Community Reinvestment Act goals, sponsors said.
"Our aim is to create an active, liquid market in CRA securities" that benefits both investors and issuers, said Trez Moore, a managing director in the mortgage finance group at First Union. The Charlotte, N.C., company's capital markets group oversaw the structuring.
The deal is the latest development for a red-hot securitization market that offers investors a stake in everything from credit card balances to rock stars' future royalties.
The First Union transaction, involving 5,400 loans, is also the latest opportunity for Freddie Mac to expand the kinds of mortgages it supports. Freddie Mac put its stamp on the deal by agreeing to guarantee the loans, meaning that investors are assured of getting at least their principal back. The deal also had assistance from Bear, Stearns & Co., which helped with distribution.
First Union is positioning the CRA security as an investment that could be less volatile than conventional mortgage securities while offering decent returns.
Lenders had mainly held CRA assets on their books, because there was no defined aftermarket. Now this securitization structure gives mortgage bankers a chance to earn CRA credit and free up part of their balance sheet for more lending, Mr. Moore said.
Banks that buy the securitized paper can also earn a modest CRA credit, industry observers said.
Wall Street analysts see the First Union deal as an aftereffect of President Clinton's steps in 1992 to pressure banks to do more under CRA rules.
Banks "were given a mandate," said Peter Rubinstein, co-director of mortgage research at PaineWebber Inc.
The circumstances could very well make CRA securitization "a viable niche" in the overall asset-backed market, Mr. Rubinstein said.
Right now, the market is ripe for review because CRA lending has a track record and a decent performance history, observers said. In trying to attain CRA goals, lenders have committed approximately $200 billion to mortgage and small-business lending to minority and lower-income borrowers over the past two decades.
First Union, for instance, crafted its deal by culling from its $2 billion CRA mortgage portfolio. Many of the loans are several years old, and the company also turns out new CRA mortgages at a pace of about $400 million a month, a spokesman said.
First Union also will consider buying CRA loans from other lenders or help them securitize their products, Mr. Moore said.
