The secondary market for Community Reinvestment Act loans is taking off on Wall Street, prompting optimism that lenders will soon find it easier to meet their obligations to borrowers in their home communities.

In the past eight months, more than $1.5 billion of CRA loans have been securitized in three major deals. The latest was a $787 million package of loans from Fleet Financial Group, which Fannie Mae plans to sell in a $750 million real estate mortgage investment conduit.

The deal follows Freddie Mac transactions with First Union Corp. and Mellon Bank Corp.

"It's only the very tip of the iceberg of the product that's out there to be securitized," said Ned Brown, president of Financial Modeling Concepts Inc., a Jersey City, N.J.-based data company. "Banks can make more of these loans because they know they can sell them."

The CRA is "intended to encourage and measure the reinvestment of bank assets back into the communities that provided the bank deposits," said Marc C. Smith, president and CEO of Crestar Mortgage Corp. and president of the Mortgage Bankers Association of America.

In the past banks had two choices for their community reinvestment loans: hold on to them or sell them to Fannie or Freddie, Mr. Brown said. But the government-sponsored enterprises would "cherry pick" the portfolios, and banks were not always happy with the price they received, he said.

Fannie and Freddie would not buy CRA loans without mortgage insurance, about 80% of all CRA loans, Mr. Brown said.

But lately, Fannie's and Freddie's attitudes have changed. Having set more aggressive affordable housing goals of their own, they have enthusiastically stepped up to the plate.

Investor attitudes have also changed. A refinance boom has sensitized them to the risk of prepayments-and investors now see CRA loans as more attractive because these borrowers are less likely to prepay than affluent ones, said Mr. Brown.

Typical buyers, he said, include insurance companies, money managers, and hedge funds looking for "a staple payment on the coupon that is not going to be affected by recent refinance periods."

Mr. Brown's firm is taking steps to open the market up for smaller banks by creating a conduit that will let them add their loans to a pool with other institutions' loans.

Since securitization deals require portfolios valued at about $200 million, Mr. Brown is creating a conduit to cater to smaller players.

Through the conduit, "even the smallest bank can get the same kind of pricing that the large banks are getting for their loans," Mr. Brown said.

And Wall Street firms have also begun to explore the market. Bear, Stearns & Co. orchestrated the first three deals. And Lehman Brothers will be partnering with Countrywide Home Loans in securitizing $200 million in loans the mortgage bank had been servicing for KeyCorp, sources said.

As a result of securitization, banks are getting very attractive pricing for what some on Wall Street see as originations that are not profitable but required by regulations.

The advent of the secondary market will mean stronger profits, said Henry A. Bessel, president of Nutmeg Federal Savings and Loan Association.

The Danbury, Conn., thrift has been able to sell about 30% of its CRA loans one by one through Fannie Mae and Freddie Mac. It holds its other CRA loans or sells them to private buyers like Countrywide, Mr. Bessel said.

Securitization will allow Nutmeg to be more competitive, he said. "Those banks that aren't doing it have to be more cautious on the rates and the sensitivity," Mr. Bessel said.

Smaller and medium-size banks with CRA loans in the $50 million to $100 million range or the $20 million to $25 million range are now being sought by Bear Stearns.

The firm wants to buy portfolios on a whole-loan basis and pool them with other banks' loans, said Richard A. Rufer, associate director at Bear Stearns. The objective: to enable smaller banks to get "big deal pricing."

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