Though based in the heart of Indian country, Ronan State Bank in Ronan, Mont., has made only one loan for an Indian housing development since the federal government began offering banks guarantees on such loans three years ago.

The $84 million-asset bank lent $1.5 million to the neighboring Salish and Kootenai Housing Authority to build a mobile home park in Pablo, near the Flathead Indian reservation. But it considered no more such deals, because there was no buyer on the secondary market to take the first loan off its books.

“Most smaller banks are not able to do long-term loans with their funds,” because much of their money “would then be tied up and so they couldn’t loan any more money,” said Ben Graves, the manager of Ronan State’s Pablo office.

That could change now that the Federal Home Loan Bank of Seattle has created a secondary market for the federally guaranteed construction loans.

The Home Loan bank said last week that it would buy up to $100 million in loans that its members make to developers of affordable housing on tribal lands under a little-known guaranteed loan program run by the Department of Housing and Urban Development.

The idea is to jump-start the HUD-guaranteed program, said Judy Dailey, who heads the Home Loan bank’s community and research department.

“For some of the smaller banks, having an outlet to sell these loans is very important,” Ms. Dailey said. Her bank’s plan “can help HUD and the tribes generate excitement in this tool,” she said.

“Through this program, lenders can offer tribes better interest rates to make their housing projects more affordable, and it also creates a terrific business investment for the banks.”

HUD guarantees 95% of each long-term loan to developers that build homes on reservations. It has the authority to back up to $200 million of the loans, but only five deals, totaling $10 million, have been made.

The Seattle Home Loan Bank would not be the first to buy the HUD-backed loans. Fannie Mae, which has a $350 million commitment on tribal lands, bought one. But Fannie is mainly interested in buying individual mortgages, said Mark Vanderlinden, its director of housing and community development.

First National Bank of Anchorage lent $1.7 million to the Asa’carsarmuit tribe in Mountain Village, Alaska, for an apartment development under the HUD program. Steve Dick, a commercial loan officer for the $1.6 billion-asset bank, said the Seattle program will encourage it to seek more business from Native Americans, who make up nearly 20% of Alaska’s population.

“There are well over 100 tribes in Alaska, and doing business with them is good business for us,” Mr. Dick said. “So the more tools we have to help them, the better.”

Still, though First National expects to make more of the HUD-guaranteed loans, it may not necessarily sell them to the Home Loan bank. In some cases, Mr. Dick said, it would be to First National’s advantage to keep the loans on its books.

That would be fine with Ms. Dailey. Most banks do not even know about the HUD program, she said, so at the very least the Home Loan bank’s new initiative and accompanying direct mail campaign will make it better known.

HUD has mainly relied on tribes to market the program to neighboring banks, a department official said.

Central Bank and Trust of Lander, Wyo., has one of its branches on the Wind River Indian Reservation in Fort Washakie, but “we didn’t even know this program existed,” said Bill Von Holtum, the chairman of the $50 million-asset bank.

Ms. Dailey said the Seattle bank is initially marketing its initiative just to banks in its own district. However, it is ready to buy the loans from any bank in the Home Loan Bank System, she said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.