Wall Street Watch: Banks Seen Cool to Fannie Offer for New CRA Loans

Fannie Mae stepped up to the plate last week with a plan to buy more affordable-housing loans from bankers, but Wall Street doubts banks will pitch many new loans to the secondary market giant.

Mortgage securities traders said rising interest rates argue against a fast start for the program, in which Fannie has committed to buy newly originated Community Reinvestment Act loans in addition to the seasoned CRA loans it has previously bought.

Fannie, which would face higher affordable housing targets under a recent proposal from the Department of Housing and Urban Development, said it would buy at least $10 billion of these loans by 2002.

But the market for CRA securitizations is not as attractive now because it is largely dependent on favorable interest rates. Lenders subsidize their CRA loans by granting a below-market interest rate, so rising interest rates compound the risk of selling these loans. Last year, when rates went down, a flurry of CRA securitization deals flooded the market, because banks could make a profit or at least break even. But with interest rates rising and expected to hover around 8% through the end of 2000, banks now may be reluctant to accept Fannie's offer, traders said.

"No one is going to sell to them," said one trader on Wall Street, who described the environment as "underwater." In a rising-rate environment "everything is less than market coupon," he said.

Still, selling to Fannie Mae and Freddie Mac, the other government-sponsored enterprise, may be better than the alternatives.

"The best execution you're going to get is selling into Fannie and Freddie," said Ned Brown, president of Financial Modeling Concepts Inc. in New York, a company that specializes in analyzing CRA loan data.

Lenders can sell conforming CRA loans to Fannie or Freddie or to someone else who needs CRA credit and will buy whole loans and pay a premium for them. With nonconforming loans -- those that are not eligible for purchase by Fannie or Freddie -- lenders can securitize or put the loans in their own portfolios.

Today about 80% of CRA loans are conforming, a drastic reversal from three years ago, when 80% were nonconforming, Mr. Brown said. He added that a new option may emerge: selling CRA loans over the Internet on a whole-loan basis.

In the past Fannie and Freddie bought only seasoned CRA loans, because they wanted to see at least 12 months of loan behavior, he said. But today's statistical models use previous credit experience to predict how a loan will perform from its first day.

Fannie believes its plan to buy newly originated loans is economically viable because it allows lenders to sell loans in "real time," said Julie Gould, vice president for Fannie's national housing impact division.

"They sell as they originate," she said. "Lenders throughout the country have been asking us to securitize their loans or purchase their loans for cash as they are newly originated." ?

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