Wall Street Watch: Mutual Fund Securitizes Loans Made Under CRA

Access Capital Strategies LLC has launched a mutual fund designed to act as a national secondary market for Community Reinvestment Act loans, with an initial $25 million investment from BankBoston Corp.

The ACS Community Investment Fund is expected to serve as a conduit or investment vehicle to encourage community and economic development.

The fund, launched last week, is one of several recent innovations that promise to help banks meet their commitments under the Community Reinvestment Act by creating liquidity in CRA loans. Both Freddie Mac and Fannie Mae have come to market in the past eight months with securities backed by CRA loans.

"We've made a commitment to CRA lending with or without this investment," said Bonnie Tracy, managing director, global treasury portfolio management at BankBoston. The $25 million is not a significant investment for BankBoston, Ms. Tracy said, noting that BankBoston has a loan pool behind this investment that is much larger.

"What we're hoping is that this BankBoston model is something that can be used elsewhere," she said, adding that the fund "offers the opportunity to broaden the participants that can be involved as investors."

Ronald Homer, chief executive officer of Access Capital Strategies, said, "The idea for this product was born directly from our knowledge of the change in CRA regulations to include an investment test."

The fund is designed to help banks meet the investment portion of their CRA commitments, which also include services and lending obligations, Mr. Homer said. Institutional investors will be the primary investors, he said.

The fund's operators hope to buy $1 billion of loans, $100 million from each of 10 geographic regions, over the next one to three years, Mr. Homer said. Investors may be banks or insurance companies looking for a AAA-rated investment that also satisfies regional CRA requirements.

New England is the first region in which the fund has established a foothold. In addition to BankBoston's $25 million investment, five Massachusetts banks have agreed to invest $4 million collectively. They include State Street Bank and Trust, Wainwright Bank and Trust Company, Boston Federal Savings Bank, Century Bank and Trust Company, and Belmont Savings Bank.

"The more people that we have focused on this, the better," said Ned Brown, president of Financial Modeling Concepts Inc., a Jersey City-based data company. "It's creating more interest in CRA portfolios."

The fund will buy securities structured for direct sales to the fund, or it will purchase private placements-a custom-crafted security where the price of the guarantee and the price of the sale of asset can be negotiated simultaneously and locked in-to create a secondary market presence.

The fund will purchase securities from CRA loans that might include commercial real estate loans, small business association loans, one- to four-family residential mortgages, multifamily residential loans, and others that qualify, Mr. Homer said.

The fund would be a potential buyer of securities from Fannie Mae, Freddie Mac, and Wall Street firms such as Bear Stearns that are acting as conduits for creating securities from CRA loans.

Sources on Wall Street said that other firms such as Salomon Smith Barney, Lehman Brothers, and Credit Suisse First Boston are also clamoring to get into the CRA securitization business.

Fannie Mae and Freddie Mac are both overlooking or "constantly evolving" some of their criteria for purchasing such loans, Mr. Homer said. "This could be pioneering for their ongoing CRA initiatives," he said.

Many investors contend community reinvestment loans and subprime loans are timely investments because of lower prepayment speeds. "The market is valuing the prepayment protection that you might be getting with a CRA investment right now," said Ms. Tracy of BankBoston.

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