The secondary market for community-reinvestment mortgages is growing as Wall Street encourages small and midsize banks to participate more actively in the capital markets.

Bear, Stearns & Co. and Greystone Community Reinvestment Associates Inc. joined forces last week to buy packages of loans made to comply with the Community Reinvestment Act by small to midsize banks with CRA loan portfolios as small as $25 million.

"The partnership will bring increased liquidity to the midsize banking institutions and provide them an exit strategy for the affordable-housing mortgages that they are holding in their portfolios," said Howard B. Brown, chairman and chief executive of Greystone, a Hartford, Conn., company that specializes in structuring securities offerings for institutional investors.

New players and innovations have sprouted over the summer in the secondary market, which has the potential to increase the flow of credit to underserved areas while also enabling lenders to meet their regulatory obligations.

With volatility in the stock market and lackluster growth in the bond market, mortgage-backed securities have not performed well in recent weeks, and investors have flocked to the safe haven of Treasury securities. But with rates dropping to historic lows, mortgage investors-who closely monitor prepayment and default characteristics of mortgages-may find value in CRA mortgage-backed securities as the market continues to grow in volume and liquidity.

The CRA niche gained momentum this year and has so far had more than $2 billion of volume, with an additional $2 billion in deals under review, said Ned Brown, president of Financial Modeling Concepts, a Jersey City company that specializes in analyzing CRA loans.

Bear Stearns is looking to give the "medium to smaller-size bank access to the capital markets that they couldn't achieve just working on their own," said Richard A. Ruffer Jr., an associate director.

Mr. Brown said Greystone will help Bear Stearns find banks that were not on their radar screen. Five Connecticut banks are already in the pipeline, and the program will eventually be national, he added.

Mr. Brown of Greystone, a former Wall Street investment banker and onetime Connecticut banking commissioner, helped craft a structure for securitizing CRA mortgages. He got approval from the four federal banking regulators for this process in 1996.

Bear Stearns has been the market leader in securitizing CRA loans. It says it has managed more than $1.89 billion of securitizations in the last 10 months. The securitizations have also involved Fannie Mae and Freddie Mac as guarantors of the senior tranches.

Bear Stearns' four large deals this year have included two transactions with each government-sponsored enterprise. In August, Bear Stearns orchestrated a $396 million bundle of CRA loans acquired from Citibank and units of Citizens Financial Group Inc. that Fannie Mae then sold as a real estate mortgage investment conduit.

Fannie Mae also guaranteed the senior tranches of a $749 million pool of loans from Fleet Financial Group, which Fannie also sold as a Remic.

Freddie Mac participated in the other two transactions: a $411 million pool from First Union Corp. in November 1997 and a $335 million pool from Mellon Bank Corp. in April. Both were also sold as Remics.

Lehman Brothers also entered the market this summer with its first CRA deal as a co-manager with Countrywide Home Loans. This transaction was a $200 million securitization of loans made by KeyCorp and serviced by Countrywide. Fannie Mae guaranteed the senior tranches.

With rates dropping, prepayments are heavily on the minds of investors, Mr. Ruffer said. "This product, as seen through the existing deals, is a very strong performer" with "slow and stable prepayments," he added.

Mr. Brown of Financial Modeling Concepts said, "Although there is an overall flight to quality in bonds right now, the banks are still preparing their portfolios, because the coupon rates on the portfolios are still substantially higher than where Treasuries are." Banks are waiting for spreads to narrow and for call-protected securities, such as CRA bonds, he added. "All the subordinate classes are getting hammered right now" because of the flight to quality, he said.

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