October 27, 1997

Bank boosts mortgages for poor

By Simon Barker-Benfield

First Union Corp. has pulled off a financing first that is good news for poor families trying to buy a house.

First Union is selling their mortgages to investors with the help of a federally sponsored corporation, the Federal Home Loan Mortgage Corp., better know as Freddie Mac .

'What they are doing is a major step to institutionalize that type of lending,' said Bruce Marks, executive vice president of the Neighborhood Assistance Corp. of America, a Boston-based pressure group that specializes in consumer banking issues.

Over the years Marks has successfully persuaded -- and sometimes bullied -- big banks, including First Union, to expand their low-income lending programs through his organization. Now giant First Union has bundled together $ 385 million worth of home loans to lowand moderate-income families and converted them into securities that have been bought by investors. The home loans were made to satisfy the requirements of the Community Reinvestment Act, which was passed to encourage banks to serve all segments of their markets, not just the easiest ones.

The new securities are guaranteed by Freddie Mac. That guarantee makes them attractive to investors.

The First Union sale is a big deal for two reasons.

It allows First Union to recycle $ 385 million back into making more home loans for low-income families. And it is the first time that a bank has taken low-income home loans and packaged them for Wall Street, as well as the first time Freddie Mac has given its guarantee.

And here a little background is needed.

Banks make loans to lowand moderate-income home buyers all the time. Some they include in the general mass of loans that banks routinely turn into securities for sale to investors.

But typically investors have been leery of investing in lowincome home loans without a Freddie Mac or Fannie Mae guarantee.

The result is that many banks have been keeping these loans on their books rather than selling them to Wall Street. Banks would much rather sell batches of loans in order to get more cash to make more loans, repeating the cycle again and again. Just making a home loan that will sit on their books for 30 years is not attractive to many bankers, even if it helps them meet Community Reinvestment Act requirements.

So what changed for First Union and Freddie Mac?

'Clearly we have gotten better over the years, more precise' in making low-income home loans, said Trez Moore , managing director of mortgage finance for First Union Capital Markets Corp.

Marks said that First Union has realized that a major stumbling block for many people who do not make a lot of money and are good credit risks is that they have no savings for a down payment. First Union and other big banks have restructured some of the loan products to help borrowers around the obstacle, Marks said.

Moore said the loans sold to Wall Street had been on the books for a couple of years and had good payment records.

Freddie Mac was reticent about its change of heart.

'They brought us a transaction that made sense,' was all Douglas Robinson, a Freddie Mac spokesman would say, adding that the institution does not comment on individual transactions.

But both Freddie Mac and its corporate cousin Fannie Mae -- the Federal National Mortgage Association -- have been under fire in recent years from people such as Marks for not making it easier for banks to sell mortgages to investors. For example, last year Marks' group spent Easter demonstrating in front of Fannie Mae's front door in Washington, D.C., with a well-known local minister carrying a cross. The photogenic event made the TV evening news.

'We are looking to do more innovative transactions that work for the community, work for the lender, because that is who our customer is, and work for Freddie Mac,' Robinson said.

This article is reprinted here for non-commercial, educational, fair use purposes only.