(February 6, 2006 - New York, NY) “Credit unions can, should, and will do more to provide affordable mortgages for low- and moderate-income communities,” declared Federation Executive Director Cliff Rosenthal. “By launching the CDCU Mortgage Center, we’re putting our resources to work to make this happen.”
As 2005 drew to a close, the Federation‘s secondary market went live with the purchase of loans to immigrant first-time homebuyers. The loans were originated by the Federation member Self-Help Credit Union in Durham, North Carolina.
“Our program seeks to purchase performing, though nontraditional loans that help build wealth in underserved communities,” said Rosenthal. “Loans such as cooperative and manufactured housing loans. We, plan to expand the market for these as well as more conventional loans in low- and moderate-income communities, and to help credit unions recycle their capital many times over, while managing their balance sheets for better asset-liability management.”
The Federation believes that its initiative will help fill gaps in the existing secondary market system, which tends to exclude or discount heavily loans that are perceived as non-standard or high-risk. “The secondary markets like ‘plain vanilla’ – mortgage loans that pretty much look the same – and they prefer to receive them in large bundles,” said Terri J. Fowlkes, the recently-appointed Director of the CDCU Mortgage Center™ (see accompanying article). “The goal of the CDCU Secondary Market is to purchase nonconforming loans at a fair price from credit unions, season them, aggregate them, and then resell them when and where appropriate. The Federation is also working with other non-profits on the possibility of securitizing the mortgage loans in the future.”
With the credit union movement under pressure from community advocates and Congress to demonstrate and document their service to “people of modest means,” the CDCU Secondary Market comes at an important time, according to Rosenthal. “The Federation does not support the extension of the Community Reinvestment Act (CRA) to credit unions,” he said, “but we are keenly aware of the potential of credit unions to achieve a great deal more than our movement previously has in serving low-income and minority needs. We believe our CDCU Secondary Market can help.”
The Federation’s initial loan purchases were to first-time homebuyers in areas that have been designated by the U.S. Treasury Department’s Community Development Financial Institutions (CDFI) Fund as “Hot Zones” due to high levels of economic distress. These first transactions were designed to test the CDCU Mortgage Center’s underwriting policies and procedures. The next step will be to expand the number of credit unions that are eligible to sell loans to the Center. During 2006, loans will be purchased from member CDCUs, and then the Center will phase in purchases from the Federation’s Community Development Partners -- large “mainstream” credit unions that serve low-income members. Subsequently, it will extend its activity to other credit unions seeking to expand their activity in low-income areas.
Seed capital for the CDCU Secondary Market has come from the CDFI Fund, with additional investments from the Federation’s Capitalization Program. The CDCU Secondary Market will replenish its capital by raising debt from social investors, and by selling packages of seasoned loans to outside investors. The Federation is also exploring opportunities to securitize mortgage loans, in collaboration with other community lenders.
“We’re confident that these loans will demonstrate superior performance and will change the perceptions of many potential investors,” said Fowlkes. “This market has tremendous potential for growth,” she said, “and provides a way to keep capital flowing to communities and people who need it most.”