Packaging CRA loans into securities.

There are many reasons institutions should consider securitizing their CRA loans and selling them in the MBS market. CRA securities have slower prepayments and other features that make them very appealing to investors.

The recent news about CRA (Community Reinvestment Act) mortgage-backed

The answer may lie in how well the initial transactions were received. Both the First Union ($416 million) securitization in November 1997 and the Mellon deal ($328 million) in April 1998 were several times oversubscribed. What is even more interesting is who bought the loans. Was it banks seeking CRA investment credit? No, it wasn't. The overwhelming participants were money managers and insurance companies buying the loans strictly because of their investment appeal.

Because of the publicity generated by the recent Mellon and First Union transactions, a number of banks holding sizable CRA portfolios have inquired about the feasibility of securitizing their loans. This article will detail the specific characteristics of a CRA securitization as well as, hopefully, answer some questions to determine if a transaction is right for your institution. The authors worked on the most recent CRA transactions and will share some of their insights.

There are three important elements to consider in the securitization process:

* The pros and cons of holding the loans vs. selling them.

* The credit quality of your portfolio and how it will be valued by either the rating agencies or the government-sponsored enterprises (GSEs).

* The prepayment behavior of your portfolio.

Some basic elements of CRA loans

Under the Community Reinvestment Act guidelines, a bank gets credit for originating loans or buying on a whole loan basis; but you get no credit for holding the loans. Conversely, if you sell your loans through a securitization, a buyer can get CRA investment credit if a percentage of the loans is based in the buying bank's trade area.

Talking with a number of banks, we are surprised at the size of many portfolios and, frankly, the circumstances under which banks hold on to the loans. The prevailing misconception we deal with in almost every instance is banks believing they must hold their CRA portfolio, or that they will incur a large loss if they try to sell them.