1、FEDERAL RESERVE BANK OF SAN FRANCISCOCommunity Development INVESTMENT REVIEW1Securitization and Community Lending:A Framework and Some Lessons from the Experience in the U.S. Mortgage MarketRobert Van OrderUniversity of MichiganThe purpose of this article is to provide a framework for analyzing the
2、develop-ment of securitization as a vehicle for funding community economic develop-ment (CED) loans. Broadly speaking, there are two models for funding assets: the portfolio lender model, which typically involves banks or other intermedi-aries originating and holding the loans and funding them mainl
3、y with debt, most often deposits, and the securitization model, which involves tapping bond markets for funds, for instance, by pooling loans and selling shares in the pools. The focus here is on broad issues of when securitization is likely to be the more economic form of funding, some specifics of
4、 how the funding might be structured, and an analysis of the experience in the U.S. mortgage market.It is important to consider why securitization has dominated the “prime” mortgage market in the United States, while it has not been nearly so successful in other markets and other places, and whether
5、 this dominance provides a good model for CED loans. Securitiza-tion might not matter as much as is often thought, and it is not necessarily an especially good tool for funding CED loans. In particular, a reasonable way of posing the problem of which funding structure is best is that it can be defin
6、ed by a trade-off between the advantages of securitization as a low-cost and elastic source of funds with the disadvantages of securitiza-tion due to information asymmetry between investors and lenders and the costs of setting up deals. A priori, the balance could go either way.A FrameworkSecuritiza
7、tion has become an important part of the U.S. financial system. It is the process by which lenders raise money in capital markets by selling shares in pools of loans. At the end of 2002, the outstanding volume of mortgage- and asset-backed securities was close to $6 trillion. Of this, over 80 percen
8、t was in the form of mortgage-backed securities. Credit cards and car loans, combined, were just over 10 percent.Securitization is an important part of the system, but it has been largely confined to the mortgage market, particularly the “prime” market, which consists of relatively low-risk, single-
9、family mortgages. This concentration in a single market is important, and it is important for reasons relevant to CED lending. Prime 1 See Davidson et al. (2003).FEDERAL RESERVE BANK OF SAN FRANCISCOCommunity Development INVESTMENT REVIEW2mortgages are among the most transparent financial instrument
10、s in the system, particularly because of the collateral that supports them and the legal system that supports foreclosure. That is less true for CED loans. As I will discuss below, while there is no particular reason that any asset cannot be securitized, it is not an accident that high-quality mortg
11、ages are securitized more successfully than other assets. They suffer least from asymmetric informa-tion and small volume problems that can present important barriers to securitization.The main advantage of securitization is that it can provide an elastic and low-cost source of funds, particularly f
12、or long-term fixed-rate assets. In contrast, traditional funding sources for banks, such as deposits, are generally not elastic in supply and have variable rates. As I will argue, in a perfect, frictionless world, different sources of funds would have the same cost in an “all-in” sense, after adjust
13、ing for the value of characteristics like embedded options, hedging cost, and loan term. The choice of funding vehicle (e.g., traditional bank via deposits vs. packaging and selling into the bond market) would not matter. This does not appear to be the case in the real world. There are many “frictio
14、ns,” like asymmetric information, that make the choice important and make the public policy issue of barriers to securitization at least potentially important. To get a handle on this, it is best to begin with a very simple framework in which frictions are unimportant, and move from there to the rea
15、l world by focusing on important frictions.Modigliani-MillerThe point of departure is the much-celebrated “Modigliani-Miller Irrelevance Theorem” (henceforth MM) (see Modigliani and Miller 1958). Briefly, the theorem assumes perfectly competitive markets, no transaction costs, and widely agreed-on i
16、nformation. The liability structure of the firm is irrelevant; changing the way the firm finances its assets will not affect its “all-in” cost of funds because different liability strategies are simply different ways of rear-ranging the same cash flows from the firms assets. In a well-informed, comp
17、etitive market with a perfectly elastic supply of funds, arbitrage will assure that all structures will be priced so that none has an overall advantage.Taken literally, the theorem implies that while there are lots of possible institutional structures for funding mortgages, for example, and lots of
18、liability structures within the institutional structures, which institutions and structures are chosen does not affect mortgage rates. A softer version of the theorem is that any advantages of different structures are likely to be small. Because of very elastic supply curves, small advantages of one
19、 source of funding (e.g., some sort of subsidy or slightly lower transaction costs) can lead to big effects on how the financing is done, but with small effects on borrower interest rates. The MM Theorem is one of those ideas that seems obvious, but of course it does not hold true in the real world.
20、 Real markets are not perfect, though they are often rather good. Asymmetric information is often the rule rather than the exception. And transaction costs FEDERAL RESERVE BANK OF SAN FRANCISCOCommunity Development INVESTMENT REVIEW3matter. MM has been debated extensively in the economics and financ
21、e journals, but the theorem is not a bad first approximation. It makes us ask the right question: Why should we expect one institutional setup to be better than another at financing a particular set of cash flows when they all compete in the same overall financial system? In particular, it suggests
22、that some justifications for particular structures, like “getting assets off balance sheet” or “the high cost of capital relative to debt” or “allowing banks to shed the risk of low downpayment loans” are wrong, or at least suspect, pending analysis of what part of MM is violated. Much of the focus
23、in studying MM has been on debt vs. equity funding. However, the securitization issue is less about debt-equity structure than it is about the structure of debt funding, particularly as it relates to institutions that typically use different types of debt funding. For instance, the most common type
24、of debt funding for financial institu-tions is deposit funding by banks, but the important alternative, especially in U.S. mortgage markets, has been securitization, typically performed by the government-sponsored enter-prises (GSEs), Fannie Mae and Freddie Mac, or the government-owned Ginnie Mae (c
25、ollec-tively, the “Agencies”). The starting point for our investigation, then, is to understand why there should be any difference between deposit funding and securitization.I. Community Development LendingPublic policy interest in CED lending has been alive, cyclically, at least since the Commu-nit
26、y Reinvestment Act of 1977. Here is a brief discussion of what it is and what characterizes CED loans.What Is It?Community economic development lending is not easy to define. Many CED loans are small business loans, and they are typically defined by lender and customer type rather than loan type. Th
27、ey are often supported by the federal government via a variety of grants, tax subsidies, and guarantees, which are typically “leveraged” with private funding. Community development lenders are generally small institutions, often not for profit, though they can also be commercial banks or work closel
28、y with commercial banks. Sometimes the loans are defined by specific tax benefits for which they are eligible or regions in which they operate. The GAO (2003) study on barriers to securitizing community development lending defined CED loans by lender and customer: “Community and economic development
29、 (CED) lenders make loans to qualified businesses that are generally unable to obtain suit-able financing from conventional private-sector sources.”The customers are typically low- to moderate-income borrowers with little experience or observable credit history, and the 2 The issue of subsidy via gu
30、arantee is not touched on to any extent here. Both sources of funds, deposits and Agency liabilities, have implicit or explicit guarantees, and the question of which is more valuable (at the margin) is not clear.3 GAO (2003) cites five major types of lending sources: Community Development Financial
31、Institutions, Micro-lenders, Community Development Corporations, Revolving Loan Fund Lenders, Intermediate Relenders, 504 Certified Development Companies, HUD Section 108, and Community Development Block Grant Programs. FEDERAL RESERVE BANK OF SAN FRANCISCOCommunity Development INVESTMENT REVIEW4loa
32、ns typically have one or more types of subsidy. Community development loans are often mortgages, that is, loans secured by real property, but they are also often ordinary busi-ness and other loans without property as security. According to the GAO, the loans are perceived as risky and requiring a fa
33、ir number of resources devoted to monitoring and technical assistance.Policy and HistoryThe theoretical underpinnings for the public policy concern follow a line of literature associated with the classic Stiglitz and Weiss (1981) paper on asymmetric information as a source of market inefficiency, le
34、ading to “underserved” markets. In particular, Weber and Devaney (1998) argue that information asymmetries are larger for marginal borrowers in rural or inner-city geographies, and this causes underallocation to these areas. The asymmetric information here is between borrower and lender, rather than
35、 between lender and seller as discussed above, but it presents a similar problem. Lenders know a lot less about projects and collateral than borrowers know, which makes lending difficult. This in turn creates an asymmetry of information between the lender and the potential buyer of the loans because
36、 the lender is closer to the borrower and is likely to have better information than an outside buyer, putting the buyer at risk of being selected against. Other policy issues revolve around externalities, such as that increased lending in certain geographies produces external benefits for those comm
37、unities. These are reasons for subsi-dizing the loans, however. They are not directly relevant to the securitization issue. While there has been some interest in, and some success in, securitizing CED loans, secu-ritization has not been a major factor in CED lending. The GAO estimated that less than
38、 $6.2 billion in nonfederally guaranteed loans was securitized from 1994 to 2001, and only $22 billion in SBA guaranteed loans.In contrast, banks held around $450 billion in small business loans in 2001. The leading firm that does securitization of community develop-ment loans is the Community Reinv
39、estment Fund (http:/ It is a private nonprofit, and it has bought over $300 million in loans.Stylized FactsIn the GAO study, lenders cited several barriers to securitization. The key barriers were:1. A lack of incentives for lenders to participate due to lack of knowledge of borrower demand.2. A lac
40、k of capacity to securitize loans, due especially to small scale.3. External requirements attached to funding sources (both statutory and programmatic).4. Loans with below-market rates that would have to sell at a large discount.5. A lack of lender standardization and performance information.6. Mech
41、anisms to support securitization, such as information links among capital 4 See GAO (2003) for a review of securitizations so far.FEDERAL RESERVE BANK OF SAN FRANCISCOCommunity Development INVESTMENT REVIEW5markets, lenders, and pool assemblers, are limited in number and capacity.Taken together, the
42、se observations suggest that there are five major items that can be taken as basic “stylized facts” about CED loans. These “facts” are the focus of the analysis that follows:1. There is a great deal of heterogeneity across CED programs and loan types.2. Information about individual CED loans is poor
43、 and the loans are perceived as risky by investors.3. Scale is small.4. The loans require more work by lenders (technical assistance and servicing) than do most loans.5. The loans may have to be sold at a discount to cover transaction costs and the present value of subsidies attached to the loans.Th
44、ere has not been a lot of research in this area. The GAO (2003) could not get reliable estimates of the volume of CED loans, and there was little consistent overall performance data. Weber and Devaney (1998) look at rural vs. urban loans in the Lower Mississippi Delta Region and find some evidence o
45、f a dual system with less efficient lending in rural areas. DiPasquale and Cummings (1990) analyze barriers to securitizing low-income multifamily lending. A related area of research is that of “subprime” lending. Cutts and Van Order (2004) survey some of the economic issues in the area, and Straten
46、 and Yezer, eds., (a) and (b) are special issues of the Journal of Real Estate Finance and Economics devoted to the issue. Carr and Zhong, eds. (2002) is a volume of research on microlending. Data and empirical work being scarce, the focus here is on first principles, taking the styl-ized facts abov
47、e as given and analyzing the underlying economics of securitization and how it might be applied to CED loans. What follows is a discussion of U.S. experience, primarily in the mortgage market, and of the underlying economics that drives securitization, which will provide a framework for the discussi
48、on of CED loans.II. Securitization ModelsSecuritization in the United States has been most successful in mortgage markets. Indeed, the structure of the U.S. mortgage market has changed dramatically in the last quarter century, largely because of the rise of securitization. This rise has come about p
49、rimarily because of the standardization of mortgage-backed securities, brought on mainly by three secondary market agencies: Fannie Mae, Ginnie Mae, and Freddie Mac. Annual sales of mortgages to these three institutions have risen from under $100 billion in 1980 to over $2 trillion recently. They now own or are responsible for over half of the outstanding stock of single-family mortgages. This growth has been accompanied by a decline in the market share of savings and loans and banks.5 See Weicher (1999) for a discussion of some of the history of the secondary market. S
