Academic journal article ABA Banking Journal

Sugar Mae Taps Secondary Market

Academic journal article ABA Banking Journal

Sugar Mae Taps Secondary Market

Article excerpt

Sugar Mae taps secondary market

The Mac and Mae clans have a new cousin - Sugar Mae, a Vermont-based secondary mortgage market for rural housing loans.

Sugar Mae differs from the other secondary market agencies in several ways. First, it only serves a statewide audience, not a national one. Second, it is not an independent entity, but rather a program administered by the Vermont Finance Housing Agency, Burlington.

And unlike Freddie Mac or Fannie Mae, its nickname was not derived from the formal name of the program - Green Mountain Mortgage Market - but rather as a tribute to the state's famous maple syrup. Nonconformists. According to Allan S. Hunt, executive director at the Vermont Housing Finance Agency, Sugar Mae's introduction last autumn could not have come at a better time, as local lenders were reporting difficulty in dealing with the national secondary markets.

"Lenders were saying the loans they wanted to make were perfectly credit-worthy," says Hunt, but were unacceptable to the secondary markets for reasons such as the property not being on a paved road or not close enough to a fire hydrant. In other cases, there was too much land attached to the property.

"A lot of these things we have just don't fit into the national secondary market mold," says Timothy Y. Hayward, executive vice-president of the Vermont Bankers Association. He says that for the state's rural housing, it is "not unusual that the heating system might run on wood, for example, or that the owner or mortgage applicant may be a self-employed logger."

Hayward adds that Vermont lenders are being unfairly penalized because of these differences. "We know these are good loans," he says. "The default rate for these loans is very, very low." We can work it out. The situation began to hurt local lenders. "Vermont banks had to curtail their lending activities on those types of properties," recalls Hunt, "or they were doing the loans and putting them in portfolio."

The banks and the VHFA examined the problem and, working with Fannie Mae, came up with Sugar Mae.

Hunt explains how the program works: "If the VHFA would indemnify Fannie Mae for the perceived credit risk of these nonconforming loans, Fannie Mae would be willing to buy up to $100 million. If something goes wrong with them, the VHFA buys them back."

The agency swaps the mortgages for Fannie Mae's mortgage-backed securities, which Hunt hopes to sell to Vermont-based insurance companies and pension funds. …

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