Change Co. Bundles Loans to Low-Income Borrowers Into ESG Bonds

(Bloomberg) -- Change Company, a community mortgage lender based in California, has packaged residential home loans made to people of color and low-income borrowers into a first-of-its kind bond and is planning a second round.

The firm sold a $297 million mortgage bond deal last week. Change Company is a lender known as a community development financial institution, which were created in 1994 to provide loans mainly in neighborhoods and areas that might not otherwise have access to credit. They are eligible to receive grants and low-cost funding from the U.S. Treasury.

Change Company is the first such institution to sell mortgage bonds backed entirely by loans it made. Among the more than 20 buyers of the bonds were managers of funds that aim to be socially responsible.

The loans have some similarities to “Alt-A” mortgages, which proliferated about 15 years ago and helped inflate the housing bubble: As with Alt-A debt, Change Company often hasn't verified a borrower's income. But there are key differences between the two loans.

For Change Company's mortgages, credit scores averaged 737, according to ratings firm DBRS, a level viewed as prime. Change Company's loans were generally made to borrowers with relatively large amounts of equity in their homes, giving the homeowner an incentive to keep paying if times got tough. On average, the loans are equal to about 70% of the value of the homes. And borrowers generally had enough cash reserves to cover their payments for four years.

Borrowers don't have to submit the same kind of documentation for income that they would for a conventional mortgage, because the loans are generally designed for people who may not be able to provide that verification, according to a spokesman. But the lender does verify elements of the application, including liquid reserves and previous housing payments.

The largest and least-risky of the securities, around $240 million of bonds, were priced at 1.75 percentage points more than benchmark swaps. Cantor Fitzgerald and Performance Trust led the financing.

Change Company is already planning its second deal, expecting to sell $350 million of its own loans in February or March. “We will be a programmatic issuer,” Jesse Elhai, head of capital markets at Change Company, said in a phone interview.

Community development financial institutions had more than $150 billion of assets as of the end of their fiscal 2020 years, according to a report from the Community Development Financial Institutions Fund. Change Company is based in Irvine, California, but is moving to Anaheim.