Abstract: Unconventional mortgage-backed securities (MBS) present an opportunity for the capital markets to support community investment on behalf of issuers interested in less-distant stakeholders with their investors. Such instruments seek to link offers-of-capital to on-the-ground housing finance provision that helps build community identity, which can be expressed through local economic linkages, participatory governance mechanisms and the creation of tangible assets that build personal equity. These securities can be differentiated from conventional MBS by the sectors of the economy they support, the connections they maintain with community actors, and their potential for piquing the interest of market investors through risk-return enhancements. An innovative aspect of the securities is that, through a designated capital flows mechanism, they can recirculate capital within a defined region, creating direct and indirect effects through a filtering process. By bringing together a range of institutions from diverse sectors, the paper aims to provide a stepping stone to the innovative finance communities. The paper discusses the theory behind the securities and their capital flows, gives examples of community reinvestment assistance programs, describes possible roles that different stakeholders can take on, and details the type of support socially responsible investors seek. The results clearly show that financing the housing recovery efforts in high-vacancy areas poses unique risks, and there is a widespread concern that the downside risks could be compounded through demand for low-cost, high-volume investments.
In this context, the motivation for community groups is to bring visibility to the housing market in which they operate, and to identify specific instruments that suit their investment philosophy. At present, there are very few, if any, housing rehabilitation mortgage-backed securities the investment community could focus on. These securities would not be about the issuance of collateralized mortgage obligations that operatively bundle the best assets in the market and re-label them to fit an investor-defined credit quality; the securities would rather be about the capital that operates at a local level, where default risk can be better realized, and the product sold delivers what the investor would expect: a return of their values, along with their expected return.

Keywords: Unconventional MBS, Community Investment, Capital Markets, Housing Finance, Community Identity, Economic Linkages, Participatory Governance, Tangible Assets, Personal Equity, Capital Flow Mechanism, Regional Recirculation, Innovative Finance, Reinvestment Programs, Socially Responsible Investors, Housing Recovery, High-Vacancy Areas, Investment Philosophy, Local Capital, Default Risk, Values-Based Returns.

| DOI: 10.17148/IJIREEICE.2022.101214