REQUIRED READING: A Beacon Of Hope In Today’s At-Risk Communities

Written by Phil Hall
on October 03, 2008 No Comments
Categories : Required Reading

Within the realm of residential lending, community development financial institutions (CDFIs) occupy a relatively slender space in regard to origination output. They also occupy a relatively precarious market: economically challenged urban and rural communities, including many areas where legitimate financial service providers do not operate.

In the midst of the current banking crisis, one might assume that the CDFIs are experiencing their share of wreckage. However, this sector is showing no signs of bruising. In fact, many CDFIs are filling both financial and emotional voids that were left when larger lenders recently stumbled. Through conservative business practices and an intensive outreach to their communities, the CDFIs are often seen as beacons in an otherwise cloudy environment.

The concept of the CDFI industry was created in response to the ‘War on Poverty’ launched by President Lyndon B. Johnson in the 1960s. In the 1970s, when the notion of community renewal became a major socio-political concern, a number of CDFIs began to open. This was accelerated in 1994 when the U.S. Department of the Treasury started issuing financing through the CDFI Fund, which is now the largest source of capital for these institutions.

In recent years, the CDFI Fund has been the source of political struggle. For the 2008 fiscal year, the federal government appropriated $94 million to the CDFI fund. In its fiscal year 2009 budget, the Bush administration pegged $29 million for the fund – the Senate Appropriations Committee marked up $100 million during a July meeting. (The final sum has not been approved, as of this writing.)

The typical CDFI borrower would fall into what most lenders would consider nonprime (or even subprime) status: low or moderate incomes and either low credit scores or sparse credit histories. But while many lenders would actively avoid such borrowers, the CDFIs have experienced very few problems.

‘Historically, CDFIs have a much lower default rate than the general lending population,’ says Fred Zeytoonjian, executive director for the Coalition of Community Development Financial Institutions. ‘I've not heard that's changed in any way.’

What is the CDFIs' secret? ‘They are more cautious about lending,’ continues Zeytoonjian. ‘In order for people to get a loan through a CDFI, they have to jump through a lot of hoops. I think this a level of confirmation that folks are ready and well educated enough to purchase a house.’

Furthermore, the CDFIs never waded into the risky waters where many larger lenders drowned.

‘One reason why the CDFIs are doing well today is because they had very little direct exposure to the subprime fallout,’ explains Lisa Williams, director of the CDCU Mortgage Center for the National Federation of Community Development Credit Unions. ‘They knew their costs and didn't make subprime loans. They were looking out for their customers – and their portfolios. They do what I would call 'make sense' lending. CDFIs can do this because a lot of them know their customers.’

For Pedro Bryant, president and CEO at Louisville Community Development Bank, the secret to a CDFI's success is maintaining conservative lending values.

‘Our underwriting is pretty stringent,’ he says. ‘While the industry was pushing 100 percent to 110 percent loan-to-value (LTV) mortgages, we have always taken a very firm position of not financing for more than 85 percent of LTV. To encourage lending when someone doesn't qualify is to do a greater disservice to that individual, his family and the community as a whole.’

Community outreach

But this is not to say that the communities served by the CDFIs are immune to today's economic problems. After all, not everyone in the community has loans through their local CDFIs. However, these institutions are taking the proactive approach to ensure the stability of their surroundings.

For Bryant, whose bank is the only CDFI in Kentucky, the Louisville area has seen a significant rise in the number of foreclosures. Rather than wait for distressed borrowers to seek him out, Bryant is aggressively going out in search of homeowners who may need his help. To reach these people, he is working with local religious leaders.

‘I have been calling on pastors and leaders in churches,’ he explains. ‘Homeowners with problems often talk with their worship leaders.’

Bryant notes that he brings the faith-based leaders, along with other community advocates, to his bank for regular meetings to get a sense of the local situation and to explain how his bank can help.

‘We have a list of all faith-based organizations in the county,’ he says. ‘We call on four to five ministers a week.’

The ministerial outreach has enabled Bryant to meet with parishioners who might not have been aware of his bank's ability to help them during their current difficulties.

‘We can step in to help refinance mortgages,’ he continues. ‘Reaction has been very, very positive.’

While Bryant is facing the current problems, Bill Bynum is finding community crisis management to be a little too familiar. As chief financial officer for Hope Community Credit Union, headquartered in Jackson, Miss., he serves a region that is still struggling to regain its footing following a catastrophe from three years ago.

‘We've been working since 2005 to deal with the aftermath from Hurricane Katrina,’ he says. ‘It's been busy.’

Bynum notes that while Katrina damaged the regional infrastructure, the current economic crisis has done a harsh number on its financial well-being.

‘The subprime challenge hit this region hard,’ he says. ‘In the region, Mississippi had the highest rate of subprime and a high rate of foreclosures.’

But Hope's financial health has not been imperiled. ‘We never did subprime,’ adds Bynum. ‘Our portfolio performed fine. We didn't make loans that led to foreclosure. We had fixed-rate, 30-year loans on our books.’

As with Bryant, Bynum and his colleagues are making an effort to work with faith-based groups and local nonprofits to help local residents facing mortgage-related hardships.

‘Because of our mission, we worked a little harder to reach economically distressed communities,’ he says. ‘That's been our strategy all along. Sometimes, we have to stretch ourselves in order to come up with some response.’

Indeed, CDFIs across the nation appear to be receiving more requests for assistance and advice from people who never had previous communications with these institutions.

‘We're getting somewhat of an increase,’ says Williams. ‘Many of our credit unions have mentioned they are getting more inquiries.’

CDFIs also have another outreach concern: the secondary market. Bynum notes that Hope has traditionally had no problems selling loans, but today's environment is creating new concerns.

‘What we could approve 12 to 18 months ago, we cannot find investors to approve now,’ he says. ‘We are holding more loans in our portfolio.’

For CDFIs that did not have direct contact with the secondary market prior to the market's current problems, there are entities that help bridge that cap.

‘The CDCU Mortgage Center began three years ago to help credit unions expand their mortgage financing,’ says Williams. ‘We purchase mortgages from credit unions. Many community development credit unions don't have the solvency to sell to Fannie Mae and Freddie Mac. We're that gateway for them.’

Williams adds that the center also buys a particular type of loan that often remains stuck in portfolios. ‘We purchase manufactured housing loans,’ she says. ‘That is a rare commodity for credit unions that don't want those on their books.’

Furthermore, Williams notes that the center offers educational training to help bring community development credit unions up to speed on the secondary market. She believes that CDFIs have the potential to emerge from today's environment and expand their footprint in the residential lending sector.

‘I see them locating more resources and broadening their depth and breadth to help customers,’ she says.

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