CDFI Lenders Persevere Amid The Crisis

style=’font-size: x-large’>The ongoing recession has not missed any corner of the financial services world, and this includes the relatively slender sector occupied by community development financial institutions (CDFIs) that focus exclusively on economically challenged urban and rural communities. Yet despite obvious problems, the CDFIs appear to be holding their own despite the ongoing financial tumult. There are currently more than 1,000 certified CDFIs with a collective $25 billion in assets. The sector receives a considerable amount of financing from the CDFI Fund, which is operated through the U.S. Department of the Treasury. While attempts to cut CDFI Fund financing were made during the Bush administration, the Obama administration has pegged the CDFI system as being a crucial part of economic revitalization – and Federal Reserve Chairman Ben Bernanke has openly voiced his support of keeping CDFIs stable in the midst of the recession. ‘As CDFIs move past the immediate hurdles, however, careful consideration will need to be given to more systemic changes to correct weaknesses that have emerged in the current CDFI model,’ said Bernanke in a speech in June before the Global Financial Literacy Summit in Washington, D.C. ‘Notably, the reduction of funding by key participants highlights the importance of broadening and diversifying the industry's funding base. For example, in the case of the Low-Income Housing Tax Credit markets, major investors, including several large banks and government-sponsored enterprises, sharply curtailed their investments in affordable housing as the value of the tax credits declined along with their profits. ‘Continuing and expanding the current efforts to attract new investors to the Low-Income Housing Tax Credit market could mitigate the overreliance on a few market investors,’ he added. ‘The same could be said for investors in projects supported by the New Markets Tax Credit, a program of the CDFI Fund meant to attract investment to low- and moderate-income areas. Other ongoing efforts to access institutional funding and the capital markets should continue so that CDFIs can tap more reliable sources of funding at wholesale prices.’ Bernanke also noted that the Federal Reserve has been conducting research to promote the CDFIs' financial stability, while the Federal Housing Finance Agency recently sought out public comment on how certified CDFIs can become members of the Federal Home Loan Bank System, thus giving them access to lower-cost funds. ‘Such funding, with known pricing and terms, would be reliable and would help CDFIs manage their balance sheets more efficiently and inexpensively,’ he said. {OPENADS=float=left&zone=15} Within the realm of residential lending, the CDFIs have noted an increase in consumer interest. ‘We have seen community development credit unions (CDCUs) experience unprecedented growth because people decided that banks were not the place to have their business anymore,’ says Lisa Williams, director of the CDCU Mortgage Center for the National Federation of Community Development Credit Unions. ‘There has been an increase in rural housing and Federal Housing Administration loans. We've received a barrage of applications at our mortgage center.’ ‘It is not just in mortgages,’ says John Egan, director of housing development for Coastal Enterprises Inc., a nonprofit community development corporation in Wiscasset, Maine. ‘It is also commercial development and small-business loans. Mainstream financial institutions have become more restrictive in their lines of credit, so people have gone to the CDFIs.’ Jeff Smith, vice president of the Woodstock Institute, a Chicago-based policy and advocacy nonprofit that works to promote community reinvestment and economic development, points out that CDFIs have been bedeviled with a major problem that has impacted the rest of the financial services industry. ‘Not unlike a lot of lenders, they are having a difficult time with the deep decline in property values,’ he says. ‘Property values are so unstable that a lot of CDFIs are not able to make loans over 100 percent of the loan-to-value ratio.’ Smith says that many CDFIs have shifted their home loan focus away from refinancing – their major activity at the start of the current crisis – to loan modifications. He adds that these entities are not actively pursuing secondary marketing options, but it is not a reflection of the current state of the market. ‘Most CDFIs usually portfolio their loans,’ he says. Smith also notes that within this sector, the CDFI loan funds that work with nonprofit developers are in a somewhat more comfortable position than the banks or credit unions. ‘On the loan fund side, they have large capital cushions – much larger than banks' – which is why the loan funds are not having the problems that the banks have,’ he says. At least one CDFI loan fund – Genesis Community Loan Fund in Damariscotta, Maine – has seen its activities gaining an unexpectedly high level of attention. ‘We recently put out a request for bids on a multifamily project, and we had 15 contractors bidding on a $500,000 job,’ he says. ‘That is unheard of in this kind of state.’ But that's not to say the CDFI loan funds are experiencing trouble-free conditions. Theresa Acosta-Lee, vice president and chief lending officer for Texas Mezzanine Fund, a Dallas-based CDFI, observes that entities relying on banks for investment and funding are in a bind. ‘If you get your money from banks, you're not getting it anytime soon,’ she says, noting that her organization's relationship with Guaranty Bank has been disrupted due to the cease-and-desist order placed against the institution by the Office of Thrift Supervision last March. However, Acosta-Lee is optimistic that federal stimulus money and support from the Obama administration will help the CDFI sector – which, in turn, will help bring new opportunities to home buyers. ‘The new budget has more money for CDFIs than any budget in the last eight years,’ she says. ‘There are better days for us in regard to our relevance – today, we are getting respect.’ [i](Please address all comments on this article to Phil Hall at hallp@sme-online.c


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