Pondering the Securitization of Community Development Financial Institution Loans
November 5, 2024
Do Community Development Financial Institutions (CFDIs) Have a Role to Play in Meeting the Demand for Affordable Housing?
The bottom line: The growth of the securitization market in all its permutations – from commercial real estate to autos and credit cards, to home loans – is responsible for delivering heightened access to capital and increased debt liquidity.
On October 22, the Federal Reserve Bank of San Francisco hosted a meeting with CDFIs, other lenders, and securitization market participants to discuss the feasibility of CDFIs securitizing their loans. Securitizing these loans would allow for the recycling of capital in an effort to maximize funds available to CDFIs. CREFC’s Executive Director Lisa Pendergast attended the meeting.
The ultimate goal of this initial meeting was to determine the viability of a secondary market for CDFI loans.
What Are CDFIs? The U.S. Treasury Department’s Community Development Financial Institutions Fund (CDFI Fund) helps promote:
- Access to capital and local economic growth in urban and rural low-income communities across the nation via monetary awards and the allocation of tax credits.
Financial institutions certified by the CDFI Fund are eligible to apply for monetary support and training to build organizational capacity. The CDFI Fund’s model is competitive and each of its programs provides CDFIs with the flexibility to determine the best use of limited federal resources in their community.
As per the New York Federal Reserve:
- CDFIs are certified by a sub-agency of the U.S. Department of Treasury.
- They are mission-driven financial institutions specializing in lending to low- and moderate-income communities.
- Have access to sources of capital that are not available to other financial institutions. The main sources of CDFI capital include technical assistance grants and long-term capital at below-market rates. And yet, those sources of capital are limited.
By the numbers: As per the Federal Reserve Bank of New York, the CDFI industry has experienced significant growth, with industry assets tripling over the last five years to $452 billion.
- There are currently 1,487 CDFIs (as of May 2023), representing a 40% increase since 2019.
CDFIs come in various forms, including:
- Community Development Banks
- Credit Unions
- Loan Funds, and
- Venture Capital Funds
Loan funds and credit unions comprise the largest share of CDFIs at a combined 85%.
CDFI Expansion through Securitization
What's next? While there are additional pathways to expanding CDFI capital beyond securitization:
- Securitization has the potential for becoming a key avenue for capital expansion and recycling in the sector.
- Yet, securitizing these loans could prove challenging given concerns over a lack of homogeneity in loan types, volume, data, and overall standardization across the various institutions involved.
While CDFIs originate many types of loans, multifamily affordable housing loans may prove to be the most attractive avenue in terms of asset classes given the growing need for housing. Notably, Bank of America is the largest private investor in CDFIs with more than $2 billion in loan deposits, capital grants, and equity investments across its over 250 CDFI partners.
Key CDFI Programs
CDFI programs provide monetary awards to FDIC-insured banks for increasing their investments in CDFIs and for expanding their lending, investment, and service activities in economically distressed communities.
The CDFI-Related Programs include:
- Bank Enterprise Award Program. Provides monetary awards to FDIC-insured banks for increasing their investments in CDFIs and for expanding their lending, investment, and service activities in economically distressed communities.
- CDFI Program. Financial Assistance (FA) and Technical Assistance (TA) Awards for certified and emerging CDFIs to support affordable financial services and products, including single-family mortgage lending, in distressed communities.
- Technical Assistance Awards. Focused on start-up or existing CDFIs, these awards are used to build capacity to underwrite loans and provide other services to its target market through the acquisition of goods and services such as consulting services, technology purchases, and staff or board training.
- Capital Magnet Fund. Competitive grant program to CDFIs and nonprofit housing developers to support financing tools, such as loan loss reserves or loan guarantees, to attract private capital for affordable housing and community and economic development associated with affordable housing.
Potential for Developing a Robust Secondary Market for CDFI Loans?
The sources of capital for CDFIs (as per a Federal Reserve Bank of Richmond survey) tend to be small and include:
- Deposits,
- Income earned from fees and interest on loans,
- Government funding, and
- Bank lenders seeking to meet their Community Reinvestment Act obligations
The ~$450 billion in CDFI assets represents just a fraction of the nearly $23 trillion held by all non-CDFI U.S. banks.
- Limited access to capital sources is one reason why the industry is small relative to other lender types.
The ability to securitize CDFI loans would improve liquidity of CDFIs by affording them greater access to recycle capital and in turn the ability to originate more loans to low- and moderate-income communities.
CDFIs and Securitization
What we do know is that some CDFI loans are sold today in the secondary market — both on an individual or pooled basis.
- According to Treasury, billions of dollars in single-family home loans originated by CDFIs are sold each year.
- These loans, including loans backed by government programs, typically meet standards set by institutional investors and government sponsored enterprises, such as Fannie Mae and Freddie Mac.
To the good, there is some potential to securitize CDFI loans as they are generally granted on standardized terms and a robust dataset exists on loan underwriting and performance. The loans are also created at large enough volumes to attract investors either on a standalone basis or pooled.
Standardization and Detailed Data Gathering Imperative to Forward Movement
As in all securitization product, investors and credit rating agencies will demand and expect to receive a high level of pertinent data, allowing them to appropriately determine the level of risk they are assuming and possible returns. Specifically, investors must have the data available to understand the nature of the collateral, the structure of the loans, and historical loan performance across market/economic scenarios.
CREFC will continue to keep you updated on what potentially could be a novel and attractive market for institutional investors. Please reach out to CREFC’s Lisa Pendergast (LPendergast@crefc.org) if we wish to become involved in this effort.
The information provided herein is general in nature and for educational purposes only. CRE Finance Council makes no representations as to the accuracy, completeness, timeliness, validity, usefulness, or suitability of the information provided. The information should not be relied upon or interpreted as legal, financial, tax, accounting, investment, commercial or other advice, and CRE Finance Council disclaims all liability for any such reliance. © 2024 CRE Finance Council. All rights reserved.