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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. 

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Election Night Guide

November 5, 2024

On this Election Day, as the nation awaits the results of its presidential election and various races for seats in Congress, remember that not all states may have final vote counts because of factors such as processing mail-in votes. There may be, however, some early indicators that suggest which party is faring well even before the final ballot has been accounted for.

Below are a few early signs to look for to ascertain which party is doing well before all the results are tallied.

President: Vice President Kamala Harris or former President Donald Trump need at least 270 electoral votes to win, and most paths to victory run through the swing states of Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin.

North Carolina is a competitive swing state this year, as President Trump only won it by just over 74,000 votes or a 1.4% victory margin in 2020. Polls close at 7:30 PM ET.

• Watch the vote counts in the suburbs of Charlotte, Raleigh, and Greensboro to see how well Harris’ message is resonating.
• If Harris runs up the vote count enough in these populous centers of the state, she has a chance to win. However, if Trump eats into her margins in the cities and the surrounding suburbs, it could spell trouble for the Democrats.

Florida counts its votes very quickly and its results should tell us much about where the candidates stand going into the final stretch. Polls close at 7:00 PM ET.

• While Trump is expected to win the state for a third time (2016 by 1.2% and 2020 by 3.3%) the margin of victory may be an early barometer of national sentiment.
• Trump’s margin and his performance in large population centers, like Miami, Orlando, Tampa, and Jacksonville will be highly scrutinized. The results will be another indicator of how effectively the Harris campaign is making inroads with the voters she needs to win the White House. A better-than-expected performance by Harris in the sunshine state could suggest Harris does well in other states.

House: Republicans currently control the House of Representatives with a 220-212 margin and three vacancies. Democrats need to flip just five seats to regain control of the chamber going into the next Congress.

The Cook Political Report rates 22 seats as toss ups, which is less than 5% of the total seats in the chamber. Most election predictions have the odds of control for each party at 50-50.

Virginia’s 2nd and 7th Congressional District results could prove to be early indicators of how each party is performing nationally, and where control of the House may be headed.

• These two swing districts were reliably Republican prior to the 2018 midterms when Democrats won both amid a wave of anti-Trump sentiment. However, Republicans retook the 2nd district in 2022 and came close to winning in the 7th district.
• Retiring Rep. Abigail Spanberger (D-VA) has held the district since 2018 and is retiring to run for Governor. She won in 2022 by a margin of 52-47%.
• The 2nd district is held by Republican Jen Kiggans who took office after the 2022 midterms, defeating Democrat Elaine Luria by a margin 51-48 %.

Senate: The Senate is controlled by the Democrats with a margin of 51-49.

• The tight margin gives Republicans the clear advantage in retaking the chamber.
• With a guaranteed pickup in West Virginia and likely pickup in Montana, the GOP is expected to control the chamber, but the question is by what margin.

The Senate elections in Michigan, Ohio, Pennsylvania, and Wisconsin are all rated as toss ups by Cook Political Report. If any of these seats is won by a margin greater than 3%, it will be viewed as an early indicator of success for the corresponding party nationally.

Ohio: Senator Sherrod Brown (D-OH) is trying to win re-election in a state that voted for President Trump by an 8% margin in 2020. If Brown holds on to his seat or even loses by a narrower-than-expected margin, it will be a good sign for Democrats across the country.

The bottom line: The election could take days to be settled. In 2020 the election wasn’t officially called until Saturday, Nov. 7, four days after Election Day.

Mail-in voting reached a historical high in 2020, when 46% of all votes tallied, or around 72 million votes, were cast via mail, amidst the pandemic.

• The percentage of mail-in ballots is expected to have declined from 2020, however large-scale mail-in voting will cause some inevitable delays in declaring a winner.
• States like Pennsylvania and Wisconsin don’t begin counting ballots until Election Day. For a full list of how each state processes its mail-in ballots, click here.

Be patient, as a similar waiting period is likely this time around. Click here to see when the AP called each state last cycle.

Please contact James Montfort at Jmontfort@crefc.org with any questions.

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Lame Duck Congress Outlook

November 5, 2024

Tonight’s election results will begin to set the stage for legislation and regulation in 2025, but the most immediate impact will be on the legislative agenda for the outgoing Congress and President Joe Biden.

Why it matters: Government funding expires after Dec. 20, 2024, and there are a number of unfinished items Congress needs to address before next year. Party leadership may be incentivized to wait until 2025 in the hope of gaining better policy outcomes with new/larger majorities or they may try to act in November and December if an issue is unlikely to advance in the next Congress.

CREFC members should not expect major policy actions specific to the industry in the lame-duck session, but several items of broader macro interest could be in the mix.

• Government funding and flood insurance expiration after Dec. 20;
• Smith-Wyden Tax Bill H.R. 7024, which passed with a large majority in the House, but was blocked by the Senate GOP; and
• Cannabis banking safe harbor legislation (SAFER Banking Act).

Below, we briefly cover each of the topics and rate the likelihood of action in the lame-duck session.

Government Funding and NFIP Extension: Very Likely.

• Regardless of the election outcome, Congress must act to avert a government shutdown ahead of Dec. 20. The National Flood Insurance Program (NFIP) will also lapse without action.
• In the event of a GOP sweep or Trump victory, Republicans may be incentivized to go with a shorter term government funding extension into 2025 if they expect to be in a better position to shape the funding bill. Speaker Mike Johnson’s (R-LA) original plan had extended funding through March 2025.
• But if the GOP loses the House, it is unclear how the strategy would play out for an outgoing Speaker, especially with a Harris victory.

Smith-Wyden Tax Bill Passes: Unlikely.

• As we’ve previously covered, H.R. 7024 would expand Low-Income Housing Tax Credit (LIHTC) availability for affordable housing as well as enhance deduction calculations for certain real estate.
• The bill had passed the House 357-70, but failed to advance in the Senate as the Republican Senate tax committee was cut out of the negotiation process.
• Since Republicans are expected to take the Senate and be in a position of greater negotiating power, there won’t be much incentive to advance the bill.
• A Harris victory with a Democratic House could spur action if the GOP thinks this deal is better than anything they would get in the 2025 tax debate. But then Senate Democrats may hold out for a better deal.

Cannabis Banking Passes: Unlikely.

• The legislation to create a federal safe harbor to bank state-authorized cannabis businesses has been known by several names (SAFER Banking Act, formerly the SAFE Banking Act) and has had many fits and starts.
• Various bills have repeatedly passed the House and this year the Senate Banking Committee advanced the SAFER Banking Act out of committee on a bipartisan (albeit narrow) majority.
• But the bill has encountered new obstacles from the Right and the Left, which have continued to stymie progress. And influential GOP senators Mitch McConnell (R-KY) and Mike Crapo (R-ID) have been opposed to the measure, which means the bill is unlikely to get standalone consideration on the busy Senate floor.
• Senate Dems could be incentivized to add the bill to a must-pass deal, but that would require buy-in from GOP Senate leadership. Even then, a Republican House leadership may not be on board with the current formulation.
• While lame duck consideration is unlikely, 2025 could present new opportunities for federal decriminalization or legalization of cannabis businesses. Florida has a ballot initiative to legalize recreational cannabis, which Trump is supporting. Both Harris and Trump could present opportunities to legalize cannabis, and new Senate GOP leadership may not be as adamantly opposed as outgoing GOP leader McConnell.

The bottom line: Even for an outgoing Congress, elections have consequences. The November and December months will be busy with spending debates and lawmakers looking to wrap up action on must-pass bills like the National Defense Authorization Act (NDAA) and the Farm Bill. Plus, if Trump wins, expect Senate Dems to jumpstart the process of confirming judges into overdrive.

Contact David McCarthy (dmccarthy@crefc.org) with questions.

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