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July 02, 2009
Report Suggests that CDFIs are Weathering the Worst of the Economic Crisis
    by Robert Kropp

With funding for community development financial institutions a central part of the economic stimulus, and with renewed interest from individual investors, CDFIs look forward to improved performance for remainder of 2009.


It came as no surprise that economic conditions in the US worsened in the first quarter of 2009. The economy shrank at an annual rate of 6.1%, the second largest decrease in 26 years. The national unemployment rate rose to 8.1%. FDIC-insured loans and leases 30 or more days past due rose to 5.8%, and the percentage of mortgages in foreclosure increased to 3.85%.

With conventional mortgage originations for home purchases reaching historic lows in the first quarter of 2009, the overall mortgage lending industry continued its decline. In such an environment, how did community development financial institutions (CDFIs) fare?

CDFIs are community-based financial institutions with a primary mission of community development in economically distressed urban, rural, and Native communities. Nationwide, there are more than 1,000 certified CDFIs with a collective $25 billion in assets.

The Opportunity Finance Network, a network of more than 170 private financial intermediaries that through 2007 originated $20 billion in financing in non-conforming communities, has published its third consecutive quarterly survey of CDFIs. The survey aims to better understand the impacts of tight credit markets and the economic downturn on the CDFI industry.

Entitled CDFI Market Conditions Report: First Quarter 2009, the survey includes responses from 106 institutions. More than half of the respondents reported that the number of financing applications increased in the first quarter. According to the report, "New originations did not keep pace with demand due to liquidity constraints and intensified due diligence."

CDFI portfolio quality improved in the first quarter, and nearly half of the respondents increased their loan loss reserve ratio to manage higher levels of risk. While over half of CDFIs remain capital-constrained, one-third of respondents reported that access to capital improved. Respondents expect that demand for CDFI financing will continue to increase.

At the very least, the report describes an industry that managed to remain stable during a quarter in which the overall mortgage lending industry suffered sharp declines. SocialFunds.com spoke with Mark Pinsky, the CEO of Opportunity Finance Network, about the findings of the report.

"We're very pleased that the first quarter was stable for CDFIs. Considering the economic picture, we were prepared for worse," Pinsky said.

"Historically, CDFIs have generally tracked what's going on in the greater mortgage lending industry," Pinsky continued. "However, in the first quarter our reported net charge-off was a third of what it was in the overall mortgage lending industry. We believe that charge-offs in the third and fourth quarters may have cleaned up the balance sheets of CDFIs."

Pinsky attributed the stability of CDFI performance to "an aggressive conservative approach in the third and fourth quarters of last year, in which assets were valued down and things that had to be written off were written off. CDFIs took the hit up front, which should be done in such circumstances, and were not carrying bad assets and pretending they were good."

The report noted that CDFIs are continuing to implement "strategies to respond to the changing market. They are monitoring their loan portfolios more closely, providing more technical assistance to borrowers, and adjusting risk ratings and reserves. They are reducing operating expenses and creating worst-case contingency plan budgets."

Looking ahead, Pinsky said, "If we see consistent trends in the second and third quarters, I think we can conclude that CDFIs have handled the economic downturn well."

Prospects for greater success in the future performance of CDFIs received a significant boost when Treasury Secretary Timothy Geithner announced recently the awarding of $90 million in financial assistance to 59 CDFIs in 26 states and Puerto Rico.

Pinsky said of the awards, "Some CDFIs say the funding will grow their available funds by 50%. We expect that the money will produce half a billion dollars in new financing activities in short order."

In a speech delivered before the Global Financial Literacy Summit on June 17, Federal Reserve Chairman Ben S. Bernanke described some of the challenges to financing that CDFIs face in the current economic climate, as well as innovative ways in which CDFIs have managed to fund their activities at such a time.

"Traditionally, CDFIs have been able to fund a majority of their operating activities through earnings," Bernanke said. But, he continued, "CDFIs' main sources of outside capital and operating support are facing significant pressures of their own." Bernanke cited philanthropic sources, mainstream financial institutions, and state and local governments as sources whose support for CDFIs are being challenged by economic conditions.

Referring to what he called "nontraditional funding sources" for CDFIs, Bernanke continued, "Increased interest by socially motivated individual investors has expanded the pool of investment capital for community development." Bernanke cited a "product similar to a mutual fund" as one example, which, he said, "has raised capital from about 4,700 individuals and invested about $160 million; further, it has performed well, with an average 3% rate of return to investors and very low loss rates."

Asked by SocialFunds.com about the product to which Bernanke referred, Pinsky cited the Calvert Foundation's Calvert Community Investment (CCI) Note, which he called "An important innovation for CDFIs."

In fact, CDFIs have reported significant increases in investments by individual investors. Alan Cantor, the Vice President of Philanthropy at the New Hampshire Community Loan Fund, told SocialFunds.com, "We have about 300 individual investors. We've seen a surge to nearly $900,000 in investments from them this fiscal year, which represents a four-fold increase over the previous year."

"Sophisticated investors with a social mission are taking community investment much more seriously," Cantor said. "And community investing now seems very attractive to people who have been burned by the stock market recently."

 

 
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