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%.
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.
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
"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."
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."
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
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
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."