How can community lenders survive?
At a panel this morning on community development finance, there was lots of talk about capital constraints and liquidity constraints and in general the way in which the funding for community development lending has completely dried up, despite the fact that such lending has massively outperformed most of the credit product out there.
The problem as I see it is that much of the funding has historically come through trying to be just a little bit too clever in terms of taking advantage of the more conventional banking system. Lots of community development finance has come from banks looking to get into compliance with the Community Reinvestment Act; or investors with taxable profits looking to buy things like low-income housing tax credits; or foundations looking to help provide leverage without risk by using the tools of structured finance, with securitization giving them the opportunity to invest in securities carrying a triple-A rating.
Today, of course, banks have much bigger things to worry about than CRA constraints; they don’t have taxable profits which need to be offset with tax credits; and faith in the tools of structured finance is at an all-time low. But the panelists still felt that they had to continue to push the old model — “none of us would be here”, said the moderator, Betsy Zeidman, were it not for the tools of structured finance being repurposed to what are often called “double bottom line” institutions.
This makes sense: there’s really no alternative out there able to provide the billions of dollars in funding which has flowed into the community-development space from the broader financial sector. On the other hand, with the broader financial sector shrinking, alternatives are going to have to be found somehow. There was talk about letting community development financial institutions borrow from the Federal Home Loan Banks on the same terms currently available to commercial banks — that seems like a good idea to me, so long as the Federal Home Loan Banks are up and lending (they have big problems of their own).
But it was clear that over the long term there’s a big need for community development financial institutions to get smarter and leaner about how they operate, by outsourcing a lot of the back-office and risk-management operations which are often at the moment performed haphazardly by institutions far too small to do them well. The problem is how do we get there from here — we don’t yet have the kind of institutions capable of providing efficient back-office services to a large number of small and largely non-profit lenders. Any laid-off bankers care to try founding one?