Affordable housing in your community: How it all comes together

Planning an affordable housing project is like assembling a puzzle. It can take a lot of different pieces, and sometimes the challenges can seem daunting, but when it comes together the results can be truly rewarding.

"Doing affordable housing today is very complicated," said John Eller, first

vice president and assistant director of housing and community investment at the Federal Home Loan Bank of Boston. "Generally on the applications we see (for the Affordable Housing Program), there are between three and seven different sources of funding used to create enough money to develop a property" These projects generally include cooperative efforts between community banks, funding sources such as grants, government programs (at the local, state and federal levels), and various nonprofit organizations.

Helping people afford housing is nothing new for community banks. "The history of ACB members is in housing finance, and very much oriented toward the middle- and lower-income individuals who don't have myriad options to buy a home," said Bob Schmermund, America's Community Bankers' managing director of corporate communications. "Affordable housing is how our members got into the business originally, and that's how they currently maintain their stake in that business."

What is new is the level of complexity involved in some of these projects, and the increasing need for more affordable housing developments. Soaring home prices, coupled with rising consumer debt loads, have made it hard for many Americans to afford housing while meeting their other responsibilities. In the United States in 2001, over 12 million (about one in 10) households spent more than 50 percent of their income on housing, according to the U.S. Census Bureau's American Housing Survey. This was divided about evenly between those who rent and those who own their homes.

FHLBank Programs

The Affordable Housing Program is an important part of the puzzle because, taken as a whole, the FHLBanks are the largest source of private sector grants for housing and community development in the United States, according to Christopher McEntee, senior public relations manager of the Federal Home Loan Bank of Atlanta. The FHLBanks are also the largest funding provider to Habitat for Humanity, he added.

The Affordable Housing Program was established in 1990 through changes made to the Federal Home Loan Bank System in FIRREA, or the Financial Institutions Reform, Recovery and Enforcement Act. Since then, the program has awarded over $1.4 billion to fund over 8,000 affordable housing projects for very-low-, low-, and moderate-income households. In 2002 alone, combined AHP contributions from the 12 FHLBanks totaled $239 millionand averaged over $5,000 per housing unit, according to McEntee.

The Federal Home Loan Bank Act requires the Federal Home Loan Bank System to set aside 10 percent of annual net earnings each year, or at least $100 million, to use for funding affordable housing for very-low, low-, and moderate-income households. The majority of these funds are distributed to member banks through grants or subsidized loans purchases, construction, or rehabilitation projects. Each of the 12 FHLBanks has its own approach to distributing the funds.

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The grants can be very competitive, and there is never enough money to go around, according to Richard G. Fritz, director of corporate communications and chief economist at the FHLBank of Atlanta. "There are often five or six applications for every grant that we give out. In many cases, applications that get turned down are for very worthwhile projects.'

Martha Walters-Pierce knows how that feels. "We are about to submit one project for the third time," said the vice president and Community Reinvestment Act officer of New South Federal Savings Bank, a $1.4 billion-asset ACB member in Birmingham, Ala. "We will just keep going until we get funding. You just don't know what your competition will be like in any one round. If it's a good project, you just have to keep trying."

Learn from the review process, and get all the help you can from the FHLBank, Fritz suggested. "Some people (who don't win a grant) just go away mad. But the people who really care and want to know how to do it better can get help. They can even get an on-site visit from one of our analysts," he said. The FHLBanks also offer regional training workshops and have information on their Web sites to help banks plan their proposals. Fritz said it might even make sense to submit multiple proposals if the bank is considering more than one worthwhile project.

Broadway Federal Bank in Los Angeles currently is involved in several projects that have received AHP grants from the FHLBank of San Francisco, according to Jonathan Heywood, the chief loan officer at the $200 million-asset ACB member. These projects include a long-term transitional facility that provides housing and programs for single mothers; a program that offers financial help to low-income people in buying rehabilitated HUD homes through the Enterprise Home Ownership Partners program; and a couple of affordable apartment complexes.

"The large affordable apartment complexes typically have some bond financing, and sometimes some other groups get involved," Heywood said. While these projects can get quite complex, they are also fairly straightforward, he added. The bank will often work in partnership with Bank of America Corp., using the larger financial institution's expertise to make winners out of its grant applications. Also, sometimes Bank of America will come to Broadway with projects that the community bank can sponsor.

On a less-competitive note, some of the FHLBanks set aside part of their funds for programs that are open on a first-come, first-served basis to all member banks. "I don't think enough people in the market reach out for these programs..I hate to say it, because maybe some of our competitors will start using them, but I don't think enough banks are taking advantage of them at this time," said ACB Chairman D. Russell Taylor, who is president and chief executive officer of Rahway Savings Institution, a $429 million-asset ACB member in Rahway, N.J.

Rahway Savings offers a three-to-one matching funds down payment program (up to $5,000) to qualified customers through the FHLBank of New York's First Home Club. The bank will then match the grant with additional down payment assistance. The loans will then be made at market interest rates. This program is important to the bank because "the down payment seems to be the biggest issue in our market, not the monthly payment," said Taylor. "It amounted to the same cost to us, but was a bigger benefit to the consumer because it helped them get into the home quicker because they could save faster."

The FHLBanks aren't the only place to go to find grants for housing projects. Below are the foundations that awarded the most in grants for "housing and shelter" in 2000, as ranked by the Foundation Center:

1. The McKnight Foundation (24 grants totaling $27.6 million).

2. Fannie Mae Foundation (248 grants totaling $11.2 million).

3. The Blandin Foundation (2 grants totaling $8 million).

4. Lilly Endowment Inc. (8 grants totaling $7.4 million).

5. The Columbus Foundation and Affiliated Organizations (28 grants totaling $6.2 million).

6. Marin Community Foundation (22 grants totaling $5.7 million).

7. The Bush Foundation (8 grants totaling $5.3 million).

8. El Pomar Foundation (8 grants totaling $5.2 million).

9. John D. and Catherine T. MacArthur Foundation (24 grants totaling $4.8 million).

10. Citigroup Foundation (128 grants totaling $4 million).

Founded in 1956, the Foundation Center is a leading authority on philanthropy in the United States. Its Web site at www.fdncenter.org includes a searchable directory of nearly 70,000 grant makers.

Government and Other Partnerships

Over the past year, New South Federal has been working with Housing Authorities on a program that lets recipients of public housing assistance become eligible to use their Section 8 Vouchers to cover homeownership expenses.

Typically used for subsidized rental expenses, these vouchers are issued through the U.S. Department of Housing and Urban Development to low-income individuals and families that meet certain criteria. These vouchers also are often used in the financing of affordable rental housing projects. In fact, such projects often incorporate programs available at the local, state and federal level.

But working with the government can take time. "With Birmingham Housing Authority, it took two years for them to close the first (loan). It's a slow process in getting the applicants prepared to buy a home," said Walters-Pierce. How long it takes depends on the applicants, she added. Those with good credit scores who are ready to take on the responsibilities of owning their own home are "fast-tracked," and can usually go through the process in just a couple of months.

In another public-private partnership, Cooperative Bank in Wilmington, N.C., is helping put people in homes through a joint project with the local city government. Under the program, Cooperative and other participating banks make a first mortgage to the qualifying home buyer at market rates, and then the city makes a second mortgage at 0 percent interest. "We've been doing that for a number of years. It's been very successful and provided housing for a lot of first-time home buyers," said Frederick Willetts, III, chairman, president and CEO of the $500 million-asset ACB member.

Cooperative also sponsors affordable housing through the North Carolina Bankers Association's Community Investment Corporation of North Carolina. CICNC is a loan consortium of over 100 members that provides funding for affordable housing projects throughout the state.

Participating in a consortium of lenders spreads the risk around, and also allows lenders to participate in projects that are too big for them to tackle alone, according to Gordon M. Ur, president of Thrift Institutions Community Investment Corporation of New Jersey, a for-profit subsidiary of the New Jersey League of Community Bankers. Also, since groups like TICIC and CICNC have considerable experience working with affordable projects, they bring a level of expertise that can help these projects run smoothly.

Partnerships with nonprofit organizations can also help community banks shape their affordable housing efforts. While nonprofits can occasionally bring money to the table, they more often bring education, experience, enthusiasm, and a connection with the people most likely to need housing assistance.

However, "when you bring in a third party to act in your stead, the consumer sees that organization as you," said Taylor. "To the consumer, if there is anything they do wrong, it's the bank that has performed the error, not the other company." Rahway Savings is now in the process of bringing its counseling services in-house. "I just think we will bring a better service to the customer, and will be able to monitor the quality of the service more carefully, if we are the educators in the process," he added.

To assist in the transition, Rahway requested a counseling product called Desktop Counselor from Fannie Mae that is traditionally given free of charge to nonprofits to assist them in credit counseling, said Senior Vice President Kenneth R. Totten. "They tell me we are one of the first to ask that the bank get it directly," he added.

Financial literacy is an extremely important part of the bank's 10-month down payment savings and education program, said Totten. About a third of the participants drop out. "I feel we are doing them a service by basically expelling them from this program instead of expelling them from a house, and making them go through the difficulty and embarrassment of foreclosure," Totten added. "This program kind of weeds out those people who won't be able to keep up the mortgage payments. That person is infinitely better off if we just close out their savings account than if we have to close out their home."

New South Federal uses a combination of nonprofit volunteers and bank staff in its homeownership counseling efforts. "Here in Birmingham, the NeighborWorks organization does a phenomenal job in preparing people," Walters-Pierce said. For example, out of a recent class of 18 people, 12 were ultimately qualified to buy a home. "It is very exciting to see people who have worked so hard for so long finally obtain their goals. Helping them clean up their credit and get in a home is just about the most wonderful thing you can do for somebody," she added.

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How Safe Are Affordable Housing Loans?

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For community banks, the biggest obstacle to participating in the affordable housing arena is concern about possible

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delinquency and foreclosure problems. By nature, the people who stand to gain the most from affordable housing are the same people who are likeliest to suffer financial setbacks in the future. They also are the most likely to be financially illiterate.

However, to date, loans for affordable housing have not proven significantly riskier than other loans. For example, at the end of the third quarter of 2002, the delinquency rate for mortgage loans sold through the Neighborhood Housing Services of America was 3.24 percent, according to Ellen W. Lazar, executive director of the Neighborhood Reinvestment Corp. The Neighborhood Housing Services of America is a specialized secondary market for the NeighborWorks Network, which is a national network of over 220 community-based organizations committed to affordable housing initiatives.

These delinquency levels were better than the industry average of 4.66 percent for mortgage loans on one-to-four unit residential properties, as reported in the Mortgage Bankers Association's Third Quarter National Delinquency Survey, but not quite as good as the rate for conventional loans of 3.04 percent. The delinquency rate for the same period was 11.62 percent for FHA loans and 7.81 percent for VA loans.

Affordable housing "is not only a regulatory requirement that they need to meet," said Lazar. "Investments in these projects are often good business. They can create not only good returns financially, but also good returns in terms of building and revitalizing their communities so that their economic base becomes even stronger."

But concern about the quality of these loans persists. Many low-wealth and low-income families have limited equity or cash

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reserves, and for them a prolonged economic downturn could be devastating, according to the authors of "The State of the Nation's Housing 2002," released by the Joint Center for Housing Studies of Harvard University. Problems such as unemployment, unexpected medical bills, or a rise in interest rates (for homeowners with adjustable rate mortgages) could rapidly make the monthly mortgage payment unaffordable for many of these families.

What can community banks do to control the risks associated with these loans? Below are some highlights from "Mortgage Default and Affordable Housing: A Primer," released in mid-2002 by the Local Initiatives Support Corp. Since it was founded in 1979, LISC has helped 1,700 locally controlled nonprofit organizations build or rehabilitate about 100,000 affordable homes.

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*Households that put effort into building their own homes are significantly less likely to default;

*Characteristics of the census tract in which the property is located is more important to determining default risk than borrower characteristics;

*Smaller down payments and lack of credit history significantly increase the risk of early delinquencies;

*Loss ofjob is the primary reason for mortgage default, being cited as the reason for half (47 percent) of the studied foreclosures. Other financial problems accounted for another 28 percent. Divorce, illness and death combined made up 21 percent

*Pre-purchase counseling can help lower default rates by allowing households to screen themselves for homeownership and better prepare buyers for the financial responsibilities o owning their own homes, and

*Encouraging early delinquency intervention and broad default-workout availability can benefit both investors and affordable housing availability. ----M.H.

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more info

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www.AmericasCommunityBankers.com

www.broadwayfed .com

www.census.gov/hhes/www/ahs. html

www.coop-bank.com

www.ehop.info

www.fdncenter.org

www.fhfb.gov

www.fhfb.gov/fhlb/fhIbs_banks.htm

www.habitat.org

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www.hud.gov

www.jchs.harvard.edu

www.liscnet.org

www. ncba.com/community.html

www.newsouthfederal.com

www. nw.org

www.rsibanking.com

www.ticic.com