Screen Shot 2016-04-25 at 3.06.29 PM

After half a century of multilevel loan funds, federal sanctions, and grassroots organizing, the community development finance industry has changed the relationship between mainstream financial services and economically disadvantaged people and communities. By offering access to basic financial services, affordable credit for home purchasing, rehabilitation, and maintenance, and loan and equity capital for business development, CDFIs are responding to needs not met in low-income communities, bringing hope for asset accumulation to vulnerable populations. However, as CDFIs push the boundaries of the past, their structure, outlook, and purpose are slowly transforming. More so than ever before, they’re becoming aggregators of capital and the quarterbacks of broader initiatives and partnerships that energize local community development. In order to continue this positive evolution, remain resilient, and grow, CDFIs will need to adapt to the constantly morphing economy and explore new avenues to funding.

 

Here are four major ways that the industry can improve upon itself with inside integration, outside assistance, and universal support.

 

  1. Exposure

CDFIs have demonstrated that financing nontraditional customers works if it is done in a way that recognizes the market’s and the customers’ idiosyncrasies. CDFIs have helped prove several things, many of which now constitute mainstream market thinking:602_CDFI_0812

  • that financing women and minority homeowners and business owners is not only possible, but profitable, and that race and gender are not reliable indicators of financial performance
  • that managing risk in non-financial and non-traditional ways (such as intensive technical assistance) can work
  • that unconventional financial customers are important to conventional financial service companies because they are future customers and solid assets
  • that community-centered groups can organize capital, manage it responsibly, pair it with organized people, and create measurable changes in communities

Countless CDFIs have proven themselves sustainable, viable, successful models of aid surrounding self-help and self-responsibility, as opposed to charity and handouts. They are able to provide the most specialized and most needed assistance to their communities. The Reinvestment Fund, the CDFI Fund, and general community development organizations like the Food Trust need to have more exposure to widely share their success. We’ve seen with the New Markets Tax Credit Program and with the CDFI Bond Guarantee Program that when the opportunity is there for CDFIs to scale their operations, they step up and are able to meet the challenge. Sharing the progress and achievement of these programs and institutions will continue to validate them in the mainstream market.

 

  1. Maintaining strategic positioning

An overarching lesson of the CDFI industry is that an effective community development finance system must work just outside the margins of the conventional financial system, while constantly striving to generate change in mainstream ideas and practices. To succeed from the margins, community development finance must hold substantial resources and power yet remain nimble, as the margins shift constantly.

 

Being able to navigate in both the mainstream marketplace of wealth and the more crowded world of low-income communities is a precarious balance. The ability to maintain that balance will determine whether or not CDFIs remain relevant to both ends of the spectrum – for the low-income communities they serve, and the dominant providers of resources. Putting too much emphasis on either end will lead to divergence; funds may dry up from investors, or communities may become disenchanted with top-focused strategies. Acknowledging this position will allow CDFIs to strengthen relationships at both ends and work to ensure equilibrium.

 

  1. Including CDFI policies in law (permanently)

While there are certainly community development-centered programs and incentives included in our statues, many of them, like the CDFI Fund, New Markets Tax Credit, and Community Reinvestment Act are not incorporated permanently into law and require renewal every few years. Making CDFI poverty alleviation strategies integral to federal, state, and local policy as well as to private sector reforms of the financial services industry will be vital if we hope to continue the work that we’ve started. This will require devoted policy champions at all levels of government.

 

  1. R&D

Despite the good work of CDFIs over the past decades, there is little academic research to critically analyze and overarching vision of what works and what doesn’t. The standardization of data, information, and information-sharing protocols will facilitate a more efficient flow of value-added information across informal and formal networks, reduce transaction costs, and simplify access to information about CDFIs and their performance. Additionally, with hard research, the likelihood of receiving grants, funding, and resources is increased for all players in the industry.

url

As a student at a university, I also would strongly advocate for CDFI collaboration with universities and corporations to train young and mid-career professionals in community development finance skills. Incorporating community development finance within business schools (especially ones that are traditionally corporate-minded [i.e. Fox School of Business]) will encourage an economy of justice and equity and will present community development as an integral part of the economy.

——

 

Through a focus on collaboration, innovation, incubation of creative energy, and dynamic problem solving, the future of the community development finance industry is bright. The potential to grow the impact of CDFIs is not only possible, but likely if we continue to strengthen the connections we currently have and work to make new connections.

Avoiding A Repeat of the Great Recession

The intricate web of misinformation, greed, and inconsistency that were the causes of the Great Recession threaten to strike again if strategies are not put in place to ensure economic stabilization. If we simply feed into the washed out idea that “the big banks” were the sole offenders, the complicated reality of the situation is forgotten. Altogether, it was decades of convoluted policy, irresponsible business practice, and uneducated customers that fed into each other; by the year 2008, more than half of all mortgages in the United States were subprime or otherwise very weak mortgages. Of that half, three quarters were on the books of the government agencies Fannie Mae and Freddie Mac. While responsibility for the housing crash that led to the recession lies with multiple parties, we risk a repeat if American consumers don’t have a full understanding of what caused the crisis. Banking regulations, consumer protections, Fed policies, and broad-based economic growth are all important for a healthy financial system. Therefore all of these components must be considered.

One of the most important tactics to pursue to prevent a repeat of the crash is to foster the truth that homeownership isn’t for everyone. Although unfortunately integral to the classic American dr
eam, the reality is that many people simply are not (and may never be) in a secure enough financial situation to own a home.  Heightened public enthusiasm toward home buying from the late 1990s – early 2000s caused a freUntitlednzy of mortgages to be approved that should never have been. Historically low interest rates and low or no down payment made homeownership seem within reach for individuals and families that would be much more secure renting.

Additionally, the housing boom of the early 2000s changed the average American’s view on the purpose of home buying. “House flipping” was no longer an activity reserved for investors; it seemed as though anyone could buy a cheap home, flip it, or even sell their own home for a profit and upgrade. This is a dangerous ideology to have about housing; in addition to preventing people from perceiving homeownership as one-size-fits-all, we must prevent it as being seen as an investment that can reap incredible returns. Homes are places to live, not prizes to cash in on. In the past when real estate continued to appreciate year after year it was easy to get into the mindset that you could buy a home today and sell it for double what you paid in just 10 or 15 years. Clearly, this is not always the case. Buyers should take a long-term approach to real estate and look for a home that enhances their life and will increase in value slowly over time. The bottom line is that your home is a place to live, and if you happen to make a profit when you sell, you should just consider that a bonus.

Another invaluable step to preventing a crash is reinstating the traditional percentage of a down payment. Not only does a low or no-down payment mortgage heighten risk for the individual, it also drives up costs for all buyers. Former HUD undersecretary Ken Blackwell described the situation with this example:

“If you have $10,000 to buy a house, you can buy a $100,000 house if the down payment requirement is 10 percent. But if they lower the down payment requirement to 5 percent, then you can buy a $200,000 house. So what is happening is that when you lower underwriting standards, more people can bid for more expensive houses. And a result of that is that housing prices go up, and they become much more expensive to low-income people.”

By requiring a traditionally sized down payment of 10-20%, it is far less likely that mortgage holders will default on their payments.

While these consumer-oriented tactics are vital, the role of government policy in the crash should not be overlooked. Federal policies were the cause of the incredibly low interest rates that caused the housing frenzy. Not wanting to put the brakes on a booming market, the Fed didn’t raise interest rates when it should have. While HUD has a responsibility to be a catalyst for low and moderate-income housing, its methods of encouraging subprime mortgages were misguided. Combined with the repeal of Glass-Steagall, federal forces must accept much of the responsibility for the crisis.  Thankfully, programs like the Neighborhood Stabilization Program are attempting to make amends for the Untitlejjdgovernment’s hand in the recession. We must continue to fund and expand these types of initiatives in order to assist low and moderate-income families and neighborhoods.

There is plenty of responsibility to go around for the Great Recession, and for the lasting effects it is causing for American families to this day.  It is profoundly irresponsible – and demonstrably untrue – to pretend that the crisis could not have been avoided or lessened. Potentially, if the right reforms are made, we can ensure that we do not live to see another repeat of the Great Recession.