Rise of the Rentals

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Th e M Rep o RT | 27 Feature A s of the fourth quarter of 2013, the homeownership rate in the United States was 65.2 percent—only 2 percentage points higher than the year's first half, when homeownership was down to its lowest level since 1995. Week after week, the media and the public continue to see (mostly) promising statistics cataloguing the housing market's slow march toward recovery, but in the end, "tomorrow's homeowners" still seem to be waiting for tomorrow. The fact is, for many non- homeowning Americans, the barriers to entry remain high. For some, home prices have stretched beyond their means; others are plagued by muddy credit histories at a time when lenders are reluctant to take the chance. Some simply live in areas where there's no one around to help finance their own piece of the American Dream. The latter problem is a particular concern for the Appalachian region, where the Federation of Appalachian Housing Enterprises (FAHE) works to put residents in homes. "We do this because in the region we work in, the reach of traditional financing sources is not so robust," said Jim King, president and CEO of FAHE. "Typically in the Appalachian counties where we primarily serve, we're not going to have a big presence from Wells Fargo, BofA, Chase. It's going to be a lot of smaller banks." FAHE is just one of hundreds of community development financial institutions (CDFIs) nationwide—organizations created to help secure loan funds for residents and businesses in un- derserved communities. Funded through grants and investment capital, these institutions are able to provide support (housing- related or otherwise) to commu- nities in low- to moderate-income areas—another big problem for Appalachia, where King says household incomes can range as low as $10,000 for some of the FAHE clients. That presence can make a monumental difference for these underserved regions. According to the most recent Home Mortgage Disclosure Act (HMDA) data reported by the National Community Investment Fund, CDFIs in 2012 achieved a median Development Lending Intensity score of 54.33 percent, meaning more than half of a median CDFI's HMDA-reported lending occurred within low- to moderate-income communities. A Different Way of Doing Business B ecause they exist to pro- vide financing in economi- cally distressed markets, it may seem sensible to label these institutions as charities. How- ever, that's not the case at all, explains Mike Loftin, CEO of Homewise, a CDFI based in Santa Fe, New Mexico. "We really care about the strength of the borrower because we have skin in the game," Loftin said. In other words, while these are funds given to borrowers who can't afford higher down payments or market interest rates, they're still loans, and they have to be made responsibly. For Homewise, the outreach starts with creating the type of borrower to whom the group feels comfortable lending without sacrificing quality. "Our business model is, basi- cally we prepare homebuyers to prepare for a good mortgage," Loftin said. "Our philosophy is not to lower credit standards to meet the borrower but to raise the borrower to meet the credit standard." In addition, in order to receive CDFI certification from the Office of the Comptroller of the Currency (OCC)—and thus be eligible for assistance in the form of Treasury funds—institutions have to operate intelligently, making themselves accountable through a governing or advi- sory board. Certified CDFIs also benefit in other ways, as the OCC explained: "Some CDFIs have found that CDFI certifica- tion increases their ability to raise capital from other sources, such as banks, foundations, and gov- ernment agencies at all levels." That said, CDFIs enjoy a few benefits that traditional lenders don't get. For one, the Consumer Financial Protection Bureau's (CFPB) Ability-to-Repay (ATR) rule exempts "several types of creditors that focus on extending credit to LMI [low- to moderate- income] consumers," includ- ing those designated as CDFIs, whether they're supervised or not. As Comptroller of the Currency Tim Curry explained in a speech at the National Community Investment Fund's Development Banking Conference in November: "This exemption recognizes that community-fo- cused lenders have a special role and, in many cases, substantial experience in providing respon- sible loan products to low- and moderate-income borrowers." Loftin expressed the same thought, only a little more suc- cinctly: "Good CDFIs are good at lending. They understand it." Connecting an Industry G iven the increased pressure originators feel to pro- duce while still adhering to the Qualified Mortgage (QM) guide- lines, it makes good business sense for mortgage banks to work with CDFIs as partners to reach borrowers they otherwise wouldn't be able to help, keep- ing customers happy (and more likely to return to that bank) in the process. "Let's say that I'm a bank, and let's say that I have a client that comes in . . . and for some reason, my bank has decided that we're not going to make non- QM loans," posited Barry Wides, deputy comptroller for commu- nity affairs at OCC. "Do I tell my customer that I can't help them out, or do I find a local CDFI that I might partner with?" Not only that, but investments in CDFIs are exempt from certain Basel III requirements, includ- ing the deduction of capital that investments in other institutions would be subject to. As much as banks benefit from partnering with CDFIs, it's a two-way street: As com- munity development groups tend to take on slightly greater risk than would be the case for other lenders, Wides says many need

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