Private Capital at Work in Affordable Rental Housing

While they aren't a new concept, the second issue of the HUD publication Evidence Matters highlights the growing importance of multibank efforts in financing affordable housing developments. This "consortia" of private banks share the risk, reduce the cost of lending, and pool together their expertise to meet affordable housing needs in their respective communities.

"Consortia" came about as a result of the federal Low Income Housing Tax Credit (LIHTC) program in 1986. Private commercial banks, accustomed to working primarily with short-term capital, were asked to provide long-term capital, permanent mortgages, and related services to affordable housing projects and, in response, formed the first multibank consortia in the early 1990s.

The consortia helps banks meet Community Reinvestment Act (CRA) requirements while satisfying local affordable rental housing needs. These consortia are able to expand their funding resources by qualifying with the Treasury as a Community Development Financial Institution (CDFI). This allows member banks to apply for more funds to be used specifically for economic revitalization and community development works.

The consortia can be flexible in their approach to development activity as long as it profits the public and includes low and middle income members of the community. Their activities might include forming community development corporations or forming partnerships with community-based organizations; creating loan pools to finance affordable housing development, revitalizing low-moderate income areas or underserved rural areas and participating in tax credit programs. The member banks must determine what credit issues need to be addressed in their community and decide how to contribute to solving those problems.

The bank consortia provide services that generally fall into two categories; capital-based backing of loans or knowledge-based services such as the provision of technical assistance, guidance in underwriting, loan services, and asset management.

Member banks determine their own geographic coverage area. This is a crucial decision that must take into account the ability to provide adequate coverage, the potential to expand and diversity borrowers, and the need to spread out risk. Members also decide on the lending products they offer and the appropriate operational structures to adopt.

The Spring 2011 Evidence Matters article features the Network for Oregon Affordable Housing or NOAH, a 22-member non-profit consortium operating in one of the country's least affordable rental markets as an example of the consortia's operations and potential.

More than 63 percent of Oregon's renter households are low, very low, or extremely low-income and one quarter of the renter households spend more than 50 percent of their income on housing. Federally subsidized housing is shrinking at an alarming rate with 8.1 out of 10 privately owned subsidized units scheduled to disappear within the next five years. An additional 2,700 households were displaced between 1999 and 2008 as manufactured home parks closed.

NOAH was established by the Oregon Bankers Association in 1990 and uses various financing and technical assistance tools to help developers build and renovate affordable housing throughout the state. The member banks contribute to a blind loan pool where the banks participate in any loan that the 12 member board and its loan committee approve. The committee is composed of bankers and two public-sector representatives charged with evaluating the public benefit of any loan under consideration. NOAH's professional staff works out the details of each loan.

NOAH also has a permanent loan program which, as of last June, had financed 6,445 units of housing with 139 permanent loans. The loans, totaling more than $158 million, were used to leverage $726 million in project costs. NOAH also offers predevelopment loans and staffs a statewide initiative to preserve at-risk federally subsidized rental properties. This initiative had preserved 416 units of subsidized housing by the end of last year.

These investments are not without return. A model developed by the Association of Oregon Community Development Organizations with the assistance of the National Association of Home builders attempted to measure the economic impact of the affordable housing developed by the Associations' members between 1990 and 2002. It concluded that the $94 million invested in 7,562 affordable housing units had helped generate 12,212 jobs, $393 million in wages, and $23 million in income taxes. In addition, the original investment leveraged $408 million from private and federal sources.

The most important impact: Renters in the units constructed by these organizations paid about $267 less per month in rent than if they lived in market rate units and the increased purchasing power (a total of $24 million) of these families supported 833 ongoing jobs

"In light of these outcomes," the article concludes, "bank consortia like NOAH, which stimulate the available supply of affordable rental housing with capital loans, are an integral part of safeguarding the future well-being of American communities and building community capacity for sustainable, long-term growth."

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Private Capital at Work in Affordable Rental Housing

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