A New Vehicle for Securitization – Nov. 18, 2024
“The growth of the securitization market in all its permutations – from commercial real estate to autos and credit cards, to home loans – is responsible for delivering heightened access to capital and increased debt liquidity,” says the CRE Finance Council. Now there’s talk of extending that access and liquidity to affordable housing, via a secondary market for Community Development Financial Institution (CDFI) loans.
Last month, the Federal Reserve Bank of San Francisco hosted a meeting with CDFIs, other lenders and securitization market participants to discuss the feasibility of CDFIs securitizing their loans. Securitizing these loans would allow for the recycling of capital in an effort to maximize funds available to CDFIs, according to CREFC, whose Executive Director, Lisa Pendergast, attended the meeting.
CDFIs are certified by a sub-agency of the U.S. Department of Treasury. They’re mission-driven financial institutions that specialize in lending to low- and moderate-income communities.
The main sources of CDFI capital include technical assistance grants and long-term capital at below-market rates. “And yet, those sources of capital are limited,” according to CREFC.
Citing data from the Federal Reserve Bank of New York, CREFC says the CDFI industry has experienced significant growth, with industry assets tripling over the last five years to $452 billion. There are currently 1,487 CDFIs as of May 2023, representing a 40% increase since 2019.
CDFIs come in various forms, including community development banks, credit unions, loan funds and venture capital funds. Loan funds and credit unions comprise the largest share of CDFIs at a combined 85%.
The ability to securitize CDFI loans would improve liquidity of CDFIs by affording them greater access to recycle capital and in turn the ability to originate more loans to low- and moderate-income communities, says CREFC.
Although there are additional pathways to expanding CDFI capital beyond securitization, nonetheless securitization is potentially a key avenue for capital expansion and recycling in the sector. However, CREFC says, “securitizing these loans could prove challenging given concerns over a lack of homogeneity in loan types, volume, data and overall standardization across the various institutions involved.”
While CDFIs originate many types of loans, multifamily affordable housing loans may prove to be the most attractive avenue in terms of asset classes given the growing need for housing. Notably, says CREFC, Bank of America is the largest private investor in CDFIs with more than $2 billion in loan deposits, capital grants and equity investments across its 250-plus CDFI partners.
Already, CREFC says, some CDFI loans are sold today in the secondary market on either an individual or pooled basis. According to the Treasury Department, billions of dollars in single-family home loans originated by CDFIs are sold each year. These loans, including loans backed by government programs, generally meet standards set by institutional investors and government sponsored enterprises, such as Fannie Mae and Freddie Mac.
“There is some potential to securitize CDFI loans as they are generally granted on standardized terms and a robust dataset exists on loan underwriting and performance,” according to CREFC. “The loans are also created at large enough volumes to attract investors either on a standalone basis or pooled.”
CREFC points out that as with all securitized product, investors and credit rating agencies will demand and expect to receive a high level of pertinent data, allowing them to appropriately determine the level of risk they are assuming and possible returns. “Specifically, investors must have the data available to understand the nature of the collateral, the structure of the loans and historical loan performance across market/economic scenarios.”