of Consortia Membership for Financial Institutions
The consortia provide excellent underwriting and asset management services,
especially to institutions who cannot develop sufficient expertise
on their own,
but who desire to provide capital through the shared pool concept.
In particular, the low loss rate of the consortia is
directly tied to the intensive asset management required by these loans.
loans are very technical, and many banks do not have the internal expertise
dedicated to this product. The expertise gained from years of underwriting
and asset management experience is invaluable to mitigating risk. To
date, loan losses total only 0.3 percent of total loans originated
over the last
14 years; losses passed on to investors total only 0.1 percent of total
loans originated; and in comparison, the charge-off rate for all insured
commercial banks for multifamily loans averaged 0.45 percent from 1991
*From Federal Reserve Summary Profile Report
The consortia provide value to their bank investors in a number of ways.
While providing a reasonable rate of return to members, the consortia
operate like a business with minimal to no operating subsidies. Consortia
have developed a set of documents, funding and service standards
that have allowed them to meet market needs and quickly reach a state
In terms of the loan product and its return, the pooling of resources and
economies of scale achieved have enabled an overall reduced cost of lending.
a repeat customer base has resulted in continuous cost reduction in delivering
financial products and services due to the familiarity of the players
and the consistency in documentation and delivery.
Finally, in a sign of further self-sufficiency,
the consortia’s product
has been seasoned, sold, rated and securitized with excellent results.
A total of $527 million in loans have been sold in the secondary markets
member banks; the Community Reinvestment Fund; the Community Development
Trust; Impact Community Capital; and the Federal Home Loan Bank of Atlanta.
Community Reinvestment Act Credit
An important benefit to bank investors is Community Reinvestment Act,
or CRA, credit. However, in addition to the CRA benefits for member institutions
from the loans themselves, other consortia activities often provide additional
CRA opportunities for the banks. For example, tax credit investments provide
investment test credit, and board and loan committees, as well as seminars,
provide service test credit. Moreover, through the consortia, banks can
receive CRA credit for loans outside their service area, which provides
great leverage for their lending activity.
For larger banks, the consortia reach smaller markets
more costly to lend. Consortia are especially helpful to limited purpose
banks which have no other outlet for CRA-qualified lending. Finally,
forward take-out commitments have allowed many large banks to increase
lending in this area.
For smaller banks, consortia provide additional benefits to the CRA programs
due to the leadership of the larger banks. Specifically, consortia provide
expertise that smaller banks cannot staff in-house and additional lines
of business not generally available to them. They also provide an opportunity
to participate in large scale developments and do business with prominent
developers and borrowers.
Greater Coverage of Smaller and More Difficult Loans
Consortia provide much greater coverage of affordable housing markets
for their investor banks. The average loan size is small compared to
the loans targeted by the larger banks active in the industry. Smaller
are more expensive to deliver and service, and are often not feasible
for large banks even though these loans are important to the communities.
of the willingness of the consortia to respond to very small loan requests,
the banks can focus on the more profitable large transactions with the
comfort of knowing that the financing need for smaller loans is still
in the community. Consortia also target a variety of hard-to-serve populations,
including financing service-enriched housing, which by its nature serves
the poorest populations and carries additional risks associated with
the service components.
Greater Geographic Coverage
Participation in the consortia provides greater geographic coverage of
service areas for banks. In particular, serving rural markets is an important
niche of virtually all the consortia. Lending in rural areas can be especially
challenging for a number of reasons. The loans are often relatively small,
sponsors are often less sophisticated, borrowers and projects can be some
distance away, and small local economies can be fragile. Collectively, these
loans are relatively expensive to underwrite and service. The share of units
in rural markets ranges from 15 percent to 72 percent of consortia portfolios.
More broadly, consortia also act as incubators and play an "R&D" role
for their investor banks. The consortia have earned the confidence of
their members, which allows them to pilot new products without years of incubation
and testing. This also allows them to be much more responsive to their
The consortia ultimately create markets down the
road for their investors by going into areas with more flexible products,
and with the shared
risks, thereby attracting owners—both new and old—to invest
in properties and improve the market. Within a few years, the investors
are then making
loans in the same neighborhoods that previously were considered too risky.
The consortia also benefit banks’ affordable housing lending in
other ways. With rapid staff turnover in many banks, it would be difficult
to develop and retain staff that could perform all of the consortia’s
activities. In some cases, consortia loans diversify the participating
lending portfolios. Consortia have extensive expertise in non-bank
funding sources and are able to structure loans that are very complex.
Consortia are also often able to offer their own
products and subsidy sources that are not available through conventional
Finally, some consortia provide an outlet for banks’ problem loans
and REO properties. For example, CIC has a pool of capable developers
who will purchase problem buildings and sometimes problem loans,
the banks of the problems associated with managing foreclosures.