Benefits of Consortia Membership for Financial Institutions

Low Risk
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. Affordable housing 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 to 2003.*

*From Federal Reserve Summary Profile Report

Financial Return
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 of self-sufficiency.

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. Having 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 to: 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 where it’s 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 their construction 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 loans are more expensive to deliver and service, and are often not feasible for large banks even though these loans are important to the communities. Because 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 being met 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.

Incubator Role
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 marketplace needs.

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.

Additional Benefits
The consortia also benefit banks’ affordable housing lending in other ways. With rapid staff turnover in many banks, it would be difficult for them to develop and retain staff that could perform all of the consortia’s activities. In some cases, consortia loans diversify the participating institution’s 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 banking strategies. 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, thereby relieving the banks of the problems associated with managing foreclosures.