Volume 11; No. 2; September 1999
IMPACT Seeks Alliance with California's Banking Industry
By Daniel F. Sheehy, President, IMPACT Community Capital
With billions to invest, the insurance industry in California is poised
to become a powerful force in financing significant social and economic
needs. IMPACT Community Capital is a new community investment management
firm in California that intends to revolutionize the way the insurance
industry invests in the state.
Currently owned by ten major insurance companies, IMPACT was formed to
infuse capital into underserved, blighted neighborhoods by dramatically
increasing insurance industry community investments. It intends to do
this in a way that provides to its insurer-investors a stable, attractive,
market-driven rate of return. Community development lenders are invited
to play a key role in this joint venture.
Historically, insurer-investors have shied away from investing in community
development projects. The risks and layered financing structures of these
deals can be an institutional investor's worst nightmare. The are often
individually too small, do not merit an investment-grade rating from a
nationally recognized credit rating agency, and may be structured in widely
varying, idiosyncratic ways.
Insurers have instead invested heavily in municipal bonds that provide
consistently structured securities and are usually rated by one or more
credit-rating agencies. Municipal bonds are also traded in denominations
large enough to be economically and efficiently handles by institutional
investors like insurers.
In addition, the investments of insurance companies are closely regulated
in ways that limit how and where insurers invest. And, perception or reality,
community development investments are often viewed as too risky on their
own to meet prudent investor requirements.
IMPACT Creates Liquidity
IMPACT serves as a secondary investor for community development loans.
IMPACT purchases loans made by banks, non-bank financial institutions,
and non-profit organizations; it then packages them into loan pools. Loans
of all sizes are considered, either individually or as securitized packages
or pools. Portions of these pools are then rated by one of the major credit
rating agencies, allowing IMPACT to market them as investment-grade securities.
The portion of the loan pools that are below investment grade remain in
IMPACT's investment portfolio.
This structure is not merely a theory or plan. After a one-year planning
and recruitment phase, IMPACT is in the process of finalizing an initial
$40 million transaction with the California Community Reinvestment Corporation
(CCRC), a non-profit lender that specializes in multi-family projects.
IMPACT is purchasing 12 CCRC loans, the proceeds of which were used to
build more than 1,500 units of affordable rental housing throughout California.
Standard and Poors is expected to rate a significant portion of these
loans. The unrated portion will represent approximately 35 percent of
the transaction, and will likely remain in IMPACT's portfolio. The rated
portion will be sold to IMPACT's member investors.
In the future, IMPACT intends to do much more than merely purchase existing,
performing loans. To encourage investments in projects and activities
that are considered higher risk, like those that finance health care centers,
mixed-use facilities, child care centers and small business loans in low-income
communities, IMPACT hopes to partner with the California banking community
and others who originate such loans. IMPACT wants to work directly with
banks, non-profits, and other community development practitioners to identify
sound, but perhaps unconventional, investment opportunities.
Further, IMPACT would like to help banks structure the financing of these
projects so they can more easily be pooled, rated, and ultimately securitized.
In this manner, IMPACT will be able to use the "muscle" of the insurance
industry in California to purchase as many community development loans
as possible, allowing the dollars tied up in those loans to be recycled
back into the communities.
There is a simple elegance to this partnership. It allows each partner
to do what it does best. For example, banks have special expertise and
an enviable loan origination track record in California that IMPACT couldn't
begin to replicate. The banking community understands where and how to
identify lending opportunities and how to communicate effectively with
the community development marketplace. That's their business.
Insurers, on the other hand, are long-term investors. They have no particular
expertise or desire to originate loans, and don't have loan officers in
the field or large staffs to service these loans. In addition, they lack
familiarity with many of the key community players.
By working with IMPACT on the front end of the process, the banking community
can better leverage its lending on "tough loans" with the confidence that
they will be purchased by an already identified secondary market maker.
IMPACT envisions agreeing to purchase loans before they are made, and
issuing to its banking partners a "commitment to purchase" letter. Final
purchase approval will occur within four-to-six weeks from the time IMPACT
receives all the loan information and documentation.
In return, IMPACT will bring a common set of guidelines to the process
that will probably result in better execution, better loan performance,
and a more efficient use of capital. IMPACT will also give banks the latitude
and time to originate, package, and hold these loans for whatever time
is deemed appropriate by both parties. This will give banks and other
originators the flexibility to broaden the types of community investments
they can make, and could dramatically increase their capability to make
higher risk loans. The existence of a secondary market also assures banks
and other financial institutions that they will be able to liquidate their
community development loans at the appropriate time.
The beauty of this partnership model is that everyone wins. Financial
institutions and non-profit organizations win because valuable capital
is freed up to make additional community development loans. The insurance
industry wins because they now have a solid investment management firm
that can handle these kinds of loans. And most importantly, the people
who live in under-served neighborhoods gain access to affordable housing,
day care centers, neighborhood shopping facilities and health clinics.
Small business owners gain access to capital.
IMPACT Is A Voluntary Solution
As you may know, the California Legislature is considering a measure
that would impose upon insurers an affirmative obligation to invest in
low- income and underserved communities in a manner similar to the federal
Community Reinvestment Act. (see Wall Street Journal, California Section,
May 12, 1999). The state proposal, called the California Reinvestment
Act, would require the state's Insurance Commissioner to monitor the community
development activities of insurers. In 1996, the California Organized
Investment Network (COIN) was organized within the California Department
of Insurance to act primarily as a clearinghouse/broker, informing insurance
companies about investment opportunities in low-income communities. The
measure under consideration would give the state the power to mandate
these kinds of investments.
IMPACT is the insurance industry's voluntary solution to the legislative
proposal, and is based on the belief that a market-driven investment program
is superior to a state-mandated one. Although IMPACT's investment activities
have only just begun, it is already clear that strategic alliances will
benefit insurance investors, banks, community development organizations,
and underserved communities all over the state.
IMPACT Member Companies
Allstate Insurance Company
Beneficial Standard Life Insurance Co.
20th Century Insurance Company
Farmers Insurance Companies
Pacific Life Insurance Company
PM1 Mortgage Insurance Co.
State Farm Insurance Companies
Teachers Insurance and Annuity Association
Zenith Insurance Company
If you would like more information about IMPACT, please call Daniel Sheehy
at (415) 981-1074 or (888) 548-5485, fax (888) 548-5489.
ABOUT THE AUTHOR
Dan Sheehy is currently president and chief executive officer of IMPACT
Community Capital, LLC. He has held several positions at the Federal Reserve
Bank of New York and the Federal Reserve's Board of Governors in Washington,
DC. Mr. Sheehy served as executive vice president of a large commercial
bank and as a general partner in a major Wall Street investment banking
and securities trading firm.
From 1987 to 1997, Mr. Sheehy was senior vice president of the State
of New York Mortgage Agency, commonly known as SONY MA. It is one of the
nation's largest originators of residential mortgages for affordable housing
with a portfolio in excess of $4 billion. At SONY MA, Mr. Sheehy managed
the Mortgage Insurance Fund and developed it into a highly rated mortgage
insurer and credit enhancer with an insurance portfolio of more than $2.5
billion in community development-type mortgage loans.
Mr. Sheehy also served as a financial advisor to the Florida Housing
Finance Corporation and the Housing Finance Authority of Hillsborough
County, Florida. He has been involved in two consulting firms that have
provided advisory and consulting services in the area of housing finance
programs and credit enhancement structures to state and local government
throughout the United States, Guam and the Caribbean.