In an introduction to a new LISC white paper, Securitization for Social Innovation, on CDFIs and securitization, LISC’s CFO Michael Hearne outlines how our industry might unlock pools of capital that have yet to be tapped for the imperative work of community development.
Due to the socioeconomic calamities caused by the Covid-19 pandemic, the work of Community Development Financial Institutions (CDFIs) in the United States is more important than ever. Both private and public sectors are turning to CDFIs as economic first responders to help repair and restore communities in a manner that closes racial and place-based disparities. In order to accomplish that mission, CDFIs themselves need continued support and investments to increase their capacity and reach. Until now, increasing funding for the industry has meant incrementally increasing the availability of low-cost, geographically flexible debt to CDFIs. We see an opportunity for a quantum leap forward in CDFI funding: the creation of a secondary market for community development investments originated by CDFIs that creates liquidity and unlocks more lending in our underserved communities.
We believe that it is not a matter of if, but when a robust secondary market is created for the CDFI industry. This common feature of other assets such as mortgages and corporate bonds can and should be realized for CDFI assets. The Riegle Act of 1994 that established the CDFI Fund even anticipated this need and included the ability to fund entities that sought to purchase CDFIs’ assets, but this policy tool has yet to be funded. Now the moment is ripe. The CDFI sector can collectively unlock more liquidity than is currently available by utilizing commercial asset-backed structures to trade CDFI assets for cash. Such a secondary market would increase the amount of institutional capital flowing to CDFIs while simultaneously increasing the investment capacity of CDFIs beyond the current limits of their balance sheets. Moreover, recent advancements in accessing the capital markets like note and bond issuances are typically feasible only for larger CDFIs with sizable real estate-backed portfolios; this approach of purchasing assets would be able to include CDFIs regardless of their size, sophistication, or asset class focus.
This white paper is a blueprint for building a sustainable intermediary business that actualizes the opportunity at hand. In the commercial space, a thriving sector of intermediaries connects originators and investors across various asset-backed securities markets. For the CDF industry, we need an intermediary savvy with the expectations of commercial investors while also aligned with the social mission of CDFIs. The intermediary would take financial structures well known to the commercial sector and construct securities from pools of CDFI assets. Using the case study of the New York Forward Loan Fund, analyses of CDFI portfolio data, and commercial structure examples, this white paper details how the concept of CDFI commercial intermediation can become reality, and considers the obstacles to execution and how to overcome them.
The time has come for the next stage in community development financing. We seek to gather partners in this endeavor—investors, originators, and stakeholders. Together, we can open a new channel for greater volumes of private capital to flow into CDFIs across the country and ultimately into the local communities that we serve and live in.
ABOUT THE AUTHOR
Michael Hearne, Executive Vice President & CFO
Michael Hearne is Executive Vice President and CFO. He joined LISC in 2014 after a distinguished career as an entrepreneur and lending expert with over 25 years of experience in nonprofit, for-profit and government financial management.
