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cr C O M M U N I T Y REINVESTMENT forum SPRING | 2000 | PUBLISHED BY THE FEDERAL RESERVE BANK OF CLEVELAND NATIONAL HOUSING DEVELOPMENT CORPORATION Nonprofit is Focused on Preserving Affordable Housing By Kathy Kenny and John Trauth Despite the robust American economy, the need for affordable housing continues to grow. Today, affordable housing is available for only one-quarter of those who need it. As a nation, we are not building enough affordable housing to keep up with the huge demand. Many experts have recognized this problem, including the National Housing Conference, which has called for a bold new affordable housing production program. At the same AN EXCHANGE OF COMMUNIT Y DEVELOPMENT ISSUES AND IDEAS 7 Cleveland Fed Tackles Opportunities, Challenges in 2000 8 Chairman Alan Greenspan Addresses National Community Reinvestment Coalition Of Interest Reader Survey 13 16 ▲ C O N T I N U E D O N PA G E 2 ▲ COMMUNITY REINVESTMENT FORUM 2 C O N T I N U E D F R O M PA G E 1 time, the stock of existing affordable rental housing is diminishing through neglect, deterioration, and—most importantly—the pending expiration of federal subsidies. In the 1970s, the federal government entered into contracts with private owners to create affordable housing projects in return for a long-term (25- to 30year) commitment from the government to provide monthly rent subsidies for the tenants. The Section 8 program, administered by the Department of Housing and Urban Development, is the primary vehicle for these subsidy dollars. The Department of Agriculture’s Section 515 program has also built affordable rental housing in rural areas. Although these subsidies are not expiring, some owners are interested in selling their properties to local nonprofits. Now, a large percentage of these government rent-subsidy contracts are expiring without the expectation of renewal. Over the next three years, the largest transfer of affordable real estate assets in history will take place, exposing upwards of 800,000 affordable apartments—now regulated and subsidized by HUD—to market-rate conversion. The National Housing Development Corporation (NHDC) was created to respond to this need. It is the first national intermediary of its type to emerge from the West Coast, growing out of an award-winning housing preservation program operated by the nonprofit Southern California Housing Development Corporation. NHDC’s mission is to improve the quality of life for lower-income families by acquiring and preserving the nation’s affordable housing stock. Partnering with other nonprofit preservation efforts, it will compete aggressively with the private sector to purchase large portfolios of properties, restructure them financially, and sell them at cost to local nonprofits. ABOUT THE AUTHORS Kathy Kenny and John Trauth are organizational planning and development consultants specializing in the start-up of large-scale initiatives in affordable housing and community development. They are currently assisting the National Housing Development Corporation through its start-up phase. John Trauth was instrumental in the creation of the BRIDGE Housing Corporation and the Southern California Housing Development Corporation, two highly successful regional nonprofit housing developers. Kathy Kenny has served as a planning consultant to the Council on Foundations, the League of California Community Foundations, the National Economic Development and Law Center, and the Federal Reserve Bank of San Francisco. TIMING IS OF THE ESSENCE, AS THE MAJORITY O F T H E AT - R I S K S E C T I O N 8 P R O J E C T S W I L L F A C E S U B S I D Y E X P I R AT I O N I N T H E N E X T TO CONVENTIONAL BUYERS AND CONVERTED T O M A R K E T - R AT E H O U S I N G , R E P L A C I N G T H I S I N V E N TO RY W I L L B E C O M E C O ST- P R O H I B I T I V E . Under nonprofit ownership, affordability can be maintained in perpetuity. NHDC’s goal is to preserve a significant portion of the nation’s at-risk properties, with an initial target of acquiring 60,000 units in three years. Congress has recognized this need and has endorsed the NHDC model. Two million dollars has been earmarked in the 1999–2000 budget for NHDC’s initial seed capital. In addition, a national foundation has approved a seed grant for the first two years of operation. The NHDC program is based on the concept of “harmonious differentiation,” through which it will work with and complement housing, community development, and preservation efforts of other national intermediaries such as the National Council of La Raza and the Congress of National Black Churches. In addition, properties acquired by NHDC will be available for purchase by qualified affiliates of the Neighborhood Reinvestment Corporation, Local Initiatives Support Corporation, Enterprise Foundation, National Association of Housing Partnerships, National Affordable Housing Preservation Associates, and others (see box, page 5). NHDC will also work closely with the National Council of State Housing Agencies and its state-level members, who will identify at-risk properties and may provide property financing. ACQUISITION AND FINANCING NHDC will focus on properties that can be underwritten, purchased, and preserved under a “renewed affordability” paradigm, whereby permanent affordability—independent of future federal subsidies— can be achieved through a combination of a reasonable acquisition price and value added through financial and operational restructuring, below-market financing, tax credits, local subsidies and nonprofit ownership. C O N T I N U E D O N PA G E 4 ▲ U N I T E D N AT I O N A L P R E S E R VAT I O N T R U S T NHDC’s program, also called the United National Preservation Trust, negotiates directly with portfolio owners for properties across the country. It is designed to be a large-scale acquisition and warehouse facility that will purchase larger portfolios of at-risk affordable housing properties, concentrating on those beyond the financial or geographic reach of local nonprofits (see chart, page 6). NHDC will reposition and stabilize the properties and finally will disaggregate and sell off individual properties at cost to qualified local nonprofit organizations. NHDC’s holding period (12 to 36 months) will enable local nonprofits to assemble the necessary resources (tax credits, HOME funds, and local subsidies) to purchase the properties and assume property-management functions. NHDC will continue to act in a limited assetmanagement oversight role, retaining the ability to correct future problems. TA RG E T M A R K E TS In addition to the large number of existing low-income rental housing units which are immediately at risk because of market-rate conversion, the program will also target older assisted-subsidy-dependent properties, conventional affordable apartments owned by real estate investment trusts, lowincome housing tax credit properties reaching lock-in expiration, and large-scale neighborhood revitalization projects that are beyond the reach of local nonprofits. NHDC has targeted the mid-Atlantic, Midwest, and West Coast first because the majority of expiring Section 8 properties are located in those regions. COMMUNITY REINVESTMENT FORUM THREE YEARS. IF THESE PROPERTIES ARE LOST 3 ▲ COMMUNITY REINVESTMENT FORUM 4 C O N T I N U E D F R O M PA G E 3 With the initial seed capital in place, NHDC staff is actively working to identify and purchase its first at-risk portfolios. Timing is of the essence, as the majority of the at-risk Section 8 projects will face subsidy expiration in the next three years. If these properties are lost to conventional buyers and converted to market-rate housing, replacing this inventory will become costprohibitive. Opportunities exist for banks and other financial institutions to provide seed capital to support NHDC’s initial activities in their market areas, as well as to provide acquisition and permanent financing for NHDC properties, eventually assumable by the ultimate owner/manager, the local nonprofits. Once it is up and running, NHDC will generate income from transaction fees, special preservation funds (intermediary technical assistance grants), cash flows from acquired properties, transfer fees to local nonprofits (based on a limited cost-reimburse- ment formula) and assetmanagement fees. NHDC projects that it will achieve self-sufficiency in four years, based on an aggressive acquisition strategy. To reach self-sufficiency, NHDC projects a need for $5 million in seed capital ($2 million of which has been provided by Congress). NHDC is in the process of raising the remaining seed capital from financial institutions, foundations, corporations, and future congressional appropriations. CRA INVESTMENT OPPORTUNITY NHDC is developing an investment fund whereby participating financial institutions will receive CRA investment credit by acquiring existing affordable housing at risk of market conversion. Acquisitions will be structured as a riskshared equity pool LLC in which NHDC is the managing member and participating financial institutions are the equity investors and members. Investments are targeted for $5 million increments, although smaller investments will be considered. The investment will have a projected holding period of three years and a maximum of six years, with a projected return of 5 percent to 8 percent plus return of capital. The fund will make every effort to target its acquisitions to match investors’ service areas, broadly defined as states and regions where investors do business. However, for NHDC to have the flexibility to respond to areas of greatest need, 25 percent of the funds will be reserved for use in any location. As soon as properties are repositioned, stabilized, and a qualified local nonprofit is in place, NHDC will sell or transfer the property to that organization. At that time, the investors’ equity capital will be repaid. As an alternative, and at each individual investor’s discretion, equity capital can be recycled as a new capital contribution to acquire future properties on the same basis. If there is no otherwise viable affordability- oriented transaction, the property can be sold at market value as a last resort. NHDC PERSONNEL While NHDC is a new national intermediary, NHDC staff have a long and impressive history in affordable housing preservation. Jeff Burum, NHDC’s executive director, was the founder and driving force behind Southern California Housing Development Corporation (SoCal Housing), a large and very successful regional nonprofit that preserves affordable rental housing in Southern California. Under Burum’s seven-year stewardship, SoCal Housing preserved more than 3,000 housing units with an asset value exceeding $130 million. Other key staff members from SoCal Housing are also involved with NHDC. Sebastian Sterpa, former chairman of the California Housing Finance Agency, will serve as the board of director’s initial chairman. Other members of NHDC’s board are being recruited and include key national leaders in the nonprofit, philanthropic, private, and public sectors. Fourth District At-Risk Section 8 Units Number of units 110 percent or below fair market rents expiring by 2004 STAT E R A N K ( O U T O F 51 ) A S S I ST E D U N I TS TOTA L U N I TS OHIO 2 32,839 59,083 PENNSYLVANIA 14 12,803 36,441 KENTUCKY 27 6,825 16,393 WEST VIRGINIA 43 1,553 6,150 Affordable Housing Preservation Organizations ▲ C O N T I N U E D O N PA G E 6 National Affordable Housing Preservation Associates NAHPA is a national nonprofit organized to promote preservation of affordable multifamily housing in rural areas and small towns. NAHPA is currently completing acquisitions in Illinois and Vermont, with a goal of acquiring 3,000 units over three years. The USDA Rural Housing Service has affirmed a financing model for preservation properties to attract private lenders. NAHPA is now looking to build an organization and to establish partnerships with local and regional nonprofit organizations and housing authorities interested in acquiring and/or managing multifamily properties in rural areas. For further information contact Muriel Watkins, executive director, at 202/467-8544 or murielwatkins@hotmail.com. National Association of Housing Partnerships NAHP comprises 60 regional nonprofit housing organizations in 32 states. NAHP’s new affiliate, the nonprofit Housing Partnership Development Fund, will provide a loan facility for NAHP members, primarily for purchase of portfolios of HUD-assisted properties. The fund will offer technical assistance with financing for predevelopment costs. The fund has received CDFI designation, meaning that bank investors can receive CRA credit and cash awards. One million dollars in investment has been raised to date toward a goal of $3 million. For further information contact Kathy Farrell at 617/720-1999, ext. 204, or farrell@nahp.net. Neighborhood Capital Corporation NCC was formed in January 2000 by members of the Multi-Family Housing Initiative of the Neighborhood Reinvestment Corporation. NCC membership, comprising the multifamily organizations in the NeighborWorks Network, owns and operates 15,000 units of multifamily housing. NCC’s primary function will be aggregating capital for the timely acquisition of affordable multifamily housing for its member organizations. NCC members plan to increase their combined portfolio by 10,000 units by the end of 2003. NCC intends to work with other organizations, including National Housing Development Corporation, National Housing Trust/Enterprise Preservation Corporation, and the National Association of Housing Partnerships. The NCC board has commenced an executive search process. For further information, contact Bill Sullivan at 303/863-8651, ext. 211, or sullivanb@rmmha.com. National Housing Trust Enterprise Preservation Corporation The National Housing Trust is a nonprofit intermediary located in Washington, D.C. The Trust was founded in 1986 to preserve existing multifamily affordable housing. In 1999, the Trust and the Enterprise Foundation launched the NHT Enterprise Preservation Corporation, which will purchase real estate from owners of multifamily housing, targeting markets with insufficient local nonprofit capacity or interest to effectively complete a transaction. This new nonprofit entity plans to acquire 5,000 apartments over the next five years. NHT Enterprise will focus its activities in the mid-Atlantic, South, and Midwest regions. For further information contact Scott Kline, vice president for acquisitions at 202/333-8931 or skline@ nhtinc.org, or visit www.nhtinc.org. COMMUNITY REINVESTMENT FORUM In addition, NHDC has assembled a team of experts to assist with acquisitions, organizational planning and development, and public finance. Team members include Rick Johnston, managing director of public finance, U.S. Bank/ Piper Jaffray; Kathy Kenney, organizational planning and development consultant; David Smith, founder and president, Recapitalization Advisors, one of the nation’s leading specialists in HUD inventory; and John Trauth, organizational planning and development consultant. NHDC’s ultimate goal is to help local communities take greater control of one of their most precious assets— the housing stock that shelters lower-income families and seniors. Without a doubt, preserving this housing stock is a huge undertaking, one that, in order to be successful, will require coordination, cooperation, considerable expertise, and strong financial support. Management fees can also contribute to the sustainability of local nonprofit operations, providing additional capital to address other community needs. Through its working relationships with other preservation agencies and through its board of directors, NHDC is positioned to make a major difference in the preservation of our nation’s affordable Community Development Trust, Inc. The Community Development Trust is a for-profit real estate investment trust created in 1998 by the Local Initiatives Support Corporation, a national community development intermediary. CDT acquires long-term fixed-rate mortgages collateralized by affordable multifamily housing and other community development assets. CDT also invests equity in community development projects that meet CRA requirements. As a real estate investment trust, CDT can offer current owners of affordable housing a taxdeferred exchange that helps property owners who have exhausted their tax benefits. More than $30 million in initial capital was raised from 18 institutional investors including banks, insurance companies, and one CDFI. For further information, contact Judd S. Levy, president and chief executive officer, at 212/ 271-5099 or jlevy@commdevtrust.com. 5 ▲ C O N T I N U E D F R O M PA G E 5 housing stock. NHDC’s success will directly translate into success for the local nonprofits that wish to play a role in the preservation of affordable housing in their communities. COMMUNITY REINVESTMENT FORUM For additional information, contact the National Housing Development Corporation, 8265 Aspen Street, Rancho Cucamonga, CA 91730, 909/ 291-1400, jburum@nhdc.org. Or visit NHDC’s Web site at www.nhdc.org. How the National Housing Development Corporation Preserves Affordable Housing BUY HOLD RESTRUCTURE/REPOSITION S E L L ( AT C O S T ) NONPROFITS Local Initiatives Support Corporation ● Enterprise Foundation ● Neighborhood Reinvestment Corporation ● Congress of National Black Churches ● La Raza ● National Association of Housing Partnerships ● National Housing Development Corporation Housing Portfolios at Risk 6 United National P r e s e r v a t i o n Tr u s t Hud C D Tr u s t ● Improved Cash Flow ● Improved Property Management ● Other Cost Savings ● ● GOAL R e s t r u c t u r i n g To o l s Prevent Market-rate Conversion $5 Million Start-up $ 10 0 M i l l i o n Interim Acquisition Line ● Congress Banks ● Insurance companies ● HUD ● Foundations ● ● ● Banks Insurance companies ● HFAs ● Foundations ● Others Maintain Affordability while Nonprofits Prepare to Purchase Stabilize Property Permanent Debt Subsidies/ Equities ● HFAs Banks ● Consortia ● Private sector ● Insurance companies ● ● ● Local, state goverment LIHTC ● Congress ● Foundations Tr a n s f e r t o L o c a l C o n t r o l Permanent Affordability Cleveland Fed Tackles Opportunities, Challenges in 2000 BY RUTH CLEVENGER, COMMUNITY AFFAIRS OFFICER We begin the new millennium with optimism. The economy is strong, unemployment is low, and more lowand moderate-income individuals have access to consumer and mortgage credit than ever before. Many lenders have developed competitive credit and equity-investment products and have forged mutually beneficial working relationships with other community development practitioners. But there are new challenges, too. Our contacts at community-based organizations tell us they are alarmed by the rise in predatory lending practices, which threaten to undo years of hard work helping low- and moderate-income people own their homes. There is a growing demand for microloan programs and a need for technical assistance and training for the microentrepreneurs who benefit from these loans. And there is uncertainty over the impact of financial services modernization legislation on the Community Reinvestment Act. To address these opportunities and challenges, the Cleveland Fed’s Community Affairs staff has put together an aggressive agenda of public programs and outreach efforts for 2000. In addition, late last year a research analyst was added to the staff, giving us greater capacity for collecting and analyzing data and producing special reports. Highlights of the coming year include: Public Programs ● Conference focusing on legislative and regulatory developments, to include predatory lending, financial modernization, the CRA investment test, and microenterprise, to be held this fall in Cleveland. ● Series of “Making Cities Work” programs in Pittsburgh and Cleveland, in cooperation with the Pittsburgh History and Landmarks Foundation, the Cleveland Restoration Society, and the Sustainable Communities Coalition. ● Roundtable discussions on community reinvestment, fair lending, and economic development, to be held throughout the Fourth District. ● Rural economic development summit with the Federal Reserve Banks of Richmond and Atlanta. Research and Analysis ● Community profiles of targeted geographic areas that will identify credit needs and opportunities. ● Special reports on current issues such as predatory lending and microenterprise. ● In-depth analysis of HMDA data. Outreach and Technical Assistance ● Partnership with the Fannie Mae Pittsburgh Partnership Office to increase home ownership among African Americans in southwest Pennsylvania. ● Continued support for the Access to Capital Network in Cleveland. ● Support for the formation of an Ohio Microenterprise Network. ● Support for the Financial Resources for the Environment in Pennsylvania, a brownfields reclamation and redevelopment effort sponsored by the Federal Reserve Banks of Cleveland and Philadelphia, the Phoenix Land Recycling Company, and the Development Fund. Ruth Clevenger Assistant Vice President and Community Affairs Officer COMMUNITY REINVESTMENT FORUM What a year! From financial modernization to Y2K, 1999 proved that a new world of banking is upon us. The Community Affairs team at the Federal Reserve Bank of Cleveland enjoyed an equally eventful year, developing new programs, expanding outreach into the small towns and rural areas of the Fourth District, and creating strategic alliances with community development professionals in banking, government, and the nonprofit sector. 7 CR Forum is for and about you. From Fourth District Profile to In My Opinion, our intention is to provide an arena for the exchange of ideas and best practices. Please help us shape the future of CR Forum by completing the readership survey inside this issue so that we can write about the issues, programs, and products that interest you most. For this issue only, we have suspended two of our regular features——Fourth District Profile and In My Opinion——to include this report and survey, as well as our lead story on the National Housing Development Corporation. In addition, we’ve included the full text of Federal Reserve Chairman Alan Greenspan’s remarks, “Economic Challenges in the New Century,” before the annual conference of the National Community Reinvestment Coalition on March 22. In his remarks, Chairman Greenspan refers to lingering disparities in wealth and concern over the upsurge in abusive lending practices. The Federal Reserve Bank of Cleveland’s community affairs activities share the same goal as its monetary policy, payments system, and bank regulation activities: To foster a fair and efficient market environment in which people can prosper through their own efforts. Acting as catalysts, conveners, and consultants, we seek to identify best practices, build partnerships, and provide training and technical assistance to community development practitioners. R E M A R K S B Y C H A I R M A N A L A N G R E E N S PA N COMMUNITY REINVESTMENT FORUM 8 ECONOMIC CHALLENGES IN THE NEW CENTURY Before the Annual Conference of the National Community Reinvestment Coalition, Washington, D.C., March 22, 2000 O VER the past several days, you have been engaged value of their goods and services, the introduction of new in sharing a good deal of practical information on developments efficiencies has not led to higher unemployment. Rather, the in the financial services industry and on the evolving set of laws recent period of technological innovation has created a vibrant and regulations that influence the availability of credit in the economy in which opportunities for jobs and new businesses communities that you serve. No doubt, many of you are here have expanded, enhancing the living standards of a large majority this morning because of your long-standing interest in the Federal of Americans. Reserve’s implementation of the Community Reinvestment Act Our challenge, then, is to ensure that we—both policy (CRA). However, because we are now in the final stages of makers and community leaders—extend the favorable macroeco- drafting regulations on the Sunshine Provisions of the Gramm- nomic performance and strive to bolster the capabilities of all Leach-Bliley Act, I am prohibited from commenting at this time. Americans to share in the prosperity that is being generated. Instead, I would like to discuss with you, in broader terms, some When historians look back at the latter half of the 1990s of the challenges facing businesses, workers, and consumers— a decade or two hence, I suspect that they will conclude that we including those in your communities—as the U.S. economy are now living through a pivotal period in American economic embarks on a new century. history. New technologies that evolved from the cumulative inno- As you know, we have recently established a record for vations of the past half-century have now begun to bring about the longest economic expansion in this nation’s history. In recent dramatic changes in the way goods and services are produced years, it has become increasingly clear that this business cycle and in the way they are distributed to final users. differs in a very profound way from the cycles that have charac- How did we arrive at such a fascinating and, to some, terized post–World War II America. Not only has the expansion unsettling point in history? While the process of innovation, of achieved record length, but it has done so with far stronger course, is never-ending, the development of the transistor after growth than expected. A key factor behind this impressive perfor- World War II appears in retrospect to have initiated a special mance has been the remarkable acceleration in labor productivity, wave of innovative synergies. It brought us the microprocessor, with output per hour in the nonfinancial corporate sector increas- the computer, satellites, and the joining of laser and fiber-optic ing since 1995 at nearly double the average pace of the preceding technologies. By the 1990s, these and a number of lesser but quarter-century. And because technological change has spawned critical innovations had, in turn, fostered an enormous new so many opportunities for businesses to expand the range and capacity to capture, analyze, and disseminate information. It is the growing use of information technology throughout the economy that makes the current period unique. F Alan Greenspan OR the consumer, advances in technology and in COMMUNITY REINVESTMENT FORUM Our challenge, then, is to ensure that we— both policy makers and community leaders— extend the favorable macroeconomic performance and strive to bolster the capabilities of all Americans to share in the prosperity that is being generated. the flow of information have greatly facilitated the development of a wide range of new financial products that are better suited small businesses, times have been good for expanding traditional to meeting the preferences of diverse populations. Similarly, in lines of business as well. The most common complaints include the case of consumer and business credit, computer and telecom- the difficulty of finding qualified workers in the midst of strong munications technologies—the same forces that are shaping the competing demands for labor. In the current expansion, the vast broader economy—have lowered the cost and broadened the majority of small businesses have not listed access to credit as scope of financial services. As a consequence of these develop- their top concern, although, as you know, many business owners ments, borrowers and lenders are increasingly able to transact are quite apprehensive about the future as the familiar ways of directly with each other, and we have seen a proliferation of spe- financing business undergo sometimes dramatic changes. cialized lenders and new financial products that are tailored to Several recent developments hold the promise of improving meet very specific market needs. At the same time, the develop- links between financial institutions and the small businesses in ment of credit-scoring models and the securitization of pools of your communities. First, major banks and finance companies loans hold the potential for opening the door to national credit are trying mass-market approaches to small business finance, markets for a broad spectrum of businesses operating in local and similar to the approaches used in the consumer credit arena for regional markets. Indeed, the CRA data on small business lending many years, and this effort has greatly expanded the competition show that institutions located outside the local community are an for loans. In addition, new innovative intermediaries—such as important source of credit for many businesses. community development corporations and multibank and Much attention is focused on the role of corporate giants in fostering innovation, but we would be foolish to understate the extent to which America’s innovative energy draws, and will investor loan pools—are seeking to develop expertise in specific segments of the marketplace for small and minority businesses. I would like to emphasize, however, that credit alone is continue to draw, from the interaction of both large and small not the answer for small businesses. They must have equity businesses. Nowhere in the world are the synergies of small capital before they are considered viable candidates for debt and large businesses operating side by side in a dynamic and financing. Equity acts as a buffer against the vagaries of the competitive market economy more apparent than in this country. marketplace, and it is, accordingly, a sign of the creditworthiness Of course, the surging growth of young high-tech firms and the of a business enterprise and the commitment of its owner. This flashy presence of new Internet businesses capture the most pub- is especially true in lower-income communities, where the weight lic attention. But judging from our contacts through our regional of expansive debt obligations on small firms can severely impede Federal Reserve Banks and information collected in surveys of growth prospects or more readily lead to business failures. ▲ C O N T I N U E D O N PA G E 10 9 R E M A R K S B Y C H A I R M A N A L A N G R E E N S PA N Overall, our evolving economic and financial systems have been highly successful in promoting growth and higher standards COMMUNITY REINVESTMENT FORUM 10 O VERALL, our evolving economic and financial sys- tion, more workers currently report that they are fearful of losing tems have been highly successful in promoting growth and higher their jobs than similar surveys found in 1991 at the bottom of standards of living for the majority of our citizens. But we need the last recession. The marked move of capital from failing tech- to reach further to engage those who have not been able to partic- nologies to those at the cutting edge has quickened the pace at ipate. One way is through the education and training of our which job skills become obsolete. The completion of high school workforce—that is, enhancing our stock of “human capital,” once equipped the average worker with sufficient skills to last a which is a necessary complement to our ever-changing physical lifetime. That is no longer true, as evidenced by the trends in capital. A major consequence of the fast-paced technological workers returning to school and in businesses expanding and change of recent years and the growth of the conceptual emphasis upgrading their on-the-job training. of our nation’s output has been to increase the demand for skilled Certainly, higher education will continue to play an impor- workers. In today’s economy, skill has taken on a much broader tant role in preparing workers to meet the evolving demands meaning than it had only a decade or two ago. Today’s workers for skilled labor. But the pressure to enlarge the pool of skilled must be prepared along many dimensions—not only with techni- workers requires that we recognize the significant contributions cal know-how but also with the ability to create, analyze, and of other educational programs in your communities. Community transform information and with the capacity to interact effectively colleges, for example, have become an important provider of job with others. Moreover, they must recognize that, with new tech- skills training not just for students who may eventually move on nologies coming rapidly on line, the skills that they develop today to a four-year college or university but for individuals with jobs will likely not last a lifetime. —particularly older workers seeking to retool or retrain. In some Traditionally, broader human capital skills have been cases, community colleges are providing contract training for associated with higher education, and accordingly the demand for employers, part of a broader trend in which employers and their college-trained workers has been increasing rapidly. The result workers are recognizing that to maintain human capital, invest- has been that, over the past several decades, the economic returns ment in formal training programs must complement experience to workers with college training have on average outstripped on the job. those to workers who stopped their formal schooling with a high- As one might expect, greater worker insecurities are also school diploma or less. In the past few years, real wage gains for creating political pressures to reduce the fierce global competition college-educated workers have continued to be rapid, but owing that has emerged in the wake of our 1990s technology boom. to dynamic economic growth and tightening labor markets, Protectionist measures, I have no doubt, could temporarily reduce increases for other workers, on average, have kept pace. some worker anxieties by inhibiting these competitive forces. Nonetheless, a wide gap between the wages of college-educated However, over the longer run such actions would slow innovation workers and those of high-school-trained workers remains. and impede the rise in living standards. They could not alter the Another consequence of rapid economic and technological eventual shifts in production that owe to enormous changes in change that needs to be addressed is a higher level of worker relative prices across the economy. Protectionism might enable a insecurity, which is the result, I suspect, of fears of potential job worker in a declining industry to hold onto his job longer. But skill obsolescence. Despite the tightest labor markets in a genera- would it not be better for that worker to seek a new career in a more viable industry at age 35 than to hang on until age 50, low-income workers, however, have not reversed the rise in wage when alternative job opportunities would be far scarcer and when inequality that occurred during the 1980s and early 1990s when the lifetime benefits of additional education and training would the gap in wages between those at the top and the bottom of the be necessarily smaller? To be sure, assisting those who are already distribution was widening considerably. Nonetheless, the leveling close to retirement in failing industries is an imperative. But that off in that disturbing trend is an encouraging sign of what can be can be readily accomplished without distorting necessary capital achieved if we can maintain strong and dynamic labor markets flows to newer technologies through protectionist measures. More accompanied by low inflation. generally, we must ensure that our whole population receives an 11 Of course, we need also to consider trends in wealth, education that will allow full participation in this dynamic period which, more fundamentally than earnings or income, represent of American economic history. a measure of the ability of households to consume. The Federal No doubt, in your communities many workers may view Reserve’s Survey of Consumer Finances indicates that the median the changing needs of their employers as a threat to the security real net worth of families increased 171/2 percent between of their job; and perhaps students preparing to enter the work- 1995 and 1998. As one might expect, the rising stock market force see the demand for rising skills as a hurdle too high to coupled with the spreading ownership of equities was an impor- overcome with the limited resources available to them. You, as tant factor. However, even in the face of the strong aggregate community leaders, can continue to explore ways of developing trend, median net worth declined over this period for families creative linkages between businesses and educational institutions with incomes below $25,000, and medians for non-whites and to better prepare students for the rising demands of the workplace Hispanics were little changed. and to help workers, who must keep up with those changing That families with low-to-moderate incomes and minori- demands and who must cope with the consequences of global ties did not appear to fully benefit from the highly favorable competition, renew and upgrade their skills. economic developments of the mid-1990s is, of course, troubling, A and the survey results warrant a closer look. In the details, we find that families with incomes below $25,000 did increase their direct or indirect holdings of stock, and more reported that they S I indicated earlier, one notable aspect of had a transactions account. However, they were less likely to the remarkable performance of our economy in recent years has hold nonfinancial assets—particularly homes, which constitute been the substantial, and relatively broadly based, rise in real the bulk of the value of assets for those below the top quintile income. During the past several years, workers, including those according to income. At the same time, one encouraging finding at the low end of the wage distribution, have seen noticeable from the survey is that the homeownership rate among minorities increases in the inflation-adjusted value of their wages; more rose from 44 percent to 47 percent between 1995 and 1998, comprehensive Census Bureau figures on the real money income which may be a sign of improved access to credit for minorities. of families also show gains in each quintile between 1996 and Although market specialization, competition, and 1998, and presumably when the 1999 data become available innovation have vastly expanded credit to virtually all income further improvement will be evident. These recent increases for ▲ C O N T I N U E D O N PA G E 12 COMMUNITY REINVESTMENT FORUM of living for the majority of our citizens. But we need to reach further to engage those who have not been able to participate. R E M A R K S B Y C H A I R M A N A L A N G R E E N S PA N COMMUNITY REINVESTMENT FORUM 12 By removing the non-economic distortions that arise as a result of discrimination, we can generate higher returns to both human and physical capital. classes, under certain circumstances this expanded access may We are experiencing an extraordinary period of economic not be entirely beneficial, either for customers in general or for innovation. At the policy level, we must work to configure mone- lower-income communities. Of concern are abusive lending prac- tary policies that will foster a continuation of solid growth and tices that target specific neighborhoods or vulnerable segments low inflation. Beyond this primary mandate, we at the Federal of the population and can result in unaffordable payments, equity Reserve are also responding to the challenge of ensuring that all stripping, and foreclosure. The Federal Reserve is working on communities can fully participate in our growing prosperity. several fronts to address these issues and recently convened an With our Community Affairs program we provide information, interagency group to identify aberrant behaviors and develop instruction, and technical assistance to a diverse range of methods to address them. constituents regarding community reinvestment, community I economic development, fair lending, and related issues. Our reach is broad: during 1999 more than 15,000 participants attended our conferences and seminars, and we responded to more than 800 have no illusions that the task of breaking down requests for in-depth technical assistance. We are also increasing barriers that have produced disparities in income and wealth will the research focus on topics related to community and economic be simple. It remains an important goal because societies cannot development and in 2001 will host a second national conference, thrive if significant segments perceive their functioning as unjust. this one focusing on the theme of changing financial markets and Although we have achieved much in this regard, more remains community development. Your participation in, and support of, to be done. Despite the considerable progress evident in recent these activities is important because you play such a crucial role decades in reducing racial and other forms of discrimination, this in helping communities respond to the evolving financial, educa- job is far from complete. tional, and technological demands of this new century. Discrimination is against the interests of business—yet business people too often practice it. To the extent that market participants discriminate, they erect barriers to the free flow of capital and labor to their most profitable employment, and the A S I indicated in my opening remarks, future distribution of output is distorted. In the end, costs are higher, historians are likely to conclude that the past five years have been less real output is produced, and national wealth accumulation is a pivotal period in American economic history. I trust they will slowed. By removing the non-economic distortions that arise as also conclude that it was a period that set in place policies to fos- a result of discrimination, we can generate higher returns to both ter the eventual emergence of full participation of that segment of human and physical capital. the workforce that has not fully shared in our economic progress. Federal Reserve Bank of Cleveland CR Forum Reader Survey Please help us shape the future of CR Forum by taking a few minutes to complete this readership survey so that we can cover the issues, programs, and products that interest you most. cr C O M M U N I T Y REINVESTMENT forum Newsletter Content Please rank the features of CR Forum from 1 to 5. 1 = like most 5 = like least ____Fourth District Profile ____In My Opinion ____Cover story/special feature ____Of Interest ____Events B. 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[ ] Yes [ ] No THANK YOU VERY MUCH FOR YOUR TIME AND HELP! R E G U L ATO RY U P DAT E Private Mortgage Insurance The Homeowners Protection Act, which became effective July 29, 1999, requires lenders to provide certain disclosures and notifications to borrowers for loans on which private mortgage insurance is required. For loans closed on or after July 29, 1999, lenders must provide borrowers with an initial amortization schedule and disclosure explaining when PMI may be cancelled. Thereafter, lenders must provide annual disclosures explaining consumers’ cancellation and termination rights and an address and telephone number the consumer may use to contact the loan servicer. Requirements for canceling PMI vary depending on whether the borrower or the lender pays the PMI, whether the loan has a fixed or variable rate, and whether the loan is designated as high risk. ● $ For fixed-rate and adjustable-rate mortgages not classified as high risk, borrowers may submit a written request to cancel PMI when the loan balance is scheduled to reach 80 percent of the original value of the property, securing the loan based on the initial amortization schedule. PMI will automatically terminate when the loan reaches a 78 percent loan-to-value ratio and the loan is current. For high-risk loans, PMI cannot be required beyond the midpoint of the amortization period, as long as payments are current. ● For loans with lender-paid PMI, the borrower may not cancel PMI. PMI terminates only when the loan is refinanced, paid off, or otherwise terminated. ● For loans closed prior to July 29, 1999—and therefore not covered under the act—loan servicers must provide an annual written statement to borrowers explaining that PMI may be cancelled, with the lender’s consent, if they have met certain requirements; the disclosure must provide an address and telephone number the borrower may use to contact the servicer. ● The federal financial regulatory agencies have been granted enforcement authority under this act; however, no agency has been given rule-writing authority. Please contact the following members of the Community Affairs staff if you have questions or would like additional copies of this publication. Cleveland Stephen Ong Assistant Vice President and Corporate Secretary Corporate Communications and Community Affairs 216/579-2098 Ruth Clevenger Assistant Vice President and Community Affairs Officer 216/579-2392 Stacey Conner Senior Advisor 216/579-2146 Jacqueline King Senior Advisor 216/579-2903 Laura Kyzour Administrative Assistant 216/579-2846 Cincinnati Karen Mocker Senior Advisor 513/455-4281 Candis Smith Community Affairs Liaison 513/455-4350 Pittsburgh Althea Worthy Community Affairs Liaison 412/261-7943 World Wide Web address www.clev.frb.org We welcome your comments and suggestions. The views stated in Community Reinvestment Forum are those of the individual authors and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Materials may be reprinted provided that the source is credited. Please send copies of reprinted materials to Community Affairs, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, Ohio 44101-1387. COMMUNITY REINVESTMENT FORUM by Connie Smith, Examiner Federal Reserve Bank of Cleveland Banking Supervision & Regulation Private mortgage insurance, or PMI, protects lenders in the event of default. Generally, it is required on loans for which the borrower has less than 20 percent equity, based on the appraised value of the property or the sale price. CR FORUM ACKNOWLEDGMENTS 15 of interest COMMUNITY REINVESTMENT FORUM 16 Mortgage Credit Partnership Guide Mortgage Credit Mortgage Credit Partnership Partnership Guide projects seek equitable home Mortgage Creditopportunity Partnershipforprojects ownership for all financially qualified seek equitable opportunity for home individuals,for from first contact ownership all their financially qualified with a real estate agent, getting an individuals, from their firsttocontact appraisal, insurance, and an with a realobtaining estate agent, to getting applying for a mortgage. By bringing appraisal, obtaining insurance, and together representatives local applying for a mortgage. from By bringing insurance,representatives real estate, appraisal, lending, together from local and other related industries, the projects insurance, real estate, appraisal, lending, identify fair and equal access and otherbarriers relatedtoindustries, the projects in the home-purchase process. identify barriers to fair and equal access MCPhome-purchase projects have process. been implein the mented——with MCP projectsgreat havesuccess——in been impleBoston, Chicago,great Cincinnati, Cleveland, mented——with success——in New York, St. Louis, and San Francisco. Boston, Chicago, Cincinnati, Cleveland, Their York, success haveSan been colNew St. stories Louis, and Francisco. lectedsuccess in a free,stories step-by-step resource Their have been colguide that you create a similar lected in a can free,help step-by-step resource collaboration in your area. To order guide that can help you create a similar the MCP Resource collaboration in yourGuide, area.contact To orderthe Federal Bank of St. Louis the at the MCPReserve Resource Guide, contact 314/444-8761. For more information Federal Reserve Bank of St. Louis at about the MCP project in information your commu314/444-8761. For more nity, contact theproject FederalinReserve Bank about the MCP your commuof Cleveland at 216/579-2903. nity, contact the Federal Reserve Bank of Cleveland at 216/579-2903. Fed Launches Community Affairs Web Site Fed Launches Community The FederalWeb ReserveSite System’s national Affairs community site is now The Federal affairs ReserveWeb System’s national online at www.federalreserve.gov/ community affairs Web site is now communityaffairs/national/. The site online at www.federalreserve.gov/ provides current informationThe on issues communityaffairs/national/. site such as access capital andoncredit, provides currenttoinformation issues community development, microentersuch as access to capital and credit, prise, predatory lending, and CRA, community development, microenteras wellpredatory as upcoming Federal prise, lending, and Reserve CRA, programs and links to as well asnationwide upcoming Federal Reserve additional resources. programs nationwide and links to additional resources. National Community Development Lending School toCommunity be Held at National Washington DevelopmentUniversity Lending The 2000 National School to beCommunity Held at Development Lending School will take Washington University place July 16–20 at Washington The 2000 National Community University in St. Louis;School the School will Development Lending will take focus July on attracting underwriting place 16–20 atand Washington consistentlyin profitable develUniversity St. Louis; community the School will opment business. Training will cover focus on attracting and underwriting single-family profitable and multifamily housing, consistently community develsmall business development, opment business. Training willcommercial cover real estate, and single-family andcommunity multifamilyfacilities housing, lending, with an emphasis on the daysmall business development, commercial to-day mechanics of underwriting comreal estate, and community facilities munity development loans on andthe ensuring lending, with an emphasis daytheir long-term profitability. Expertscomin to-day mechanics of underwriting the field developed the curriculum and munity development loans and ensuring servelong-term as the school’s faculty.Experts in their profitability. information or to and theFor fieldprogram developed the curriculum requestasathe brochure, serve school’scontact faculty.Fred Mendez at the BankoroftoSan For Federal programReserve information Francisco at 415/974-2722, or check request a brochure, contact Fred Mendez thethe SanFederal Francisco Fed’sBank WebofsiteSan at at Reserve www.frbsf.org/frbsf/events. Francisco at 415/974-2722,Enrollment or check is limited to 60 community the San Francisco Fed’s Webdevelopment site at lenders who possess a minimum of one www.frbsf.org/frbsf/events. Enrollment year and atomaximum of fivedevelopment years of is limited 60 community community experience. lenders whodevelopment possess a minimum of one year and a maximum of five years of community development experience. Cleveland Fed Conducts CRA Exams In the second quarter of 2000, the Banking Supervision and Regulation Department of the Cleveland Fed will conduct Community Reinvestment Act compliance exams for two Ohio banks: Buckeye Community Bank Lorain, Ohio May 29, 2000 Settlers Bank Marietta, Ohio June 19, 2000 Sustainable Communities Symposium 2000 Fed Makes New Kicks Off in May ‘Payday Loans’ Rule The Communities The Sustainable Federal Reserve recently published Symposium 2000 willbusinesses be held May a regulation requiring that 11–13, 2000, at Cleveland Statehighoffer payday loans——short-term, University’s Center. Hosted interest cashConvocation advances made against by a coalition of northeast Ohio busi-to borrowers’ paychecks——to disclose nesses, government agencies, civic customers in writing the annual loan organizations, and academic institutions, interest rate. Storefront lenders often the forum will kick off an ongoing provide payday loans that can carry dialogue representatives triple-digitamong interestlocal rates on an annual from four primary areas——architecture basis. The central bank’s rule clarifies and andtoeconomthat urban paydaydesign, loans business are subject the ics, politics and zoning, and terms of the Truth in LendinginfrastrucAct, which ture——to create a stronger says lenders must disclose economy, in writing,a more healthy and educated workforce, before the transaction is completed, and a healthy environment. the finance charge for the loan and its Keynote speakersrate. willThe be rule Garytook annual percentage Lawrence, president Sustainable effect March 31, but of compliance is Strategies and Solutions, voluntary until October 1. Inc., and an internationally recognized expert on sustainability and urban issues, and Greg Watson, executive director of the Dudley Street Neighborhood Initiative. Other speakers will include local business and political leaders. For more information on the symposium or to become involved in the SCS2000 initiative, contact Rosemary Szubski at 216/523-7495 or visit www.scs2000.org. Federal Reserve Board Member Governor Cleveland Fed Gramlich Discusses Conducts CRA Exams Predatory Lending In the second quarter of 2000,atthethe Fair Housing Council of Banking Supervision and Regulation New York Department of the Access to Fed creditwillfor Cleveland lower-income and conduct Community minority borrowers Reinvestment Act has increased compliance exams for dramatically over the two Ohio banks: past five years, Governor Gramlich Buckeye Community Bank said in his recent address to the Fair Lorain, Ohio Housing Council of New York in Syracuse. May 29, 2000 However, he said, a negative effect of Settlers increasedBank access to credit has been Marietta, Ohio lending cases where seen in predatory June 2000 borrowers are subsome 19, low-income stantially worse off as a result of the terms of their credit. Fed Makes New Gramlich stressed the importance of ‘Payday Rule understandingLoans’ the difference between The Federal Reserve recently published predatory lending and subprime and atheir regulation thatand oppositerequiring effects inbusinesses low-income offer payday loans——short-term, minority neighborhoods. Subprimehighlendinterest cash advances ing increases access to made credit against for people borrowers’ paychecks——to with less than perfect creditdisclose historiesto customers in writing annual loan risk for a reasonable pricethe based on loan interest rate. Storefront lenders often and transactions costs, enabling people provide payday loansbuild thathome can carry to purchase homes, equity, triple-digit interest ratesworth. on anPredatory annual and increase their net basis. centraltactics bank’ssuch ruleas clarifies lendingThe involves outright that loansfalsifications, are subject toand the fraud,payday deception, terms Truth in Lending Act, which abusesofofthe loan terms and practices that says lenders must disclose in writing, leave borrowers substantially worse before transaction is completed, off as athe result of the credit terms. the finance charge loan and its Gramlich noted thatforthetheFederal Reserve annual percentage rate. The rule took has convened a nine-agency working effect but compliance group March that will31,focus on commonis voluntary Octoberenforcement 1. approachesuntil to tighten of existing statutes, identifying predatory practices that might be limited by stronger regulations or legislative changes, and establishing a coordinated attack on predatory practices. The complete text of Gramlich’s speech is on the Web at http://www.bog.frb.fed.us/ boarddocs/speeches/2000/.
@FedFRASER