Building the Case for Community Investment: Real Examples of Real Returns
In years past, the primary factor motivating many financial institutions’ investments in affordable housing and community economic development was the need to fulfill their CRA requirements. Today, many financial institutions are realizing a wide array of benefits associated with their community investment efforts—from growing deposits and increasing mortgage volumes to an improved ability to contain margin compression, and, of course, creating community goodwill.
We recently asked three Seattle Bank members to discuss their use of our affordable housing grants and low-cost community investment loans and the benefits derived for their own businesses. Here’s what they had to say.
Pat Leach, Executive Vice President of HomeStreet Capital, on HomeStreet Bank’s use of a Seattle Bank CIP-eligible Standby Line of Credit (LOC)
Seattle Bank: HomeStreet Bank recently used a Standby LOC to help fund the LaSalle Project in Seattle. The Standby LOC, which was eligible for a discount through the Seattle Bank’s Community Investment Program (CIP), enabled HomeStreet to collateralize a portion of its municipal securities portfolio. Would you describe the project and tell us about how this opportunity developed?
HomeStreet Bank: The LaSalle Project involves the renovation of four, early 1900’s, interconnected mixed-use buildings located adjacent to the Pike Place Market in Seattle—the LaSalle Hotel, the Cliff House Hotel, the Outlook Market and the Outlook Hotel—as well as the construction of a new building on the neighboring “Creamery Site.” Upon completion, the project will include 64 affordable apartment units for senior citizens, a 6,500-square-foot senior center, 13,060 square feet of retail space, and 5,856 square feet of office space. The project sponsor was the Pike Place Market Preservation and Development Authority; other members of the development team included Walsh Construction Company and Hewitt Architects.
Renovation and construction was complicated not only by the age and condition of the existing buildings, but also by the mix of residential and commercial uses. In addition to the Pike Place Market Preservation and Development Authority’s capital campaign, financing came from a variety of programs and funding sources, including Low Income Housing Tax Credits, Washington State Housing Trust Fund, Seattle Housing Levy, the Seattle Bank’s Affordable Housing Program (AHP), City of Seattle Community Development Block Grant, and Washington State Community Services Facilities Program. Each had its own unique requirements, along with varying conditions and restrictions.
Seattle Bank: Why did you choose to use a Standby LOC from the Seattle Bank, rather than a product from another vendor?
HomeStreet Bank: We looked at a couple of options for a Standby LOC for this transaction. We chose the Seattle Bank’s LOC over other vendors’ products primarily for two reasons:
- Pricing: The Seattle Bank’s Standby LOC offered highly favorable pricing as compared to the competition.
- Collateral: The Seattle Bank was willing to accept municipal bonds as collateral for LOCs associated with their CIP. CIP is about the only type of transaction in which the Seattle Bank will accept municipal debt as collateral.
Originally, the transaction had been structured in the form of a construction/rehabilitation loan with HomeStreet as the lender. Once the loan was closed, funds became available from the City of Seattle Community Development Block Grant Float Loan. The interest rate on the Float Loan plus the cost of the LOC was lower than the interest rate on the HomeStreet loan. The Float Loan carried with it a chance that the City would call the loan prior to maturity, and the LOC option mitigated that risk.
Seattle Bank: Did the pricing of the Standby LOC help with the overall profitability of the transactions?
HomeStreet Bank: Certainly the pricing of the Seattle Bank’s LOC was more competitive than what was available to us from other vendors. Since this was our first transaction utilizing this type of loan structure and we took into consideration the affordability and community enhancement attributes of the project, we probably did not realize the level of profitability one might have expected on a complex transaction such as this one.
Seattle Bank: Your organization regularly receives “outstanding” ratings on your FDIC CRA exams. How important is this sort of “goodwill” in terms of attracting new customers into your bank?
HomeStreet Bank: Our “Outstanding" rating is just one way that current and potential customers can know that HomeStreet Bank is really committed to the community and especially to meeting the diverse housing needs in the Northwest. For this reason, we try to communicate both our "Outstanding" CRA rating and the other contributions that we make in partnership with the community. Increasingly, more new customers are hearing about our demonstrated commitment to the community, which may influence their decision as to where to bank.
Carolyn Middleton, Vice President/Chief Lending Officer, and Beverly Cramer, Finance Manager at Rainier Pacific Bank, on Rainier Pacific’s use of the Seattle Bank’s Community Investment Program/Economic Development Fund (CIP/EDF)
Seattle Bank: Rainier Pacific has made extensive use of the Seattle Bank’s CIP/EDF. Why has this program been so attractive to your institution?
Rainier Pacific Bank: We have been actively involved in the CIP/EDF since 1999, and we have made extensive use of the program. At August 31, 2006, we had 82 CIP/EDF loans outstanding for a total of $88.2 million. CIP/EDF helps us to provide loans for local community-based affordable housing, as well as for businesses that locate in low- and moderate-income communities. The CIP/EDF also enables us to meet the needs of many of our commercial and multi-family real estate loan customers who want longer-term, fixed-rate loans.
Seattle Bank: Why is Rainier Bank so committed to affordable housing and community economic development?
Rainier Pacific Bank: As a community financial institution, we support our community. If we are presented with an application for a CIP/EDF-eligible, or community economic development project and it meets our loan criteria, we’ll do it. And, we basically prepare a CIP/EDF application for any commercial real estate or multi-family loan that meets our underwriting criteria.
Seattle Bank: Has your use of CIP/EDF helped to broaden your mortgage loan origination market?
Rainier Pacific Bank: CIP/EDF has helped with our mortgage loan originations. Because of the low interest rates and our associated ability to better manage interest rate risk, we have been able to make some loans that, otherwise, would not have met our criteria.
Seattle Bank: There are many sources of funding that you could use for community investment purposes. Why CIP/EDF?
Rainier Pacific Bank: Because CIP/EDF offers a lower cost of funds at a fixed term, we can use it to manage our interest rate risk. The fact that CIP/EDF can help us maintain our margins is a huge advantage over other funding sources. In addition, CIP/EDF is very straightforward and easy to use. Even in the current Sarbox environment and its heightened reporting requirements, it’s still very easy to submit an application and get it approved.
Jim Ness, Senior Vice President at Glacier Bank, and Lynn Moon, consultant to the Glacier Affordable Housing Foundation (GAHF), on the GAHF’s use of the Seattle Bank’s AHP
Seattle Bank: Glacier Bank offers a variety of affordable housing loan solutions to its customers, including the Glacier Affordable Housing Foundation (GAHF) loan program. Tell us about this program. What is the purpose, and why is it beneficial to your business?
Glacier Bank: GAHF is a 501(c)(3) non-profit corporation formed in 1995 by Glacier Bank to provide funding for affordable housing. First-time homebuyers with incomes at or below 80% of their county’s median income may apply for assistance. Down payment and closing cost assistance provides for the difference between the qualifying loan amount and the purchase price of the home. The current maximum funds available are $40,000 for down payments and $5,000 for closing costs. The homebuyer is limited to a housing payment that is no greater than 30% of their gross income. Recipients must contribute 1% - 2% of the purchase price and complete a first-time homebuyer education course prior to closing on the loan.
All funds used for assistance are secured through a Resale Restrictive Agreement and a lien filed in the name of GAHF. The assistance is made on a deferred basis, with no payments due and no interest accruing. At such time as the borrower sells or refinances the property, the loan, together with a share of the equity, becomes due and payable. The “recaptured” funds are then “recycled” to provide down payment and closing cost assistance to additional eligible homebuyers.
The lien is subordinate to any placed by Montana Board of Housing (MBOH) and/or Rural Development. MBOH provides below-market-rate, 30-year financing for the permanent first-mortgage, and Rural Development guarantees the MBOH portion of the loans. In many cases, Rural Development provides permanent financing through direct loans at rates ranging from 1% - 6.25%, depending upon household income. Any MBOH-qualified lender is eligible to partner with GAHF as long as they are willing to pay a $250 participation fee and allow GAHF to perform the final underwriting of the loans.
Seattle Bank: How have the Seattle Bank’s community investment products supported GAHF’s efforts?
Glacier Bank: In 1995, GAHF successfully applied for a $610,000 Seattle Bank AHP grant to provide up to $4,120 in closing cost assistance to a minimum of 144 low-to-moderate income, first-time homebuyers. These funds were coupled with grants (Community Development Block Grant and HOME Grant funds) obtained through a competitive grant application process sponsored by GAHF’s partners—units of local government and non-profit agencies. These additional grant funds were used to provide down payment assistance.
GAHF continues to seek additional funding sources and has accessed the available Home$tart Program funds on numerous occasions to augment the foundation’s contribution to the first-time homebuyer’s purchase.
Seattle Bank: What sort of marketing strategies do you use in order to bring in new customers that would qualify and be interested in these types of programs?
Glacier Bank: We market the program in the following ways:
- Advertisements in newspapers with high readership by minorities, who are typically underrepresented
- Posters and brochures placed in each assisted county at: Human Resource Development Council (HRDC) offices, project-based Section 8 or other federally subsidized apartments, large mobile home park management offices, and public places and agencies frequented by minorities and women
- Presentations to local social services agencies offering programs for low-to-moderate income persons
- Announcements to churches and local community groups
Seattle Bank: Have you found any indications that these new customers have stayed with your bank longer than the average customer and have used other services that you offer?
Glacier Bank: We have not tracked specific customer data, but the success our program speaks to its popularity. Today, GAHF has many local partners and has become eligible to apply for funds in its own right as a “Community Housing Development Organization.” As of June 30, 2006, GAHF has assisted over 300 homebuyers for a total of $6,639,392. Of that amount, $624,274 are “recycled” funds.
Even though we don’t have “hard data” to know if our customers stay with Glacier Bank longer based on their use of this program or if they have used other services, our experience with these clients tells us that they are very appreciative that we have helped them live the dream of home ownership. You don’t have to have hard data to know what that does for you as far as customer loyalty is concerned!
Printable Version
E-mail this article
 |
|
Newsletter content is for our readers' informational purposes only.
Please refer to our Terms of Use for details. |
|