When Leaving HUD, Turn Right: Personal Reflections on Community Capitalism as a foundation for a Nat

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When Leaving HUD, Turn RightPersonal
Reflections on Community Capitalism as a
foundation for a National Urban Policy

• Michael A. Stegman,
• Center for Community Capitalism, University of
  North Carolina at Chapel Hill
• Presented at a conference on
• Bootstrap Capitalism Financial Services in
  Low-Income Communities
• Washington, DC
• September 17, 2004

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Overview of Presentation

• Genesis of the Center for Community Capitalism at
  UNC, founded in 1997
• Positive and negative developments in four areas
  of community capitalism policy
• Financial services, the unbanked savings
  strategies
• Low-income home ownership as wealth-building
  strategy
• Access to capital and integration of community
  development finance with capital markets.
• 3. Closing thoughts

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Origins of Center for Community Capitalism at UNC

• Founded in 1997, CCC stems from my work at HUD on
  presidents national urban policy report in 1995
• Poor communities represent an untapped economic
  opportunity for our whole country. While we work
  together to open foreign markets abroad to
  American-made goods and services, we also need to
  work together to open the economic frontiers of
  poor communities here at home
• President Bill Clinton, August 1995

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The Global Context for New Markets Focus

• The era of big government is over 1995 State of
  the Union
• Asian financial crisis of 1997-98 Labor
  Department ties decline in U.S. manufacturing
  jobs to spread of the crisis from Thailand to
  Indonesia, Malaysia and other Southeast Asian
  countries
• Domestic trade missions to showcase untapped
  investment opportunities in places without the
  currency political risks inherent in overseas
  markets
• Argentinas currency crisis in 2001-02 caused big
  losses to major banks, share prices plummet
• Fleet Bank a prime example, caused bank to
  refocus on domestic retail banking services as
  surer path to profits.

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Community Capitalisms Guiding Principles

• In Community Capitalism, business supported by
  the government and community sectors, drives
  investment, job creation, and economic
  opportunities in distressed communities
• Urban neighborhoods are profiled by measures of
  economic strength rather than social pathologies
  
• Promising inner-city entrepreneurs have access to
  capital
• Corporations make inner-city investment decisions
  for business reasons instead of charity.

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Porters Business Case for Investing in Inner
Cities
Americas Inner Cities
Mexico
Population Households Average disposable
household income Total household income Consumer
Spending power per sq. mile Proximity to large
markets clusters Average education
level Currency stability Government
stability Stable, known legal system American
business norms and language
7.7 million 23,888 184 billion 43,000,000 Hi
gh Medium High High High High
24.6 million 11,024 272 billion 224,433 Low
Low Low Low Low Low
1Simple average of household disposable income
for the inner cities of Atlanta, Boston, Chicago,
Miami, New York, Oakland 2Average of inner cities
of Atlanta, Boston, Chicago, Miami and Oakland
(if Harlems 340m is included, the average of
the six cities would be 93m Note Mexico data is
1995, post devaluation Sources ICIC, Boston
Consulting Group, Euromonitor Latin America
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CC has Real Policy Implications

• The Low Income Housing Tax Credit vs. the New
  Market Tax Credit
• LIHTC -- deep enough (70 PV) to make markets
  without additional help
• NMTC too shallow (30 PV) to stand on its own
  deals must have real economic value
• Brownfields tax credit helps compensate for
  cleaning up site, but cant use it unless
  underlying development has strong market
  potential
• Deep federal subsidies that dont leverage
  private at-risk capital are neither sustainable,
  nor have the potential to achieve scale.

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Financial Services and the Unbanked
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Large Numbers of Lower Income North Carolinians
are Unbanked

• Nationally, about 10 of all households are
  unbanked
• One of every six (17) lower income families in
  NCover 222,000 householdsare unbanked.
• TANF households are more than twice as likely
  (38) to be unbanked.
• Recent TANF recipients are even more isolated
  from financial mainstream42 are unbanked.
• Median savings account balance of TANF households
  is 0, and for recent leavers, 5.

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Why banks should care about increasing financial
access

• Strong link between account ownership and use of
  bank credit
• Lower-income families with checking, savings, or
  money market accounts are six times as likely as
  to have credit cards and are more than twice as
  likely to have a mortgage.
• Demographics shape the future market
• Up to 80 percent of all first-time buyers between
  now and 2010 will be young minority immigrant
  families
• But more than 40 percent of low- and
  moderate-income African American and Hispanic
  renters are unbanked..

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Same technology driving banking is driving
changes in social safety net delivery system

• A Revolution in delivery of means tested benefits
• EFT99 --Beginning 1999, federal benefit
  recipients start receiving benefits by direct
  depositoriginally mandatory, now voluntary
• By end of 2002, food stamps had to be delivered
  electronically
• More than 35 states have added distribution of
  welfare benefits to the magnetic swipe card used
  to distribute food benefits.
• Treasurys First Accounts initiative
• On May 2, 2002,Treasury awarded 15 grants
  totaling 8 million to financial institutions to
  assist 35,500 unbanked low- and moderate-income
  individuals open accounts.
• 15 Awards to nonprofits, insured depositories,
  CDFIs, faith-based organizations, and local
  governments to aggregate unbanked market through
  employers, schools, tax preparation services, day
  care services.
• FDIC Money Smart financial education system

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Rise of Fee-Based Banking a Two-Edged Sword

• No longer do banks make most of their money from
  the interest spread
• Non-interest revenues, particularly fee income,
  is driving bank income
• Bank fees now account for about 44 of net
  operating revenues for commercial banks
• ATM surcharges generate 2 billion in revenues
• In 2000, 400-million bounced checks generated 40
  billion in fees
• Banks starting to charge for over-the-counter
  (teller) transactions
• Transaction-based fees makes possible wider range
  of services, but potential for exploitation
  exists.

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You cant build wealth through payday lenders

• Payday lending is 8-14 billion/year business
• between 26 47 million loans per year
• generates about 2.5 billion in loan fees per
  year
• Between 2000 and 2003, the number of outlets
  offering payday loans more than doubled to 20,000.

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Underbanked as Important as UnbankedPayday
Lending Profits Tied to Chronic Borrowing

• Most important contribution to revenues is of
  customers
• 2nd most important variable is percentage of
  repeat borrowersrollovers is key to
  profitability
• Although industry rationale for high fees is
  occasional nature of need, average NC payday
  customer took out 7 loans a year 27 took out
  more than one loan per month
• Given perverse business model, significant
  regulatory issues unresolved.

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SummaryChanges in Unbanked Policy Environment
Since CCC Started

• Glass is Half Full
• Matricula as Acceptable ID
• Intense Competition in Remittances
• EBT food stamps, welfare, child support
• Payroll cards other innovations
• First Accounts program/Center for Financial
  Services Innovation Awards
• ITIN mortgages
• de Novo Hispanic Banks
• 500 IDA programs
• EITC-banking/savings initiatives
• 1995 CRA reforms.

• Glass is Half Empty
• Efforts to eliminate Matricula
• Spread of bank overdraft fees unregulated high
  cost loans
• Payroll cards unregulated
• Payday lending company setting up shop on HBCU
  campus
• Federal preemption of state predatory lending
  laws
• lt3 of all banks do IDAs
• Tax Credits for IDAs stalled
• Regulators Attacking CRA.

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Dumbing Down the CRA

• OTS recent decision to define small thrifts from
  lt250 million in assets to 1 billion, reduces
  community reinvestment requirements of 88 (828)
  of all institutions it regulates
• FDIC considering same rule would reduce
  community reinvestment requirements of 96
  (5,115) of all banks they regulate.

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Growing Wealth Through Homeownership
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Importance of Home Equity

• Access to Mortgages on the Rise
• 1993-2003, mortgage loans to Hispanics grew 6x
  faster, Asians 4x, and blacks 2x faster than to
  whites
• Loans doubled to LMI buyers while rising 88 to
  higher income
• Compelling business case minority share if
  population up from 17 in 1980 to 26 in 2000,
  and will be 34 by 2020
• 12 million black Hispanic households who enter
  market next 15 years will account for 80 of all
  first-time homebuyers.

• Home Equity is a Wealth Equalizer
• Lowest income quintile, median net wealth in 2001
  was 68,000, compared to 500 for renters
• Among those owners, home equity accounted for 80
  of net wealth
• From 1989 to 2001, ratio of median wealth of
  blacks to all U.S. households rose from about 9
  to 22 as black homeownership rose from 42 to
  48
• But minority homeownership rates still 25
  percentage points behind whites.

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Lowering the Wealth Constraint to Buying a Home
is the New Frontier

• Lower down payments made possible by improved
  credit scoring and underwriting
• Efforts to eliminate all borrower up front cash
  needs poses serious risks
• Builder/developer-linked down payment gifts tied
  to FHA loans
• Proposed FHA zero down payment loan.

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FHAs Zero Down Payment Loan is Wrong Way to Go

• By design, anticipates about twice the proportion
  of home owners to go into foreclosure (17) than
  is the case under FHAs mainstream mortgage
  program
• CBO projects defaults at 1 of borrowers each
  year, with a cumulative default rate of more than
  30 over 30-year loan term
• This is twice what HUD projects.

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SummaryChanges in Homeownership Environment
Since CCC Started

• Glass is Half Full
• Strong business case for serving LMI minority
  first time homeownership market segment
• Demonstrated profitability of CRA lending
• Innovations in foreclosure prevention loss
  mitigation
• Innovations in securitization secondary
  markets
• Big increase in subprime lending makes home
  ownership possible for those with imperfect
  credit
• Progress on lending to undocumented Latinos
• Secondary market innovations

• Glass is Half Empty
• Eliminating down payments wrong way to address
  wealth constraints
• Federal preemption of predatory lending laws
  without strong national consumer protections
• Affordable housing policy is out of whacktoo
  much attention to home ownership, while rental
  assistance system withers on the vine.

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From Debt to Equity The Rise of Inner City
Venture Funds
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SummaryChanges in Capital Provision in EDM
Since CCC Started

• Half Full
• New Market Tax Credit
• HMDA reporting for business loans
• Focus on domestic emerging markets by commercial
  private equity funds
• CDVC funds have 300 million under management,
  now dwarfed by 2.6 billion double bottom line
  private equity funds
• Banc of America 195 million California Community
  Venture Funds a fund of funds including
  CalPers/ CalSters
• New companies specializing in market information
  needs of EDM investors
• Between 1977 and 1995, number of minority MBAs
  grew fourfold to 13,000 they now fill
  managerial ranks of leading companies.

• Half Empty
• Declining appropriations for CDFIs
• Increasingly return-driven community development
  finance system
• CDFIs losing market niche to mainstream banks
• Need to do more to prepare local populations for
  jobs in expanding companies.

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Concluding ThoughtsHow Community Development
Morphed into Emerging Domestic Markets
Implications for Bootstrap Capitalism

• Demographic purchasing power trends
• Deregulation globalization of capital markets,
  financial sectors
• Saturation of traditional markets and narrowing
  margins
• Technologic advances making possible
• improved risk assessment/credit scoring
• securitization as a vehicle for tapping
  mainstream capital markets
• If Wall Street investment funds cherry pick best
  deals, where does this leave CDFIs on the
  risk-reward continuum, and the federal role in
  community economic development?
• While inner city poverty down, it still exceeds
  30
• For community capitalism to work, there must be
  untapped market potential, which does not exist
  in all distressed places.

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For more information on todays presentation

• Center for Community Capitalism web site
  www.ccc.unc.edu.
• Call at 919-962-6849