Before the Community Reinvestment Act was first passed in 1977, cities were plagued by severe shortages of low- and moderate-income housing. To spur development, the act required banks to provide credit to all parts of a community, regardless of race or relative economic status.
Nearly 40 years later, the divide between the booming luxury housing market and affordable options still persists. Miami, frequently named one of the least-affordable housing market in the country, suffers from the gap more than most.
In response, Miamian Ken Thomas, a longtime authority on the CRA, has rounded up 10 banks to invest in a $25 million fund designed to spur affordable housing properties across the nation, and Miami in particular.
The new Community Development Fund also helps participating banks meet CRA requirements.
The fund launched in February and is currently only available to banks with a minimum initial investment of $1 million. The Fund is trading on the NASDAQ exchange under the ticker CDCDX, and has had performance consistent with comparable funds and some bond indexes so far.
The fund primarily invests in government-guaranteed Mortgage Backed Securities backed by Fannie Mae and Freddia Mac. Each investing bank owns a piece of a nationwide fund, but the capital each contributes is set aside for investments in its own local community. The fund is currently only open to FDIC-insured banks with a minimum $1 million investment. Individuals, businesses, organizations or other entities cannot yet invest in the Fund.
Thomas has been an independent consultant to hundreds of banks since 1975. For more than 40 years, he lectured on finance at The Wharton School of the University of Pennsylvania, where he received his Ph.D. Thomas, author of “The CRA Handbook,” has also given congressional testimony and advised regulators on the CRA.
Growing up in Miami has heightened his understanding of the importance of housing for low- and moderate-income residents — making the fund the apex of his lifelong work.
He recently spoke with Miami Herald about the effort.
Q: What led you to decide to create the fund? Why now?
A: My first home in Miami in the mid-1950s was in an apartment house on Northwest Third Street across from the Orange Bowl. We later moved a few blocks down that street to our first home. I have always felt that good housing was out of reach for too many Miamians, and my lifetime goal was to do what I could to increase affordable housing in what is now one of the nation’s least-affordable housing markets.
Q: Can banks reasonably expect solid returns from this fund?
A: Because almost all of the investments are government-guaranteed, the Fund provides modest returns consistent with the low-risk profile of these investments.
Q: How did you get banks interested in the fund?
A: I was so pleased that six of the 10 charter investors in the new fund were local community banks who were not only anxious to invest but also interested in expanding their investment over time. What was most interesting is that all of the existing bank investors are local community banks, namely City National Bank, Coconut Grove Bank, Florida Community Bank, Gibraltar Bank, Sabadell United Bank and TotalBank, rather than out-of-state giant banks. These investing banks are the heroes of local community development. (The remaining four banks are HomeBanc in Tampa Bay, NorthEast Community Bank, UMB Bank and Century Savings Bank.)
Q: Why are banks interested in the fund?
A: Besides getting a modest return on a primarily government-guaranteed investment, banks will also get credit on their periodic exams under The Community Reinvestment Act of 1977 (CRA). Also, each investing bank has access to my CRA and Fair Lending consulting expertise at no additional charge.
Q: How long will it take for the fund to have a visible impact on communities, and what will that impact look like?
A: The Fund has already had an impact with over half of the initial $25 million being deployed into affordable single-family and multifamily housing in a price range between $150,000-$200,000 in Miami neighborhoods such as Hialeah.
Q: How do you expect this fund to impact the Miami area in particular?
A: Miami is one of the nation’s most unaffordable housing markets. This is not good for our low- and moderate-income residents struggling to find a decent and affordable place to live or for our businesses who may struggle to hire a reasonably close workforce. Rather than building more housing closer to the water or closer to the sky in mega condos, we need more inland housing that people can afford.
Q: How is the fund geared toward affordable housing?
A: All of the $25 million invested by the banks will be reinvested into primarily government-guaranteed mortgage-backed securities that finance affordable single-family and multifamily housing for low- and moderate-income households and in low- and moderate-income neighborhoods.
Q: How exactly are the proceeds from the fund used to “positively impact community development”? Aside from affordable housing investments, where do the proceeds go?
A: While most of the proceeds will be targeted to affordable single- and multifamily housing, the most pressing need in our community, the Fund will also invest in other projects that help develop local communities — such as economic development efforts to finance small businesses or to revitalize or stabilize low- and moderate-income neighborhoods.
Q: What other options do banks have with their CRA investments, and why is the fund superior to those options?
A: Banks can purchase CRA investments on their own, but they may not be able to get the same price or terms that a professional Wall Street money manager can get. The new fund’s portfolio manager is part of the $75 billion Fortress Investment Group on Wall Street. Also, the new fund offers an investment in a diversified national fund, but the bank still gets a targeted investment in its local market that is earmarked solely to it. Finally, each investing bank has access to my CRA and Fair Lending expertise prior to and during regulatory exams at no additional charge.
Q: Is this just a way for banks to meet their CRA requirements?
A: Banks will not only help meet their CRA investing requirements with the new fund but potentially exceed them and hopefully qualify the banks for an “Outstanding” rating that only about 10 percent of banks receive. All the investing banks in the new fund already had good CRA ratings, but the new fund was a way that they could take a leadership role to help develop and improve their local community, primarily through creating more affordable and workforce housing.
Q: What are your expansion plans for the fund? Have you seen interest from other banks?
A: Our goal is to grow the new fund in a very controlled way by making sure that we first and foremost meet all of the needs of our investing banks. Since we have achieved that goal and documented that the new fund is scalable, it is now open to new bank investors — from not only South Florida but around the nation. We have had an extraordinary level of interest from all sizes and types of banks from around the nation that likewise want to take a leadership role in promoting community development in their local markets.
Q: How do you expect the fund to impact Miami in the long term?
A: We are hopeful that the other community banks operating here in Miami who care about our affordable housing problem will join the existing investors in their efforts to help bring more funds to this critical area. We expect that, with the involvement of our other community banks here, we will begin to make a real difference in closing our tremendous affordable-housing gap.
Kenneth H. Thomas
Title: President of Community Development Fund Advisors, LLC in Miami.
Personal: Thomas grew up on Northwest Third Street across from the Orange Bowl and attended Miami Senior High School. He considers himself a “MiamAdelphian” spending nearly every other week in Philadelphia. His two sons, Chris and Greg, both work on Wall Street. When in Miami, he plays basketball two to four times a week in a men’s league and is promoting a major change in the game through his new website www.4and5PointShots.com.
Background: Thomas was a member of the finance department faculty at The Wharton School of the University of Pennsylvania for 42 years, where he taught banking and monetary economics. He has a Ph.D. in business and applied economics and a master’s in finance from The Wharton School as well as an MBA from the University of Miami and a B.S.B.A. from the University of Florida. He taught finance at UM for one year.