Healthy Neighborhoods Loan Pools I and II

Report: Scaling the Use of Guarantees in U.S. Community Investing

Healthy Neighborhoods promotes community revitalization through property acquisitions and renovations in distressed Baltimore neighborhoods.

Background

Healthy Neighborhoods, Inc. is a nonprofit organization founded in 2004 by a bank, a foundation, and community leaders to revitalize undervalued Baltimore neighborhoods by improving properties and strengthening neighborhood identities. The initiative is designed to increase occupancy rates and home values, expand city tax revenues, and build community. Healthy Neighborhoods provides various services, including grants to neighborhood groups to cover marketing, community organizing, and development projects, as well as loans for property acquisition and renovation. The program also supports realtors and housing counselors to help market loans and contracts with architects to assist with design and renovation.

The Need for a Guarantee

In 2006, Healthy Neighborhoods organized a pool of USD 40 million from 10 lenders (“Loan Pool I”) to lend to homeowners at slightly below-market interest rates for the purchase, refinancing, and renovation of homes in Baltimore City. A guarantee from three local foundations and the Maryland Housing Fund covered the first 10% of losses of each loan, making the loans affordable and enabling a relatively high loan-to-value ratio of 120% of the post-renovation appraised value. The guarantee helped mitigate risks associated with the depressed local housing market, borrowers with limited collateral or credit history, and the start-up of a new program with a limited track record.

In 2012, once all the funds from this first fund had been committed, a second pool of similar size was arranged from six lenders (“Loan Pool II”). M&T Bank acted as the originating lender, with other lenders including PNC Bank, Baltimore County Savings Bank, Hamilton Federal, CFG Community Bank, and St. Casimir’s Savings Bank (many had participated in Loan Pool I). Loan Pool II was also backed by a 10% guarantee of up to a total USD 4 million from two of the original local foundations and the Maryland Housing Fund. Healthy Neighborhoods approached the Annie E. Casey Foundation (AECF) to round out this guarantee pool, since one of the guarantors had decided not to participate in the second pool.

Loan Pool I had proved successful, with a very low loss rate even during a turbulent period for the market, encouraging the banks to participate in the second pool. The guarantee ensured that Loan Pool II could continue providing financing at below-market interest rates and high loan-to-value ratios to draw in buyers and incentivize renovations that would increase neighborhood market values.

This case study, focusing on the second loan pool, draws from the experience of one guarantor in particular, the Annie E. Casey Foundation. AECF saw a chance to reinforce the impact of their work in East Baltimore. The Healthy Neighborhoods target communities were adjacent to East Baltimore, and many residents had relocated to those areas from East Baltimore during a neighborhood revitalization initiative. For both these reasons, AECF was interested in promoting stability and rising home values in those neighborhoods.

Negotiations

The guarantee structure for the second fund was largely modeled on that of the first fund, with most of the original stakeholders continuing to participate. Thus, there were no significant negotiations on terms and structure. AECF fully underwrote the transaction and was comfortable with the risk profile, investment terms and guarantors and lenders. Further, a strong existing relationship and trust between AECF and the Abell Foundation facilitated the negotiations.

AECF provided an unfunded guarantee of up to USD 1 million, which was recorded as a contingent liability on their balance sheet and which would be counted as a program-related investment if called. Based on the performance of the first loan pool, AECF estimated that their pro-rata portion of any losses incurred would not exceed USD 25,000, so they decided to provide this amount up-front as a grant to Healthy Neighborhoods in addition to the USD 1 million, in order to simplify payment of any call on the guarantee.

 

Results

AECF’s guarantee had a relatively high leverage effect: Their USD 1.025 million helped leverage USD 40 million by completing the guarantee pool. Most of the guarantee was unfunded, which allowed the foundation to leverage its balance sheet without taking funds out of their endowment, where it could earn a higher return.

According to a case study published by the Federal Reserve Bank of San Francisco in the 2016 issue of Community Development Investment Review, the two loan pools together have originated 352 loans totaling USD 53.6 million, with defaults costing the program 2.5% of capital. The program has seen positive measures of progress in metrics such as home sales prices, rehabilitation permits issued, and days homes stay on the market. Tracy Kartye, Director of Social Investments at AECF, said, “Healthy Neighborhoods is deploying capital in target neighborhoods and is able to indicate that the loans are remaining stable and property values are increasing, particularly for the relocated residents. They moved into homes with a significant amount of equity, so the ability to grow that equity is meaningful.”

Conclusion

This case study exemplifies the use of a low level of coverage and a small amount of upfront capital to significantly expand financing in a troubled market. The program also demonstrates how a guarantee can support an innovative, collaborative structure that provides a variety of interconnected services, in this case grants, loans, and coordination of technical assistance. From the perspective of the guarantor, the way the guarantee was applied could be improved, as a pooled rather than loanby-loan basis would better distribute the risk, with the fund as a whole required to document a loss before calling on the guarantee (rather than a call being triggered by any loan going unpaid). Still, the structure has good potential for replication, especially in cases where an intermediary with strong linkages to the community, such as Healthy Neighborhoods, can be identified to manage relationships and play a coordinating role with homeowners.

 

Key Details

BASIC INFORMATION
Overview

AECF’s guarantee was provided in two parts: a USD 1 million unfunded guarantee and a USD 25,000 grant to Healthy Neighborhoods, to be used first for losses or to otherwise stay in Healthy Neighborhoods’ loss reserve.

Year

Loan Pool I: 2006, Loan Pool II: 2012

Size of Guarantee

USD 4 million total from four guarantors

Size of Loan Pool

USD 40 million

Impact Themes

Community revitalization through property acquisitions and renovations in distressed Baltimore neighborhoods

KEY CONSIDERATIONS
Objectives of the Guarantee

The guarantee helped mitigate risks involved in investing in Healthy Neighborhoods (described below). It enabled Healthy Neighborhoods to shift its risk-return profile to attract investment from banks and provide financing on attractive terms.

Type of Risk Addressed

Market risk, borrowers with limited collateral or credit history, and risks related to a new business mode

Coverage Level

10% top loss per loan

Financial Return

A one-time fee of 50 basis points was charged on the USD 1 million unfunded guarantee.

Triggers and Access

The guarantee pool could be called once a loan had been delinquent for 60 days. Healthy Neighborhoods also has an obligation to maximize return on the collateral before calling on the guarantee, and it must draw on the grant-funded reserve of USD 25,000 before calling on the unfunded guarantee

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