It was 10 years ago this month that the mammoth piece of legislation to address the savings and loan crisis was signed into law. Officially called the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the 500-plus page bill authorized funding to close hundreds of insolvent thrifts, reconfigured the nation's deposit insurance system, and instituted tough new regulations for all financial institutions.
One of its most notable legacies, however, is one of its least-known provisions: creation of the Affordable Housing Program (AHP), a privately funded effort aimed at attracting investment into low-income housing development. This relatively small program has delivered a big message about the role of financial institutions in publicly supported housing developments, and how our nation will pay for these and other community- building efforts.
The AHP is a program of the Federal Home Loan Bank System, the nationwide network of 12 regional wholesale banks. The Federal Home Loan banks set aside 10% of their net income each year and then distribute the funds as grants for affordable housing. Financial institutions - in partnership with community groups or governments - compete for the grants and apply them to construction or acquisition costs, as down payments for loans, or as interest rate writedowns on long-term financing.
Three features of the program are key.
First, AHP funds are private dollars, not public money. Second, lenders apply for and use the funds in collaboration with other local organizations. This framework forges community partnerships. Finally, AHP grants draw private investment by local banks into affordable housing development. This feature is perhaps the most significant.
Some contend that AHP funding alone isn't much more than a drop in the bucket, given the nationwide need for low-income housing. However, the ripples that emanate from that drop matter most. In the last 10 years, AHP grants of $775.5 million have leveraged $12.8 billion in total development costs. The grants have drawn $2.5 billion in private-sector financing from community lenders, supplemented $2.9 billion in private equity through Low- Income Housing Tax Credits, and leveraged more than $3.0 billion in federal, state, and local housing dollars. In the last decade, AHP- supported partnerships have created rental housing for more than 136,000 households. Another 65,000 families have become homeowners, helping to push our nation's homeownership rate to its highest level ever.
This program has provided four important lessons about financing affordable housing development and building successful public/private partnerships to tackle other national priorities.
(1) Affordable housing finance is good business for banks. One of the great myths of public/private partnerships is that the private sector foots the bill and the public reaps the benefits. That's not how it works. Private-sector partners, such as banks, rightly expect to turn a profit on Community Reinvestment Act (CRA)-related investments. An AHP grant is one tool that can make a project's financing pencil out, enabling banks to make prudent loans that will leverage limited public dollars. So rather than shortchanging the community, profitable private participation generates better outcomes than public financing can produce alone.
(2) Start with a simple, nonbureaucratic program, and then make it easier. The language outlining how AHP funds can be used consumed a mere 20 lines in the FIRREA legislation. No bureaucratic superstructure burdens the nearly $1 billion program, which is regulated by the Federal Housing Finance Board. Just over 100 people nationwide are involved in its administration.
(3) The carrot works better than the stick. The creation of the AHP coincides with the beginning of public disclosure of financial institutions' CRA ratings. This gave a powerful tool to community groups, who had very effectively used CRA since 1977 to secure financing from local banks in order to combat redlining. Today, those same groups use AHP grants to excite lenders with sound lending opportunities that benefit their bottom lines and business interests. Providing tools to facilitate private investment and empower banks has proven more effective than subjecting them to public shame.
(4) Flexibility breeds innovation. Affordable-housing developers have called the AHP the best source of funding available. Why? Flexibility. The program's versatility enables lenders and developers to use the grants in ways that suit their needs. Thus, communities can innovate and develop new financing methods and program models.
This minor provision in the massive bill known as FIRREA has emerged as one of the legislation's most important legacies. The AHP has funded affordable housing for people in need - its intended outcome - and given financial institutions a workable tool for financing these projects. It has also resulted in a greater understanding and appreciation among community organizations for financial institutions' role in successful public/private partnerships, an outcome good for the banking industry at large.
Norman B. Rice is president and chief executive officer of the Federal Home Loan Bank of Seattle and was mayor of Seattle. He received the 1999 Award for Outstanding Leadership on Behalf of Neighborhoods from the National Neighborhood Coalition.