How Secondary Trading Platforms Build Stronger Communities

A funding mechanism for nonprofits to build more housing

Insider

Senior Advisor

Most are aware there’s been a significant shift in the housing market, as higher interest rates and high housing prices have prompted many potential first-time buyers, move-up buyers and downsizers to put their plans on hold. But today’s market is especially tough on low- to moderate-income consumers, many of whom have been saving money for years only to be sidelined by a global pandemic followed by soaring interest rates.

There are, of course, some bright spots. One of them has been the impact of new online platforms for exchanging mortgage notes, which are opening opportunities for banks, lenders, and even non-profits to generate liquidity so they can sell more loans. More importantly, perhaps, is that these platforms are helping to build stronger communities, despite inflation and increasing signs of a recession.

The Habitat Connection

It isn’t easy being a non-profit organization these days. In fact, according to a December 2021 survey by the Federal Reserve Bank of St. Louis, the COVID pandemic hit the nonprofit sector particularly hard, especially entities dedicated to providing affordable housing.

The pandemic impacted non-profits in two ways, according to the survey. First, it increased demand for food, shelter and other needs among Americans who were laid off or experienced healthcare emergencies during the shutdown. Second, social distancing mandates disrupted the ability of non-profits to raise money through events like dinners, auctions and poker tournaments. While the pandemic’s impact is fading and many of these events can now be held, 61% of non-profits are still experiencing disruptions that impact their ability to provide services, the survey found.

These challenges aren’t lost on Habitat for Humanity, the world’s largest not-for-profit home builder, or for the 1,200 Habitat for Humanity Affiliates around the world. What many people may not realize, however, is that each Habitat Affiliate is operated independently. They each have an agreement with Habitat for Humanity to use the nonprofit’s branding and other elements of their homebuilding program, but it is up to each Affiliate to determine how to raise money to build homes.

The standard model that Habitat Affiliates use for raising money involves donations and construction sponsorships from banks and other financial institutions. When COVID hit, a lot of that fundraising work disappeared, to the point that many Affiliates struggled to stay afloat. Recently, however, new loan trading platforms have opened up opportunities for Habitat Affiliates — and other nonprofits that operate affordable housing programs — to raise money.

Enabling CRA Loans

One of them is the CRA Note Exchange, which was launched in 2018 by CBC Mortgage Agency (CBCMA), a nationally chartered housing finance agency and a leading source of down payment assistance for first-time homebuyers. The CRA Note Exchange enables the sale of Community Reinvestment Act-eligible loans through an online portal to free up capital for additional affordable home construction. As a secondary market platform, the CRA Note Exchange makes it possible for Habitat Affiliates and other Community Housing Development Organizations (CHDOs) to generate liquidity by selling their affordable mortgages to the highest bidding bank or investor.

Under the process, an affiliate uploads loans to the exchange’s online platform, where underwriters review them to make sure the loans are salable on the secondary market. The CRA Note Exchange then offers them to interested banks and investors who competitively bid on the loans. After an investor’s bid is accepted, CBC Mortgage Agency acts as a conduit facilitating the sale of the loans to the investor. Upon the successful sale of loans to an investor CBC Mortgage Agency will receive a small fee from the sale proceeds.

Based on my experience working with Habitat for Humanity, some Habitat Affiliates have relationships with local banks and can sell loans without the need for a third-party trading platform. However, many affiliates are relatively small and located in rural areas and don’t have those banking relationships. These smaller affiliates also don’t have the staff, resources or expertise to sell loans on the secondary market. They could use assistance creating sales opportunities, navigating sales and getting their loan documents in order.

Fannie Mae and Freddie Mac have operated tremendously in difficult markets in the past and will continue to do so in the future.

This is where the CRA Note Exchange is filling in the gap. The beauty about using a third-party loan trading platform is that Habitat Affiliates and other CHDOs can access help getting their loan documents in order as well as guidance through the sales process. These platforms are already making a real difference, too.

For instance, earlier this year, Habitat for Humanity of St. Augustine/St. Johns County in Florida sold its first-ever loans through CRA Note Exchange. In fact, the 14 loans it sold allowed the Florida affiliate to double its home-building production. Another Habitat Affiliate, Habitat for Humanity Georgetown in South Carolina, also recently sold five loans through the exchange in a process that took only a few weeks.

Earning CRA Credits

The CRA Note Exchange was not originally intended to help non-profits raise money for affordable housing but rather was designed as a mechanism to help support the liquidity requirements for funding down payment assistance loans. The purpose was to create a platform where banks and other lenders could go to purchase investment-quality second mortgages. These second mortgages are made to LMI (low-moderate income) borrowers and allow banks to meet their obligations under the federal Community Reinvestment Act (CRA).

The CRA was enacted in 1977 to address lending discrimination in low- and moderate-income communities by requiring all FDIC-insured banks to meet the financial needs of people in the areas in which they do business. By enabling the sale of CRA-eligible loans through an online portal, the CRA Note Exchange allows banks and investors to review, select, and buy loans in areas that support their lending goals and earn CRA credits to show that they are fulfilling their federal obligations.

The exchange also helps CBC Mortgage Agency increase the number of first-time homebuyers using the Chenoa Fund, the national down payment assistance (DPA) program provided through CBC Mortgage Agency. The company provides DPA as second liens, typically coupled with government-backed or conventional first mortgages.

The CRA Note Exchange had some early successes, but when the COVID pandemic hit, many banks and private investors that would ordinarily be motivated to buy loans shut down these operations for about two years. As the economy has healed, banks and private investors are starting to again buy these loans. To date, more than $16.4 million in first and second CRA eligible loans have been purchased by financial institutions through the exchange.

When Selling Isn’t Enough

A few years ago, CBC Mortgage Agency began to hear from non-profits operating affordable home building programs that need to sell their loans to increase liquidity. After joining CBC Mortgage Agency as a senior advisor to the CRA Note Exchange in 2018, we modified the CRA Note Exchange to add a loan program that would accommodate Habitat Affiliates and other nonprofit entities and housing agencies.

It should be mentioned that simply providing a way for banks and non-profits to sell affordable home loans is not enough. It’s important for any loan trading platform to be discerning about who is purchasing the loans and to be serious about helping borrowers and servicing the loans in a compliant manner.

For example, if a borrower is having trouble making payments, the bank shouldn’t be quick to move the loans to default or foreclosure status. Borrowers should be provided every chance of repaying the loans so they can keep their homes. At CRA Note Exchange, there’s a special servicing arrangement in place to make sure borrowers are able to stay on track with their payments, and if they miss a payment, banks are encouraged to work with them to bring their loans back into performance.

Now that the CRA Note Exchange can trade first and second mortgages, it can serve many more banks and nonprofits. Today, we are seeing a lot more activity on the CRA Note Exchange and expect to sell more loan pools for Habitat Affiliates next year. Part of what makes these partnerships work is that CBC Mortgage Agency shares Habitat for Humanity’s mission of helping families afford a home of their own.

Everyone involved in affordable housing programs wants to help more people buy homes. Yet too many Americans are missing out on this opportunity because there is a general lack of funding mechanisms for entities in a position to build or finance homes to generate the liquidity they need. This, in turn, is negatively impacting our nation’s low- and moderate-income neighborhoods.

Ultimately, loan trading platforms like CRA Note Exchange are helping to build stronger communities by increasing homeownership. As the housing economy continues to evolve, these platforms offer proof that when there is a will to expand homeownership, there is always a way.