CDFI market conditions Q308
Findings from the Third Quarter 2008 CDFI Market Conditions Survey October 2008 On October 10, 2008, Opportunity Finance Network conducted a survey of opportunity finance institutions to better understand the impact of the credit crunch on the opportunity finance industry. On that same day, the U.S. stock market suffered its largest one day drop since the crash of 1987. Responses were all received by October 27, 2008. The survey asked about the CDFIs’ third quarter (July – September) activities and asked their opinions on what would transpire in the fourth quarter. The survey was intentionally brief, with the goal of encouraging CDFIs to participate. Most of the survey questions were broad, covering all of the CDFIs’ financing activities and operations; the exception was a short section on one to four family mortgage portfolios. This was the only section requesting delinquency rates. EXECUTIVE SUMMARY CDFIs that participated in the Third Quarter 2008 Market Conditions Survey are feeling the negative impact of the nationwide economic slowdown, tightening credit markets, and declining confidence in financial institutions. They expressed general confidence in their portfolio quality, despite anticipating an upswing in delinquencies. CDFIs overwhelmingly expressed the belief that loan demand would continue to increase in the coming quarter. They generally experienced a decrease in competition as mainstream lenders pulled back due to the increasing turmoil in the credit markets, which is making all lenders more cautious, including CDFIs. Looking ahead, CDFIs expect their access to capital to deteriorate. They are concerned about their ability to serve their clients, as they see a potential increase in demand in the face of declining resources. They are interested in opportunities to partner or participate with banks, foundations or government agencies. CDFIs are employing more conservative lending practices and stepping up their monitoring. They are focused on providing technical assistance, bracing for a period of higher delinquencies and more restructuring. While they hope to provide more TA, they will be challenged to do so while contracting their operating budgets. They have identified a need to develop new loan products to respond to a rapidly changing environment. Overall they are experiencing more opportunities and fewer resources available to capitalize on the opportunities. METHODOLOGY
OFN distributed the voluntary survey to approximately 585 opportunity finance institutions across the country. These institutions included certified and non-certified CDFIs, OFN members and non-members, loan funds, credit unions, banks and venture funds. 69 institutions responded, including 61 (88%) loan funds, 5 (7%) credit unions, and 1 venture capital fund; one respondent did not provide this information or answer enough questions to be included in the results.
Respondents are based in all regions of the country, with more than half headquartered in the Midwest (31%) and the West (25%). 22% of respondents are based in the Mid-Atlantic states, followed by New England (12%) and the South (10%). See Appendix 1 for a list of states included in each region. Figure 1. Number of Respondents by Region
Respondents served various sized markets, from a single county to multiple counties, from a single state to multiple states, and a national market. More than one-third (36%) serve urban markets, 25% serve rural markets, and the remaining 39% serve both. Respondents provide a range of financing. Recognizing that many CDFIs offer more than one type of financing, the survey requested the primary type. Financing for businesses, including commercial real estate, and housing financing to organizations each accounted for 26% of respondents. Far fewer respondents (13%) primarily finance one to four family residential mortgages. Seven percent primarily finance community facilities and community service organizations. The remaining 26% are either microenterprise lenders, provide multiple types of financing with none being primary, or provide other types of financing. Table 1. Respondents by Region and Primary Type of Financing*
Primarily 14 Family Residential
Primarily Business Financing
Primarily Housing Financing to Organizations
Primarily Community Service Financing
Multiple/ Other
West
5
2
5
0
5
17
Midwest
1
7
5
3
5
21
Mid-Atlantic
0
5
5
2
3
15
New England
2
2
2
0
2
8
Total
South
1
2
1
0
3
7
Total
9
18
18
5
18
68
*Does not include one institution that did not provide region or primary type of financing. 1. DETAILED FINDINGS - NATIONAL RESULTS
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a. Third Quarter Results Figure 2. Change in Delinquencies, 7/1/08 -9/30/08
Nearly half (48%) of respondents reported that delinquencies stayed the same during the third quarter of 2008, while 38% reported an increase. Urban CDFIs fared somewhat worse than the market in general as 44% of urban CDFIs reported increased delinquencies, compared to 31% of rural CDFIS, and 38% of CDFIs that serve both rural and urban markets. Regionally, fewer CDFIs in the Midwest and Mid-Atlantic regions experienced increases in delinquencies than the nationwide average, whereas larger percentages of CDFIs in the West, New England, and the South experienced increases in delinquencies. Table 2. Change in Delinquencies by Region, 7/1/08 -9/30/08 Stayed the Increased Decreased Same West
50%
6%
37%
Midwest MidAtlantic New England
24%
24%
52%
29%
7%
64%
50%
0%
50%
South
57%
28%
15%
All
38%
14%
48%
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Figure 3. Change in Number of Loans/Investments in Workout, 7/1/08-9/30/08
39% reported an increase in loans and investments in workout, but more than half (58%) reported no change. Nearly half of all rural CDFIs reported an increase in workouts, a slightly higher percentage than urban CDFIs.
Figure 4. Change in Competition for Deals, 7/1/08-9/30/08
Nearly half (49%) of respondents experienced a decrease in competition for deals, as mainstream financial institutions tightened their lending criteria. Only 13% experienced an increase in competition.
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Figure 5. Change in Financing Applications Received, 7/1/08-9/30/08
Correspondingly, 51% of respondents indicated that loan applications had increased; this included 54% of urban CDFIs; 41% of rural CDFIs, and 58% of respondents that serve both markets. Larger increases in loan applications were experienced in the Midwest and Northeast.
Figure 6. Change in Funding Rejections, 7/1/08-9/30/08
Most CDFIs held steady on funding, with only 24% experiencing an increase in rejections on requests for capital and/or operating support.
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b. Fourth Quarter Forecast Respondents were asked open-ended questions about their expectations for the fourth quarter. Below is a summary of their responses. Portfolio Quality: 45% of respondents expect their portfolio quality to deteriorate in the fourth quarter due to an increase in delinquencies and generally riskier loans. The CDFIs cited the looming recession, growing unemployment rates and difficulties being encountered by small business as influencing their outlook. Respondents expressed particular concern regarding takeout financing for existing deals: • • •
“Banks are leaving many reasonable deals on the table and walking away.” “Borrowers will find it more difficult to find takeout financing for our predevelopment and acquisition loans.” “We have several pre-development acquisitions loans without firm takeouts that are keeping us awake at night.”
Demand for Financing: 55% of survey respondents expect demand for their products to increase in the fourth quarter. The tightening of lending criteria by banks would push more borrowers out of conventional markets and into opportunity markets. • • •
“We are already seeing more inquiries from prospective borrowers who would have been ‘bankable’ in the past…The line appears to be moving between bank credit standards and CDFI.” “We are seeing significantly increased demand as banks shut down their small business lending.” “I anticipate additional demand from those the banks are not serving.”
Liquidity and Operating Support: In many cases, respondents expect the increase in demand for loan products to be met by a lack of available resources. 31% of survey respondents felt that they would have difficulties raising capital, and having sufficient resources to meet loan demand. They further cited concern that as grant funding became scarce their operating budgets would need to contract. • “We rely greatly on support from financial institutions and expect to see annual contributions decrease”. • “Our main difficulty is lack of capital…” • “Combination of increased inquiries and demands and longer repayment periods for current borrowers may put pressure on both capital and staff capacity.” Important changes, patterns, or trends, and CDFIs’ responses: Respondents felt that with overall credit standards tightening, they need to be closer to their borrowers. As a result, many have begun to provide additional technical assistance to borrowers. Many expressed the view that they have an opportunity to provide new products and enter markets they have previously not served. Lease-to-own options and lines of credit for small businesses are two new products being explored as possible ways to meet the increasing needs and demands of the market.
2. DETAILED FINDINGS – BY LENDING TYPE a. Mortgage Portfolios Fifteen (22%) respondents that either originate or purchase one to four family residential mortgages provided aging data on these portfolios. The results are described below. Originators of 1-4 Family Residential Mortgages: 10 respondents provided aging data for their 1-4 family residential mortgage portfolios. Most of these had fewer than 200 loans in their portfolios, and nearly half had fewer than 50. Combined, they held 1,962 mortgages totaling $64 million as of September 30th. The delinquency of the combined portfolio totaled 2.8%. Of this, 1.2% was 30 days past
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due, 1.0% was 60 days past due, and 0.6% was 90 days past due. Urban lenders reported slightly higher delinquencies than rural respondents. Table 3. Originator Portfolios < 50 mortgages 10
4
between 50 and 200 4
196
18
127
346
6,370,687
2,424,000
6,958,133
6,554,583
All # of CDFIs Average # of Mortgages in Portfolio Average $ of Mortgages in Portfolio
> 200 mortgages 2
CDFIs expressed concern that their developer borrowers will experience difficulties securing residential mortgages from outside sources and that increasing vacancies would lead to increasing delinquencies. Purchasers of 1-4 Family Residential Mortgages: 4 respondents purchase 1-4 family residential mortgages. Together, these respondents held a $1.6 billion portfolio of 20,000 mortgages. A single CDFI accounted for 99% of this portfolio while another held only two loans totaling $200,000. Overall, 12% of the portfolio was delinquent as of September 30th: 6% was 30 days past due, 2% was 60 days past due, and 4% was 90 days or more past due. Excluding the smallest respondent, total delinquencies ranged from 9% to 30% among the three other respondents. b. Findings by Primary Type of Financing
Figure 7. Primarily Business Financing Responses
Business: 18 respondents identified themselves as providing primarily business financing. 39% (7) of these were from the Midwest Region. A lower percentage of business lenders indicated that they experienced an increase in delinquencies and loan workouts than other types of lenders. At the same time, a higher percentage of business lenders (50%) indicated that they experienced an increase in applications in the third quarter of 2008. In describing the outlook for business lending in the fourth quarter, one business lender indicated that: “We will run out of money. The requests are coming in faster that we can process. Our usual funders have pulled back, or are in such a condition that we don’t want to lend their money.” The majority of the business lenders felt that tightening credit standards at banks would continue to shift borrowers into opportunity markets. They echoed the general sentiment that additional capital to lend will be scarce and that they will have limited ability to increase staff to manage increased volume and riskier loans.
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Figure 8. Primarily Housing Financing to Organizations
Housing Financing to Organizations: 18 respondents identified themselves as providing primarily housing financing to organizations. 47% of these respondents indicated that they experienced an increase in loans in workout during the third quarter. 61% felt that there was decreased competition for deals. One respondent who indicated an increase in workouts indicated that through restructuring the loans would likely continue to reform. Respondents also expressed some concern about takeout financing in the fourth quarter and beyond.
Figure 9. Responses from CDFIs identified as Primarily 1 ‐4 Family Housing Lenders
1-4 Family Residential Mortgages: 8 respondents identified themselves as providing financing primarily for 1-4 family mortgages. 50% of these indicated that their delinquencies had increased and 43% reported that the number of loans in workout had increased. However, only one of the respondents reported an increase in applications. Looking into the fourth quarter, respondents indicated that they would be tightening their credit requirements and felt that as job losses mount they should expect delinquencies. In general, they expressed confidence in the quality of their loan portfolios.
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Figure 10. Primarily Community Facilities and Community Services Financing
Community Facilities and Community Services: 5 (7%) respondents identified themselves as providing primarily community facilities/services financing. These respondents did not experience increases in delinquencies in the third quarter of 2008, but two experienced an increase in number of loans in workout. The respondents had not yet begun to notice an increase in the rejection rate of their funding requests, but their forecasts for the fourth quarter of 2008 and beyond indicated that they believed their funding sources would be negatively impacted. None of the respondents reported anticipating any important changes in their market.
3. DETAILED FINDINGS - Regional Breakdowns a. Mid-Atlantic Survey respondents from the Mid-Atlantic Region largely engaged in business financing and housing financing to organizations, experienced relatively low increases in delinquencies and loans in workout. Their increase in applications was not as strong as in the Midwest, West and South Regions, yet 57% reported decreased competition for deals in the third quarter. 40% of Mid-Atlantic respondents serve urban markets and 60% serve urban and rural markets; none serves a primarily rural market. Figure 11. Mid-Atlantic Region 3rd Quarter Results
A sample of respondent comments follows.
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Portfolio quality: •
Performing a Portfolio Review and expect that downgrading will occur.
•
We anticipate housing units that we finance not being able to secure residential mortgage loans from outside sources.
Financing needs: •
More flexible uses of capital (organizational vs. project) and longer repayment periods.
•
More subordinated debt to induce private lenders to participate/fund projects.
CDFI operations: •
Access to capital was a problem in last quarter that is expected to continue.
•
Our funding sources possibly impacted by the general economic conditions including bank failures/consolidations.
Other important changes: •
Fewer national banks and merger of such - impacts size and terms of new loans.
Strategic responses: • •
Fewer national banks and merger of such - impacts size and terms of new loans Utilize capital to leverage other financing; foster partnerships with other lenders
b. Midwest Midwest CDFIs represented the largest group of respondents (21), of which 7 were primarily business lenders. During the third quarter, Midwest Respondents were somewhat less affected than respondents overall by increases in delinquencies and loan workouts. 66% of respondents indicated that their applications for financing increased, and 57% reported that their competition for deals decreased. The number of loan requests increased as traditional banks pulled back, causing CDFIs to be more cautious as they manage increased demand. Figure 12. Midwest Region 3rd Quarter Results
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Portfolio quality: •
Borrowers will find it more difficult to find takeout financing for our predevelopment and acquisition loans
•
We expect to be asked to change terms more often, especially to stretch out repayment terms for shorter term loans.
•
Taking on more big deals (+$100,000), fewer small.
Financing needs: •
Financing needs exceed the available funds
•
Loan size is growing. Loan volume is up 38% in number of loans closed over the same (6 month) period last year. 111% increase in dollars lent.
•
The line appears to be moving between bank credit standards and CDFIs.
CDFI operations: •
Monitoring loan performance more intensely.
•
Combination of increased inquiries and demands and longer repayment periods for current borrowers may put some pressure on both capital and staff capacity.
•
We are working with small businesses to discuss ways we can assist them with seminars and counseling.
Other important changes: •
More contact than customary with existing borrowers, more technical assistance.
•
Adjusting our underwriting to factor in a slowing economy.
•
Everyone will be looking more closely at credit - banks, development corporations, etc.
Strategic responses: •
More efficient and effective uses of staff time.
•
More TA to current borrowers, faster action plans for 15 - 30 day delinquencies, more scrutiny of repayment plans and sources for applicants.
•
Maximizing our creativity in looking at restructuring deals.
c. New England Respondents from New England expressed generally less concern than other regions regarding portfolio performance during the third quarter. 50% of the respondents experienced increases in delinquencies, but only 25% noted an increase in loans in workout.
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Figure 13. New England Region 3rd Quarter Results
Portfolio quality: •
Will probably see minor increase in delinquencies in business portfolio because of the economic downturn.
•
So far, so good.
Financing needs: •
Financing from other sources will become scarcer, making our financing more valuable.
•
Our demand is already the highest it has ever been, and we anticipate that will increase.
CDFI operations: •
A decline in donations, and tougher time to raise new capital. We have been slow to rehire jobs and will be cautious about expanding new positions.
•
We are looking for ways to cut costs such as layoffs.
Other important changes: •
More banks wanting us to come into deals as a subordinate lender.
•
We are seeing the need to develop a new line of business for providing business lines of credit to borrowers who have had their bank LOCs reduced or called in.
Strategic responses: •
We have participated on some loans both with another CDFI and with banks.
•
Developing lines of credit facilities for small businesses, as we do not presently provide LOCs to businesses. Working to increase loan capital for strategic real estate development projects to induce private banks to leverage our loans in these deals.
d. South The 7 respondents from the South Region generally reported that delinquencies, applications and the number of loans in workout increased in the third quarter. None of the respondents had experienced an increase in funding rejections, and 44% felt there was decreased competition for deals in the third
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quarter. The outlook for the fourth quarter expressed by CDFIs from the South was more pessimistic than the other regions. It is generally expected that loans in workout will increase, with particular focus on job losses. Figure 14. South Region 3rd Quarter Results
Portfolio quality: •
Property values continue to decrease.
•
The weakening economy is affecting the job stability of our borrowers, which could lead to increased delinquencies.
•
We feel strongly that now we need to be here for those members who truly will not be able to go other institutions for their consumer loan needs.
Financing needs: •
Apparent that credit is tightening at traditional financial institutions.
•
Working capital needs of our portfolio companies will increase, as they begin experiencing a drop off in revenue.
•
More conventional borrowers will need capital to replace traditional debt.
CDFI operations: •
We are working more closely with delinquent borrowers to identify workout solutions, carefully assessing projected losses more frequently, and making quarterly adjustments to our allowance for loan loss.
•
Operating support is becoming very thin. The first option is always to cut staff and this may be the solution.
•
Grants from banks are increasingly difficult to obtain or decreasing in size.
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Other important changes: •
Tight credit markets will permit us to have access to stronger small businesses to finance.
•
Opportunities for loan participations with local banks - they still want to do deals but are more conservative now than ever.
•
We have to closely monitor loan repayments so that we can stay on top of delinquencies and repossessions.
Strategic responses: •
More proactive with TA & Training opportunities.
•
Being aware of the risk - more so than ever.
•
Have re-evaluated each loan and re-appraised all properties to gauge how market conditions impact loan quality.
e. West CDFIs respondents from the West Region reported third quarter increases in portfolio delinquencies at a higher rate than all regions other than the South. 56% of respondents reported that applications for financing had increased in the third quarter, and 50% reported that the number of loans in workout had increased. Competition for deals generally decreased. Figure 15. West Region 3rd Quarter Results
Portfolio quality: •
I think the portfolio will increase, but due to the downturn in the economy they will be riskier loans.
•
We are seeing more loan extension requests.
Financing needs:
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•
Non-bank alternative financing such as revolving loan funds will be the only source of financing for helping low and medium income communities.
•
Banks are lending less, and more conservatively.
•
With decreasing housing prices more low and moderate income families are considering buying their first home, thus our lending activity is up over 400% over last year.
CDFI operations: •
Capital is more difficult to raise right now.
•
Our operating budget has been cut about 15% while our lending has increased dramatically. We have frozen four vacancies and do not expect to fill them.
Other important changes: •
Increased demand for limited English speaking entrepreneurs and a gap of resources to meet the needs of these new entrepreneurs.
•
The trend is more opportunities and less resources available to capitalize on them.
•
Need for creative and supportive financing will increase as the general economy slows down.
Strategic responses: •
We are developing new capitalization products (loan and grant) and broadening, deepening our TA and training products and services, as well as the research and advocacy we do.
•
Providing more technical assistance to businesses that need help weathering the changing market.
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Appendix 1.
Regions
OFN defines five regions based on which states participate in OFN regional meetings. Mid-Atlantic: Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania, Virginia, and West Virginia (7 states plus District of Columbia) Midwest: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin (12 states) New England: Connecticut, Massachusetts, Maine, New Hampshire, Rhode Island, and Vermont (6 states) South: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas (12 states) West: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming (13 states)
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Appendix 2. Tables a. Market Conditions Survey Participants
Type of Financing ALL West Midwest Mid-Atlantic New England South
Primarily 1-4 Family Residential 9 5 1 0 2 1
Primarily Business Financing 18 2 7 5 2 2
Primarily Housing Financing to Organizations 18 5 5 5 2 1
Primarily Community Service Financing 5 0 3 2 0 0
Other 18 5 5 3 2 3
Total* 68 17 21 15 8 7 68
13%
26%
26%
7%
26%
100%
25% 31% 22% 12% 10% 100%
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b. Market Conditions Survey by Lending Type Delinquencies
% Increase
% Decrease
% Same
Business
28
11
61
Community Service
0
20
80
1-4 Family
50
12
38
Housing Orgs
39
6
55
Multi/Other
50
27
23
ALL
37
15
48
Applications
% Increase
% Decrease
% Same
Business
50
28
22
Community Service
40
0
60
1-4 Family
12
25
63
Housing Orgs
44
17
39
Multi/Other
72
17
11
ALL
51
19
30
% Increase
% Decrease
% Same
28
0
72
# Loans in Workout Business Community Service
40
0
60
1-4 Family
43
0
57
Housing Orgs
47
0
53
Multi/Other
39
11
50
ALL
39
3
58
% Increase
% Decrease
% Same
Business
22
0
78
Community Service
0
0
100
1-4 Family
12
0
88
# of Funding Rejections
Housing Orgs
35
0
65
Other
28
0
72
ALL
24
0
76
Competition for Deals
% Increase
% Decrease
% Same
Business
0
50
40
Community Service
0
80
20
1-4 Family
50
12
38
Housing Orgs
11
61
28
Multi/Other
11
38
50
ALL
38
49
13
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C. Market Conditions Survey by Region Delinquencies
% Increase
% Decrease
% Same
West
50
6
37
Midwest
24
24
52
Mid-Atlantic
29
7
64
New England
50
0
50
South
57
28
15
ALL
37
15
48
Applications
% Increase
% Decrease
% Same
West
56
18
25
Midwest
66
5
29
Mid-Atlantic
40
33
27
New England
37
26
37
South
57
28
15
ALL
51
19
30
# Loans in Workout
% Increase
% Decrease
% Same
West
50
0
50
Midwest
33
5
62
Mid-Atlantic
36
0
64
New England
25
0
75
South
57
0
43
ALL
39
3
58
# of Funding Rejections
% Increase
% Decrease
% Same
West
25
0
75
Midwest
35
0
65
Mid-Atlantic
31
0
69
New England
25
0
75
0
0
100
24
0
76
South ALL
Competition for Deals
% Increase
% Decrease
% Same
West
25
45
32
Midwest
35
0
65
7
57
36
New England
13
25
62
South
28
44
28
ALL
13
49
38
Mid-Atlantic
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d. Market Conditions Survey by Urban vs. Rural Market Service Area
% Urban
% Rural
% Mixed
West
47
29
23
Midwest
24
43
33
Mid-Atlantic
40
0
60
New England
37
26
37
South
44
28
28
ALL
37
25
38
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