The Workforce Development Challenges of Returning Citizens: A Simulation from Mitchellville, Iowa

By Marva Williams

Iowa, like many other states has a growing prison population. In 1991, the state had roughly 4,500 inmates. By 2016, the number of prisoners had grown by 85 percent to about 8,300. Reducing recidivism in Iowa is a major concern. Prison officials have learned that high quality, coordinated services and supports before, during, and after release are required to reduce recidivism. It is also critical to understand the challenges of newly released prisoners for interventions to be effective.

CDPS was invited to participate in a meeting last fall organized by Central Iowa Works to participate in Community Connections Supporting Reentry training (CCSR). CCSR is an interactive simulation developed by the US Attorney’s office to help employers learn about the challenges of recently released citizens.

The simulation was offered at the Iowa Correction Institution for Women (ICIW) located in Mitchellville, 15 miles west of Des Moines. The simulation was attended by employers, including banks. In addition, there were federal and state workforce development staff and representatives from social service agencies.

The day began with presentations by Pat Steel from Central Iowa Works, Patti Wachtendorf, the warden of ICIW, and Kevin Vanderschel of Iowa’s U.S. Attorney’s Office. Mr. Steel said that many of the difficulties that job training and placement agencies have with former convicts is due to the multiple responsibilities that they have. Central Iowa Works and America’s Job Honors program decided to host the summit to assist employers in recruiting and hiring returning citizens by offering a reentry simulation to shed light on the barriers they face. Mr. Steel asserted that sending returning citizens back to their communities with no ability to get a job or manage life’s responsibilities, is a recipe for recidivism and a costly mistake.

Ms. Wachtendorf described ICIW as a minimum and medium security prison for women with a population of about 850 inmates, 236 staff, and a budget of $22 million. The offenses of the inmates are varied. The most common offenses are drug-related, with others being violent crimes and crimes involving property. Most of the offenders have some form of mental illness and/or suffer from substance abuse problems, and generally have experienced some form of trauma. ICIW staff endeavor to improve the opportunities of inmates by providing work, computer, and other life skills training, including money management and emotional coping strategies.

Mr. Vanderschel explained that CCSR simulation is a way to demonstrate the challenges experienced by returning citizens. The simulation allows ex-offenders to experience four weeks of post-incarceration life in 15 minute segments. Each participant visits stations with volunteers acting as staff from banks, homeless shelters, courts, substance abuse testing and counseling agencies, businesses, transportation offices, probation offices, etc.  In preparation for the simulation, each participant receives a fictional profile that describes the life of a former prisoner and the responsibilities to be met within four weeks. Tasks included visiting these stations to obtain state identification, establish a bank account, buy transit tickets, get tested for drugs, attend a substance abuse meeting, and meet with parole officers. In addition, participants had to find housing, search for a job, and address outstanding warrants.

At the end of the first “week,” many felt frazzled. One participant had not reported to work or paid rent because it took so long to obtain a state-sanctioned ID, report for drug counseling and testing, and to purchase transit tickets. As a result, they had to live in a shelter until the end of the second “week.” As the simulation progressed, participants experienced further challenges including court appearances, failing a drug test, and the task of budgeting to pay for basic needs, such as groceries, rent, and transportation.

The simulation provided an opportunity to experience the exasperation and frustrations that a newly-released prisoner may feel. Prison life does not allow people to manage their lives—decisions are made for them. In addition, many are experiencing these challenges for the first time. Some former prisoners have never held a job or been responsible for paying rent and managing their finances.

After the simulation there was a facilitated debriefing that allowed participants to share their immediate reactions. Many were surprised by the number of responsibilities that former prisoners must meet, in addition to every day responsibilities. They also expressed empathy and understanding of these challenges.

The program ended with three presentations. The first was by two inmates who talked about their sentences and experiences in ICIW, some of the programs they participated in, and hopes for their lives after release. The second presentation was by Kyle Horn, the Director of America’s Job Honors, which makes awards to companies that hire former prisoners and to returning citizens that have sustained a path to self-reliance. Last, a former convict talked about his experiences with prison and his struggles to build a life that embraces work, family, and self-sufficiency.

There are a myriad of challenges in the path of released citizens seeking to build a better life for themselves and their families. Obtaining jobs that pay a living wage is key to their success. Therefore, encouraging employers to participate in the training is integral to reducing recidivism.

Workforce development programs which serve returning former prisoners must take into account the obstacles faced when seeking employment. CDPS has several publications on workforce development, including:

Employment Challenges for the Formerly Incarcerated
Emily Engel, Steven Kuehl, Mark O’Dell | 2016 | ProfitWise News and Views | No. 2

Workforce 2020: Is It Time for Disruptive Innovation?
Jason Keller, Diana Robinson, Norman Walzer | 2015 | ProfitWise News and Views | No. 4

From Classroom to Career: An Overview of Current Workforce Development Trends, Issues and Initiatives
Daniel DiFranco, Emily Engel, Ryan Patton | 2014 | ProfitWise News and Views | December | 4th

Community Colleges and Industry: How Partnerships Address the Skills Gap
Emily  Engel  | 2013 | ProfitWise News and Views | November

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Community Development and Policy Studies (CDPS) Strategic Plan 2016-2020: Year 1 Recap

Beginning in 2015, CDPS undertook an ambitious information gathering process as a first step in developing a five-year strategic plan. When the Fed’s Board of Governors first created the community development function in 1981 shortly after passage of the Community Reinvestment Act (CRA), its core mission was to help facilitate the flow of credit and financial services to places and people out of the economic mainstream. The mission has become more nuanced over time, but this fundamental aspect remains constant. Responding to the needs of a geographically and demographically diverse district is a challenge for the community development function at every Reserve Bank.  This strategic plan ensures that CDPS’ efforts are aligned with and informed by direct feedback from our constituents and stakeholders.

Nine focus groups were conducted in cities around the Seventh District; also undertaken were numerous one-on-one interviews with key stakeholders, including senior Chicago Fed officials, nonprofit directors, CRA officers of large and small banking institutions, policy/advocacy organizations, and others. Further, CDPS undertook an extensive review of current conditions as documented in various policy and research publications. This process laid the groundwork for the plan, which incorporates both an updated statement of core functions, strategic priorities, and key findings from our information gathering process. This information is summarized in the strategic plan summary document linked below.

Key contacts expressed a lack of familiarity with our roles and functions and a desire to hear more from us. To this end, we began developing and implementing a communications strategy that will leverage digital tools such as converting ProfitWise News and Views to an e-publication and coding our past articles using Journal of Economic Literature – JEL– codes to make this content more searchable and accessible to researchers, practitioners, and policymakers, among others. We are also working to make our data tools more relevant and available, especially to smaller, remote places. Currently under development is the Peer Cities Identification Tool (PCIT), which derives from our Industrial Cities Initiative and much inquiry from more remote cities in the district as to how their economic fortunes compare to places with similar manufacturing legacies. The PCIT, previewed in the current edition of ProfitWise, allows users to compare a subject city across various parameters such as housing affordability and income inequality.

We learned more about the serious shortage of resources to bring about comprehensive community development, that is, efforts to coordinate strategies to link job creation, education, housing, and access to public transportation. As always, quality affordable rental housing is in short supply, but the situation is much worse post foreclosure crisis, as households with blemished credit are now essentially shut out of mortgage markets; the ratio of available units to households earning below 30 percent of area median income as defined by HUD is as low as 0.26 (the ratio in Wisconsin) in Seventh District states according to a recent report by the National Low Income Housing Coalition.  Idiosyncratic and place-specific shortages deriving from various factors also present challenges, we heard.  The current ProfitWise explores the case of Iowa City, where a very large student population competes with local residents for housing. This will be an area of renewed focus for CDPS for the foreseeable future with various CDPS partners, in addition to supporting efforts to promote affordable and responsible mortgage credit lending.

The small business lending landscape has also changed. While community banks historically have had an outsized share of this credit market, regulatory and supervisory changes and a generally cautious post-recession lending climate have constrained banks, while non-bank lenders have flourished, offering products with different underwriting standards, but often higher costs. CDPS is working with industry leaders, and the regulatory and advocacy communities to foster better understanding of this critically important emerging trend, which resonates across our district according to stakeholders.

Many longstanding community development issues, in both urban and rural areas, were intensified by the Great Recession, and have been exacerbated in the aftermath by reduced tax revenue resulting in part from the staggering foreclosure and financial crisis. Contacts reminded us of these conditions and the need to continue to explore and highlight strategies and solutions. Among the issues we have explored in both formal research and descriptive articles are the impacts of lack of employment opportunity, unsafe neighborhoods, and low educational attainment on physical health of large populations.  We have explored the ramifications of bank branch closings and consolidations in our district, and will issue further and more expansive research on community banks serving LMI populations, in particular minority-owned institutions, in 2017.

The Strategic Plan overview captures the essence of our strategic direction.

plan5.indd

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Student Debt, Wealth Inequality, and the Return on a College Degree: The Role of Children’s Savings Accounts

By William Elliott

Note: Dr. William Elliott is an Associate Professor and the Director of the Center on Assets, Education, and Inclusion at The University of Kansas. He recently participated the “Post-Secondary Education Option” panel  at the “Exploring Prominent Issues in Financial Resiliency and Mobility in Low- and Moderate-Income (LMI) Communities” conference sponsored by the Federal Reserve Bank of Kansas City. This blog reflects his presentation and not necessarily the opinion of the Federal Reserve Bank of Chicago or the Federal Reserve System.

Research shows that in time, an investment in higher education eventually pays off. However, the payoff of investing in higher education varies greatly depending on whether one graduates with or without student debt. This blog summarizes the disparity of investment returns in education between those with and without student debt, and ways to make such returns more equitable.

The book, State of Working America, states that home ownership is the main source of wealth accumulation for the American middle class. However, according to Brown and Caldwell, students who graduate with debt may be forced to delay homeownership early in their careers. In fact, the homeownership rate for 30-year-old-headed households with student debt has decreased by more than five percentage points than those without student debt between 2003 and 2013. Further, homeownership is not the only arena where student debt holders are disadvantaged. Hilton Smith found that households headed by college graduates who had accumulated median student debt have about $134,000 less in retirement savings than those without student debt. Not surprisingly, families with college debt may have as much as 63 percent less net worth than those without outstanding student debt .

Evidence further shows that problems related to indebtedness are not confined to those who do not complete college or among those with large amounts of debt. For example, the fear of debt may deter students from higher education. Other research suggests that student debt may compromise (long-term wealth accumulation) outcomes by deterring college enrollment altogether or derailing completion.[1]

Children’s Savings Accounts (CSAs) are a policy tool that may help level the playing field. CSAs restore equity in returns on investments in education, improve the life chances of disadvantaged students, and help combat wealth inequality. CSAs are understood to improve children’s well-being by strengthening parents’ expectations of educational attainment, according to Child Development Accounts and Parental Educational Expectations for Young Children: Early Evidence from a Statewide Social Experiment . Students who have designated savings for college are more likely to end up actually enrolling in and completing college than those with the ambition but not the means, according to Elliott, Song and Nam. The impact of CSAs was most acute among low-income families, suggesting the potency of this policy tool. CSAs also serve as a gateway to a more diversified asset portfolio that may result in greater wealth accumulation, according to Friedline, Johnson and Hughes. Financial inclusion is essential to closing the wealth gap, as demonstrated by researchers at the Pew Charitable Trust, who found that income from assets has a strong relationship with moving up the economic ladder.

The Annie E. Casey Foundation estimated that children’s accounts could reduce the racial wealth gap by 20 to 80 percent, depending on participation and investment. Just as the 19th Century saw the Homestead Act and the 20th Century the GI Bill, both of which offered real promise to change systems and transform pathways to prosperity for generations, CSAs provide just such an opportunity for today’s reality—and tomorrow’s college students.

Note: To learn more about CSAs and other tools for financial resilience see the most recent issue of ProfitWise News and Views.

[1] Kim, Y., Sherraden, M., Huang, J., and Clancy, M. (2015). Child development accounts and parental educational expectations for young children: Early evidence from a statewide social experiment. Social Service Review, 89(1), 99-137.

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The New World of Data and its Potential to Advance Community Change

By Robin Newberger

Hyper-local data, whether aggregated by municipal agencies or independent researchers, is providing policymakers and ordinary citizens with the information to answer countless questions affecting the lives of Chicago residents. For example, parcel-level data assembled from a variety of sources is helping researchers to address how and whether infrastructure investments affect home prices in different neighborhoods. A newly-constructed catalogue of neighborhood-level cultural assets is helping planners and community advocates measure cultural participation and the demographics of those audiences.  Analyses of geocoded data points, the location of food establishments that have been cited with code violations, for example, is allowing health inspectors to predict where the next case of food poisoning is likely to surface.

The process of collecting and distributing data is undergoing a profound transformation, and neighborhood-level data – or more specifically, what data is available and who is using it – was the topic of the latest Civic Research Forum that took place in September 2016 at the Federal Reserve Bank of Chicago. The Civic Research Forum, organized by the Chicago Fed and World Business Chicago, and for the latest meeting, Local Initiatives Support Corporation (LISC), is a forum for bringing together researchers in the Chicago area to discuss areas of common interest and potentially encourage greater collaboration. The purpose of the most recent meeting was to share some of the progress that has been made towards building new datasets, identifying new questions that can now be answered through this data, and describing the impediments that limit the dissemination of information between data aggregators and users.

New technology platforms like the Open Data Portal from the city of Chicago are largely responsible for spurring this data revolution. The city of Chicago has now made it possible for members of the public to download information ranging from every reported crime in Chicago since 2001, to water quality at Chicago beaches, to the salaries of all municipal employees. In addition, the city has launched a mapping application called Open Grid, which allows users to display multiple data sets from different sources in the same geographic area. Further, much of the code the city has written to run the data is open source, allowing interested parties to build applications like a map or a tool that run on top of this data, potentially improving upon the analytical potential for both the city and the public.

Organizations like the Smart Chicago Collaborative, founded by the City of Chicago, Chicago Community Trust and the MacArthur Foundation, are also adding to the tools that support data analysis at the neighborhood level with projects like the Chicago Health Atlas that constructs health indicators by neighborhood and zip code, and the Array of Things Civic Engagement Project. Array of Things is a network of sensor boxes operated by the University of Chicago and Argonne National Laboratory which collects real-time data on the city’s environment and infrastructure. The Smart Chicago Collaborative also founded and runs the Civic User Testing Group (CUTGroup) made up of 1700 residents of Chicago and Cook County, who test new apps and websites for civic developers, and helped support the beginning of Chi HackNight, a weekly gathering open to the public that encourages people to create data applications for civic purposes.

Mapping the data ecosystem within the city represents the next big hurdle in developing this data infrastructure. Broadly, the data ecosystem consists of data producers and consumers, but within those categories are nonprofits that collect and consume data; informal networks of people who get together to talk about or work on data; and data intermediaries like LISC that bridge the gap between the producers and consumers. To understand what is missing in the data ecosystem, the Smart Chicago Collaborative conducted a city-wide survey of data needs in 2014, and held the School of Data Days conference  to discuss some strategies for addressing these challenges, including identifying gaps in data availability (e.g. Chicago Public Schools data), and how to make data more accessible by building better “on-ramps” for nonprofit organizations, which often lack the time and human capital to be as data driven as they would like.

Getting data into the hands of people who are among the most impacted by it has become another major objective of this work. Even if data is available to the public, getting it to individuals within a community who can use the information is still a challenge. When a data analyst or “producer” engages with members of a community, most times it is for the community either to interpret or legitimize the analyst’s findings, or perhaps to give the researcher permission to access more data. Yet a core tenet of these new technology platforms is collaboration between the data aggregators and data users.  In principle, if people know what is happening on their block or in their neighborhood, then they can implement an intervention. As things stand, neighborhood residents are generally not connecting the data to their daily experiences, or using the information for social good, because of limitations to accessing or fully understanding it. Thus more work is needed to improve the accessibility of data for the mainstream public, so that the data reaches both tech-savvy groups as well as neighborhood residents who want to improve their own backyards.

Participants at the forum offered some suggestions to address this education component. One idea was for the city to sponsor “civic tech fellows,” who could become the translation points between data generators and data users. They could comprise upperclassmen at local universities interested in both community organizing and computer science, and function like Americorps volunteers. Members of the Civic Analytics Network, a network of urban Chief Data Officers from around the country, are already discussing the idea of developing a training consortium for this type of work. Another suggestion was to deploy local artists as the translators, given they have the creative skills to tell the stories that can elucidate the links between data and the people. They might be able to visually articulate the existing issues that shape neighborhoods, and help people imagine the way those places could look in the future. As the discussion made clear, it is often not until data gets to a very local level that people can relate to it and see if it makes sense with their experiences. The availability of hyper-local data ushers in a new opportunity to mobilize city residents around issues that affect neighborhood services, quality of life and even social justice, but many of these connections have yet to be made.

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Redefining the Challenges & Opportunities for Banks in LMI Neighborhoods Throughout Chicagoland: Results from Community Capacity Discussion Groups

by Emily Engel, Robin Newberger, and Jason Keller

(To view full article with figures, click here)

Bank lending in low- and moderate-income (LMI) neighborhoods in the Chicago area has remained well below levels that preceded the Great Recession in 2008. Mortgage loans originating in LMI neighborhoods fell from a high of 33 percent of originations in Cook County in 2006 to a low of 17 percent in 2010 (chart 1), followed by a gradual upward trend to roughly 20 percent in the most recent data. According to 2014 CRA small business lending data, small business originations in Cook County (for businesses earning less than $1 million) were still about 45 percent below peak levels in 2007.

This summer, the Community Development and Policy Studies (CDPS) department of the Federal Reserve Bank of Chicago partnered with the Chicago Metropolitan Agency for Planning (CMAP) [1] to bring together more than 20 bankers to share their perspectives on what drives lending and investment trends in their respective markets, and what local banks are doing to increase lending activity in LMI neighborhoods.

Chart 1.

percentofhmdaoriginationslmiareas

Note: Includes all single family loans, including refinance, home improvement, VA and FHA

Industry analysts have put forward several explanations for why bank lending (both mortgage and small business lending) has not recovered to pre-recession levels in metropolitan areas around the country, including Chicago. These include fewer homebuyers entering the market, a decline in the value of real estate that collateralizes small business loans, soft sales at small firms, and an elevated level of supervisory stringency at banks, among other reasons. The bankers who participated in the roundtable discussions, including representatives from large and small banks, city and suburban institutions, as well as mission-focused, minority-owned banks, and community development banks, offered their own assessments of the factors that have constrained lending in LMI neighborhoods. This blog summarizes participants’ reflections on the challenges to financial inclusion following the Great Recession, and describes the approaches many have taken to promote outreach and services to diverse communities.

Conditions that impact lending in LMI neighborhoods

“Innovation used to be rewarded; now bank boards want to avoid risk.”

Many bankers who attended these sessions agreed that the financial crisis reframed their – or their boards’ – perceptions of product risk. Some bankers acknowledged that they have backed away from innovating products for non-traditional customers, such as second-chance transaction accounts and banking products for ITIN  holders, out of concern that examiners (as well as their own boards) may not take a positive view of the potential risks associated with these products. Other bankers have moved away from making smaller, higher-cost loans. Some banks have even begun to scale back on their conventional, single-family mortgage lending because of new mortgage regulations including the TILA-RESPA Integrated Disclosure rule,[2] which further establish that failure to comply could restrict banks from accessing the secondary market.

“We can talk about how great it is to make loans in these communities, but if borrowers don’t meet credit standards, there is nothing we can do about this.”

The bankers also noted that the risk profiles of many potential borrowers do not meet the credit standards of their institutions. As many banks have tightened underwriting standards since the Great Recession, mortgage lending has fallen for borrowers in the lower percentiles of the credit score distribution (chart 2). The same trends that are playing out at the national level are taking place within the Chicago metro as well.  According to focus group participants, the banks with a strong presence in LMI areas focus on borrowers “with strong balance sheets” who often do not live in the areas where they purchase and develop properties.

Chart 2.

mortgageoriginationvolumebyriskscore

In addition, bankers said that many income-constrained households are carrying greater amounts of student debt, which further impedes banks’ willingness to approve mortgage credit. A few of the business-oriented bankers also explained the decline in business lending due to small business owners undermining (often inadvertently) their own creditworthiness by underreporting earnings, or not organizing their financial paperwork in accordance with conventional  standards.

“Homeowners in many of these neighborhoods are underwater.”

Negative equity is another major obstacle that bankers feel has limited the supply of credit in LMI neighborhoods. Although home prices have returned to early-2000s levels in many neighborhoods in the Chicago metro area, in many others, including those on Chicago’s south and west sides, prices are as much as 30 percent below where they were in 2003 and 2004.[3] In turn, sagging home prices have reinforced trends of economic stagnation and decline. According to participants, negative equity prevents homeowners in certain neighborhoods from selling their homes, inhibiting churn in those markets, and further weakening home prices in those communities. When homeowners in these neighborhoods look to refinance their mortgages, bankers can do little to overcome high loan-to-value ratios, even with federal programs like the Home Affordable Modification Program (HAMP) that was designed to help struggling homeowners remain in their homes.  Negative equity also affects housing supply. If people are not selling their homes, the market in those neighborhoods is stuck because there are fewer homes for people to buy.

In addition, even with negative (home) pricing/valuation pressures, participants reported that homeownership remains unaffordable for many potential homebuyers in lower-priced neighborhoods, despite programs for facilitating the purchase of foreclosed and vacant properties. Although many programs exist for moving new homeowners into vacant properties, such as the Cook County Land Bank and the South Suburban Land Bank, municipalities that support these efforts often do not coordinate with their tax departments, putting so-called affordable properties out of reach for many families due to large outstanding property tax dues.

How bankers reach out to customers in LMI areas today

Increasing Transactional Opportunities

Bankers’ attempts to promote financial inclusion have emphasized the creation of more opportunities for transactional relationships with nontraditional customers. Some banks talked about offering “second chance” accounts that allow people who have been flagged for account mismanagement in the past to open a deposit account. Some banks use prepaid cards to market their institutions to people who customarily have not been comfortable with banks, and sometimes pair these cards with savings accounts. Some offer remittance products (often through third parties) as a way to incentivize people to utilize bank branches. Other banks have offered small loans, though bankers report greater demand for this product on the consumer side than on the business side.

Supporting Financial Education

Banks have also focused on improving customers’ overall preparedness to borrow money. Many banks see financial education as the key to broader financial inclusion since, in the view of many participants, a lack of financial sophistication hurt many borrowers during the financial crisis. Participants explained how they offer education on managing bank accounts, basic budgeting, and home-ownership, usually in conjunction with a community-based organization. The short-term goal of these classes and workshops, according to many of the bankers, is to build trust and relationships through partnerships with nonprofits and grassroots organizations. The longer-term goal is to prepare potential borrowers to qualify for mortgages, rate-reductions, or credits on their loans. For single-family mortgages, banks work with community partners or the public sector to offer down-payment assistance (in the form of grants and forgivable loans from third parties, some of which are place-specific), allowing people to have immediate equity.

Eyeing New Opportunities for the CRA

Some participants see greater potential to support LMI communities through activities outlined in the final revisions to the “Interagency Questions and Answers Regarding Community Reinvestment” (the Q’s and A’s) published in July 2016. This document, assembled by the federal bank regulatory agencies with responsibility for CRA rulemaking, clarifies and updates a broad set of CRA-eligible activities in addition to traditional mortgage and small business lending. For example, the new guidance offers examples of what is meant by economic development, innovation, and revitalization/stabilization as it is used in the CRA. Such examples include funding programs that (1) create or improve access to jobs or job training for LMI populations; (2) capitalize infrastructure projects, such as broadband internet service and flood control measures; or (3) back loans to finance projects that promote renewable energy or energy efficiency. Further, financial institutions that use alternative credit histories to evaluate credit worthiness, such as rent or utility payments, may also now be considered under the CRA. As these examples illustrate, the revised guidance is designed to reflect both current economic conditions and today’s regulatory landscape; and regulators continue to encourage financial institutions to be open to innovative practices that promote the adoption of bank services in all types of markets.

Conclusion

The impact of the Great Recession continues to influence current lending trends in the Chicago metro area and efforts to promote financial inclusion, according to bankers who participated in the CDPS and CMAP discussion groups. As banks adjust their policies and perceptions to address these challenges, the recently published Community Reinvestment “Q’s and A’s” has the potential to broaden the type of lending, investing and other services that banks provide to LMI communities. The revised guidelines make clear that bankers are valuable partners in responding to unmet market needs.

 

[1] CMAP is the official regional planning organization for the northeastern Illinois counties of Cook, DuPage, Kane, Kendall, Lake, McHenry, and Will, and as part of its comprehensive plan for the Chicago region, ON TO 2050 — http://www.cmap.illinois.gov/onto2050 the agency is exploring new policy directions for promoting inclusive economic growth.
[2] Truth in Lending Act (TILA) – Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure Rule, also known as TRID, became effective for most loans applied for on or after October 3, 2015. The rule changed the definition of an application, clarified responsibilities for providing forms, established tighter limits on fee spreads, and installed a three-day review period between the closing disclosure and consummation of the loan. https://www.mba.org/issues/residential-issues/tila-respa-integrated-disclosure-rule
[3] See Institute of Housing Studies at DePaul University data at https://www.housingstudies.org/data/ihs-price-index/cook-county-house-price-index-fourth-quarter-2015/
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Highlights from the “Post-Secondary Education Option” panel at the Kansas City Federal Reserve Community Development Conference

Earlier this month, the Kansas City Federal Reserve hosted a community development conference: “Exploring Prominent Issues in Financial Resiliency and Mobility in Low- and Moderate-Income (LMI) Communities.” The conference took a fresh look at a variety of issues that affect the financial wellbeing of LMI communities, including health care, housing, jobs, education and consumer finance.  Around 200 people attended including community leaders, community development organizations and other non-profits, as well as representatives from the public sector, think tanks, and universities.

To further CDPS’ information sharing of how education and workforce development work together[1], we are highlighting the presentations from the workshop entitled “Post-Secondary Education Options.”

“Post-secondary education” is defined broadly to include traditional university education and alternative options. The goal of this session with Leigh Anne Taylor Knight from ThinkShift, William Elliott from University of Kansas, and Bernard Franklin from Kansas State University, was to understand how post-secondary options and outcomes may be different for LMI populations. For example, what particular issues or limitations do they face? Is the return on investment for post-secondary education different for LMI versus non-LMI populations? Is anything fundamentally different about post-secondary education and training for this cohort?

Dr. Leigh Anne Taylor Knight’s educational background includes serving as a K-12 assistant superintendent, advising learning institutions across the nation, and leading a bi-state consortium that provides tools for data-driven educational research to inform practice and policy. She noted that while college graduates are more likely to be employed and earn more money (see Chart 1 & Chart 2 below), a student’s particular course of study (major, principally) also impacts his or her return on investment.

Chart 1. Click to enlarge

emily-blog-unemployed

Chart 2. Click to enlarge

emily-blog-jobs

Dr. Taylor Knight noted that chemical engineers made $70,000 annually as noted by the Federal Reserve Bank of New York, February 2016 Survey (other STEM majors had high starting salaries too), while majors in religion and theology that made under $30,000 annually, based on the same survey. Furthermore, she explained that a degree does not necessarily lead to a career in a related field, meaning that many college graduates get jobs in fields unrelated to their major. Dr. Taylor Knight further explained that companies are beginning to work with schools to create curricula for certain jobs that students can fill after graduation.

Dr. William Elliott furthered the conversation by discussing student debt and the life-long effects it can have on people, especially since students rely more heavily on loans today than ever before. Student debt burdens preclude or forestall major financial decisions, including: housing, saving for the future, and starting businesses. As illustrated by the chart below, student debt is the highest among the four categories of nonmortgage debt and it is steadily increasing.

Chart 3. Click to enlarge

emily-blog-chart2

Dr. Elliott suggested solution for student debt burdens is, Children’s Savings Accounts (CSAs) along with a Promise Program because together they are, “creating an asset empowered path to the American dream.” (An example of a promise program is the Kalamazoo Promise: Work hard in school. Graduate! Earn a Promise Scholarship. Be successful in life!)

While CSAs could potentially be a long-term solution, they will only help the students who are currently too young to even think about college. Therefore, a short-term solution is also needed. He suggested a bailout policy: “Less Debt, More Equity: Lowering Student Debt While Closing the Black-White Wealth Gap.”  Dr. Elliott argued that a progressive student bailout policy would dramatically reduce the racial wealth gap among low-wealth households. Furthermore, eliminating student debt among those making $50,000 or below reduces the black-white wealth disparity by nearly 37 percent among low-wealth households, and a policy that eliminates debt among those making $25,000 or less reduces the black-white wealth gap by over percent.

Dr. Bernard Franklin wrapped up the panel by describing a problem that exists throughout higher education: preparing students for a future we cannot clearly foresee. Many commonly understood job descriptions today did not exist even in the 1990s. This uncertainty, along with lower rates of enrollment that he projected after 2020, will likely cause institutions that rely on tuition dollars to change their financial structure, leading to increasing tuition rates above inflation rates (that has already happened at many institutions). Online education offerings may also proliferate due to their inherently lower cost structure, but online education may have negative implications that we cannot predict at this time.

The rest of Dr. Franklin’s presentation focused on issues of race and ethnicity in education. As indicated by the chart below, degree attainments for the black and Hispanic populations are significantly lower than for the white population.

Chart 4. Click to enlarge

emily-blog-degree

Dr. Franklin also stated that only one in 10 low-income students complete college, leaving most saddled with debt but no degree. He went into detail describing how those populations do not get the education they need to succeed in life. Dr. Franklin referenced a program that helps both low-income and first-generation students increase college access called The Kansas State College Advising Corps. This program works in public high schools by placing “near-peers,” recent college graduates, in public high schools to provide the support that students need. This program is designed to help low-income and first-generation college students access (and complete) post-secondary education.

This brief summary of one panel identifies issues impacting LMI students aspiring to achieve a college education, and potential policy interventions to help the LMI population succeed. We plan to post blogs from some panelists that can offer additional detail and insights.  To see the activity and conversations started by the panel and conference, please check out #strongcommunities16 on Twitter.

 

[1] Two ProfitWise News and Views articles that discuss the topic: “Community Colleges and Industry: How Partnerships Address the Skills Gap” and “From Classroom to Career: An Overview of Current Workforce Development Trends, Issues and Initiative.”

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Two Examples of Mental Health Clinics in Chicago that Serve LMI Communities

by Marva Williams

Community Development departments in the Federal Reserve System work to understand and address barriers to economic mobility, and engage banks, government, and nonprofit intermediaries to channel financial and other resources to places in need of physical, economic, and other forms of community redevelopment. The Federal Reserve System began in 2009 to examine more closely the linkages between place and health. Places with thriving local economies, decent schools, (other) quality public amenities, and high civic engagement and employment levels, tend to have healthier, longer-lived populations, and less incidence of disease.

The Fed’s community development function now seeks to better understand the relationship between economic and physical health, and how community development oriented interventions related to housing, employment, credit access, and other areas, may impact both. We leave strictly health-oriented interventions–such as nutritional awareness and smoking cessation programs–to the public health field. But well-conceived development interventions and investment can mitigate ‘environmental’ factors as diverse as security/safety, pollutants (in and outside the home), and inadequate access to decent schools, fresh food, and recreational and healthcare facilities, all of which significantly impact stress levels and general wellbeing. Numerous Fed conferences including three to date in the Seventh District, coordinated with prominent, health-focused organizations such as the Robert Wood Johnson Foundation, have explored this relationship, as have various Fed (and outside) publications.

As a bank regulator, a core interest of the Fed is how investments by financial institutions fulfill CRA requirements and bring about meaningful change in neighborhoods, but the constraints of CRA and overarching lending risk guidelines limit the types of lending and investment in which banks can engage. Facilities that provide needed health services, and can support debt through a combination of subsidy, philanthropy, and user fees, represent one promising area for bank lending and investment, whether banks invest alone or in partnership with nonprofit financial organizations. Across Illinois, one of the most critical scarcities in healthcare is mental health professionals and facilities. Following are profiles of Cathedral Counseling Center and Trilogy, two mental health clinics in Chicago that serve lower-income individuals; the case studies include discussions of essential relationships with financial institutions.

Cathedral Counseling Center

Formed in 1974, Cathedral Counseling Center (CCC) is a non-profit organization that provides a comprehensive range of mental health services for low- and moderate-income adults and children. CCC offers individual therapy and psychiatric services for clients challenged with: alcohol and other drug abuse; anger and conflict; mental illnesses; and emotional trauma, among other issues. It also provides group counseling as well as premarital and couple counseling. Lastly, CCC has professional therapy education for clergy and mental health clinicians and supervision for mental health professionals.

CCC was founded by an Episcopal minister and funded by Episcopal Charities and Community Services, a Chicago based funder of programs in the diocese. Since its founding, CCC has grown into a major center, with offices in a downtown Chicago as well as Hyde Park and Evanston. In 2014, more than 1,000 clients were served at CCC. CCC does not work with indigent clients—patients must be able to pay at least a portion of their bills. In 2014, almost 40 percent of its clients had income below $10,000 and an additional 32 percent had incomes between over $10,000 to $29,999. The agency receives 75 percent of its income from client fees and insurance and 25 percent through fundraising.

Relationship with IFF

By 2005, CCC had outgrown its space in a Chicago Episcopal church, which limited its ability to expand therapeutic services. A board director of CCC referred the staff to IFF (formerly Illinois Facilities Fund) to conduct an analysis of their space needs and available options. IFF is a community development financial institution (CDFI) that provides loans for community facilities, such as charter schools, housing, grocery stores, primary care clinics, and recreation centers. Headquartered in Chicago, IFF has a 12-state service region, including all five Seventh District states: Illinois, Wisconsin, Iowa, Michigan, and Indiana. IFF also offers real estate development and facility consulting, a critical need for many service organizations, which may not have expertise on staff to determine overall facility feasibility, or even optimal use of space for service delivery and administrative functions. IFF receives funding from a variety of sources, including investments and grants from regulated financial institutions. In return, these financial institutions may receive CRA credit for IFF projects that benefit lower-income communities.

IFF completed a feasibility study for CCC on the purchase of office space, which was preferred by the CCC board of directors to renting space. The feasibility study resulted in a $1.8 million purchase of office condominium space in downtown Chicago in 2006. The project was financed by an $840,000 capital campaign and a $1 million loan from IFF. As CCC continued to grow, the board decided to expand to the entire floor of the building in 2013, resulting in a $1.4 million acquisition and construction project. The same development team was used for the 2013 project, including IFF as consultant. The expansion was financed by a capital campaign that netted over $175,000 and an additional IFF loan for approximately $1.2 million. The space allowed the organization to expand its counseling services and improve the office’s accessibility for people with disabilities.

The role of IFF for these projects was essential. CCC staff had no experience with real estate development or financing, and needed the expertise of IFF to affect the expansion. It was essential to have expertise in purchase negotiation, design oversight, contractor selection, and construction oversight to manage the project budget and development. In addition, CCC required a trusted partner that could advocate for its interests with the development team. Further, IFF carefully balanced the needs of CCC with its financial capacity to repay the loans that financed the purchase and rehabilitation.

Trilogy Behavioral Healthcare

Trilogy Behavioral Healthcare’s (Trilogy) mission is to promote recovery from serious mental illness. Founded in 1971, the agency provides counseling for people with mental health diagnoses. Trilogy’s services include individual and group therapy, case management, and medication management. It also has a linguistically and culturally competent therapy program for Latinos and a drop-in center that is open every day. Trilogy provides supportive services, such as housing, housing advocacy, employment counseling, and occupational therapy to help get people back to work. Their residential program offers a range of services from supportive housing to 24-hour residential assistance at three sites.

Trilogy partners with the state of Illinois to provide independent living opportunities for people who reside at nursing homes. A 2009 lawsuit alleged that the State of Illinois was violating the American with Disabilities Act (ADA) by only providing people with mental disabilities the option of living in nursing homes. In 2010, the US District Court found that people with mental illnesses have the right to choose to live in community-based settings. As a result, the state entered a consent decree that requires it to provide funding to Trilogy to pay for supportive services that enable people with mental illnesses to live more independently. The funding enabled Trilogy to create a team of eight new staff positions, which has since expanded to 10 teams of eight staff, to support alternative housing for people with a mental health diagnosis. The grant also pays for a client’s first month rent, rental deposit, and furniture. Trilogy staff train clients in independent living skills at ‘practice apartments’ and after the clients obtain their own apartments, a trained peer provides coaching and support through a home support program.

Trilogy also provides a range of other services. It works with police, and parole and probation staff to provide mental health services to incarcerated people with acute psychiatric symptoms. Trilogy also partners with several area hospitals and homeless shelters in Chicago and Evanston to provide homeless individuals with mental health services.

The organization promotes integrated mental and physical healthcare. It partners with the Heartland Alliance on a health clinic in Rogers Park that serves approximately 1,500 adults annually.

Over 90 percent of clients of Trilogy have low incomes and are eligible for Medicaid, a state and federal government supported health insurance system. The organization also provides services to the working poor with no health insurance at low or no cost.

The agency has grown significantly. Trilogy has 300 employees, up from 75 employees ten years ago. In addition, the agency budget increased by $5 million to nearly $12 million from 2006 to 2014. The organization now has four locations aside from its main facility in Rogers Park; the newer facilities opened in Lawndale, Uptown, South Shore, and Evanston. Trilogy raises funds through various private sources to assist its clients in meeting basic needs, including groceries, medicine, and housing.

Relationships with its Financial Institution

Trilogy has been a customer of a large national bank since 2012. The bank provides all the financial service accounts for the organization as well as a $3 million line of credit. This line of credit allows Trilogy to pay short-term bills, which is essential because with the exception to the consent decree, the state of Illinois is very slow making payments to the agency. The bank also made a loan to Trilogy to conduct maintenance and repairs to its Rogers Park headquarters. Further, a senior vice president at their bank was appointed to the Trilogy board of directors in 2016. In addition, the bank will consider an additional loan for a property in Lawndale that the agency would like to purchase in 2016.

Closing

CDPS will continue to explore the roles of banking institutions subject to CRA in bringing about neighborhood redevelopment and investment that impacts both socioeconomic conditions and general wellbeing.

For more information on CDPS explorations of community health, please see two articles in ProfitWise News and Views written by Susan Longworth:

“The Converging Visions of Public Health and Community Development” (December 2013)

“Exploring the Correlations between Health and Community Socioeconomic Status in Chicago” (Summer 2014)

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Revisiting the Promise and Problems of Inner City Economic Development: The Role of Industry Clusters

(To view full article with figures, click here)

by Robin Newberger and Maude Toussaint-Comeau

Last fall, Detroit provided an illustrative backdrop for a summit on economic advancement in distressed communities, sponsored by the Initiative for a Competitive Inner City, the Upjohn Institute, Sage Publications and the Federal Reserve Bank of Chicago. The May 2016 Special Issue of Economic Development Quarterly  makes available both the new research presented at the event, as well as a discussion paper highlighting research findings and practitioner perspectives on revitalizing inner cities.

One of the main topics of discussion at the summit was the effectiveness of cluster-based development strategies in inner cities.[1] Clusters are geographic concentrations of interconnected companies and institutions in a particular field including (1) linked industries and other entities, such as suppliers of specialized inputs and specialized infrastructure; (2) distribution channels and customers, manufacturers of complementary products, and companies related by skill sets, technologies, or common inputs; and (3) related institutions such as research organizations, universities, standard-setting organizations, training entities, and others (Porter, 1998). (See Figure 1 for an illustration of the industry clusters in the Detroit Metropolitan Area and their linkages).

Over the past few decades, research by Michael Porter and others has shown that large traded industry clusters spur innovation and enhance productivity; and are prevalent in locations that achieve better economic performance. (Traded industries are industries that are concentrated in a subset of geographic areas and sell to other regions and nations. Local clusters provide services or products mostly for the local market)[2] In the Detroit Metropolitan area, traded clusters accounted for more than 600,000 jobs as of 2013, according to the U.S. Cluster Mapping Project. Although the economic situation in the city of Detroit remains challenging, the automotive sector, despite its unusual recent history, illustrates the cluster concept (it is second in terms of number employed in the MSA only to ‘business services’). Automotive and auto supplier firms working in proximity benefit from both information networks and a local pool of engineers, designers, and workers. Other important traded clusters in the Detroit area include metalworking, marketing and design, and metal manufacturing (See Figure 2).

Local clusters in the Detroit MSA generate even more employment and accounted for more than 1 million jobs as of 2013 (Figure 3).

Figure 1. Click to enlarge

industry.clusters2

Source: Reproduced based on U.S. Cluster Mapping Project

Note:  Specialization is measured by the value of a cluster’s location quotient. A Location Quotient (LQ) is the ratio of an industry’s share of total state employment in a location relative to its share of total national employment. The LQ measures the specialization or concentration of a cluster in a particular location relative to the national average. An LQ > 1 indicates a higher than average cluster concentration in a location.  Additional explanations of legend methodology explanations can be viewed at www.clustermapping.us/content/related-clusters-methodology

Figure 2. Click to enlarge

traded.clusters1

Figure 3. Click to enlarge

local.clusters1

Public Policy Support for Clusters

Cluster strategies have gained traction in recent decades to the point of becoming a part of the basic toolkit for local economic development authorities throughout the country.  Cluster-based economic development policies involve identifying (e.g., through cluster analysis) an area’s sector strengths in order to be purposeful about the way resources are directed to expand economic opportunities. A good cluster-based development strategy involves creating an environment that bolsters cluster dynamics, which includes: encouraging related businesses to locate in ways that foster knowledge transfers; supporting science and technology infrastructure; fostering policies that improve education and workforce training; building specialized infrastructure; and promoting exports.

Additional Strategies for Practitioners to Support Clusters

Many of the practitioners who attended the summit support the thinking that industry and regional clusters are effective tools for the development of regions. But they also expressed concern as to whether cluster strategies can lead to strong economic development and growth for inner cities without more targeted support. Lower levels of educational attainment often impede inner-city residents from competing in emerging high-skill and high-wage sectors in many industry clusters. Institutional or historical obstacles also play a part in whether economic development benefits inner-city residents. For example, limited access to information resources and (commercial and financial) networks among black and Latino business owners often discourages participation in the financial system, which, in turn impedes business creation and development.

Realizing more fully the benefits of cluster industries in urban areas like Detroit requires economic development, training, and business development practitioners (and funders) to make some targeted refinements. Businesses that are pervasive in urban areas and that create jobs over a wide range of skills for inner-city residents could be singled out to receive greater investment. Additional investments could be directed at workforce training that connects trainees to businesses in inner cities and regional clusters. It may also be important to designate funding to organizations that not only upgrade the skills of workers, but can also provide greater case management for the social and personal challenges that many trainees face.

In addition, investments are needed to ensure that minority business owners are better connected to services that support local entrepreneurs. Training programs may need to focus on procurement and supply chains that connect minority business owners to both local and regional clusters. Programs may also be needed that construct resource networks for minority business owners, including accountants, attorneys and other professionals.  With respect to credit access, trainers may need to focus on financial literacy and recordkeeping to improve the capital-readiness of small businesses, and identify best-practices among financial institutions that encourage minority businesses to seek bank financing. Local regulations or other mechanisms may also be needed to ensure that resources reach traditionally disadvantaged groups.

If industry cluster-based development policies are to represent a promising means of revitalizing inner cities, these strategies must address a range of issues and barriers facing residents. A fuller set of interventions related to developing human capital, business owner preparedness, credit access, and other issues may be needed for inner cities to realize the benefits of clusters and regional growth.

Summary of Recommendations

We summarize the main takeaways from the summit for optimizing the employment prospects of clusters to revitalize inner cities in ways that are also inclusive of inner city residents, business owners, and workers.

Investing in cluster development in urban areas

  • Map the cluster composition of a region and identify which of these regional clusters also have representation in the city.
  • Develop business accelerator programs that connect businesses in the inner city to the rest of the region.
  • Coordinate cluster-building strategies between city and suburban communities.
  • Support businesses that are pervasive in urban areas and that can create jobs over a wide range of skills for inner city residents.

Expanding training for workers

  • Identify the human capital and employment skills that are needed by businesses and organizations in both inner-city and regional clusters.
  • Identify or designate new sources of funding for integrating minority workers.
  • Engage employers as training programs are developed, asking them for input on market trends and curriculum development.
  • Create programs that develop social networks and other connections between people in higher poverty areas and cluster-related employment opportunities.
  • Modify the terms stipulated by funding and reimbursement sources in order to (1) help cover the costs of skills remediation; (2) recognize that completion of remediation training is a successful outcome; and (3) include interventions that address the emotional and physical health of workers as part of job readiness training.

Supporting small and minority business owners

  • Connect entrepreneurial ecosystems to small and minority business owners.
  • Encourage small business training programs to use economic development tools (not just community development tools) to link small businesses to clusters, including training on procurement, supply chains, small manufacturing and logistics solutions.
  • Offer financial literacy and training in recordkeeping to improve the capital-readiness of small business owners.
  • Identify best practices within financial institutions that hire minority loan officers to focus on opportunities and encourage business owners to seek bank financing.
  • Support minority business owners who receive funding (loans, grants, etc.) with resource networks that include accountants, attorneys, and other professionals.

 

[1] In the United States, the term “inner city” often signifies lower-income residential districts in the city center and nearby areas, with the additional connotation of impoverished black and/or Hispanic neighborhoods. The Institute for Competitive Inner City (ICIC) offers a definition based on economic distress level, which has been adopted by many researchers. According to ICIC, inner cities are contiguous census tracts in central cities that have a poverty rate of 20 percent or higher, or have two of three other criteria: poverty rate of 1.5 times (or more) than the MSA; median household income of 50 percent or less of the MSA median; and unemployment rate is 1.5 times or more than the MSA rate.
[2] See http://clustermapping.us/content/clusters-101

 

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An Innovative Mortgage Product for Detroit Homebuyers Enters the Market

By Emily Engel and Taz George

In a recent article, Community Development and Policy Studies (CDPS) highlighted mortgage innovations serving low- and moderate-income (LMI) potential homebuyers. While Detroit has shown promising signs of an economic comeback, its housing market continues to struggle with a high number of blighted and vacant properties, and very limited mortgage lending activity. This blog summarizes a recently introduced intervention, Detroit Home Mortgage (DHM), which is designed to boost the supply of credit for purchasing and rehabilitating housing in need of repair.

Residential mortgage lending is all but nonexistent in Detroit, with an annual average of just 356 new purchase mortgages from 2009 to 2014, compared to an annual average of 6,103 new mortgages from 2004 to 2008, according to Home Mortgage Disclosure Act data[1]. Cash transactions account for the vast majority of residential real estate sales, many of which involve corporate investors and municipal entities such as the city’s land bank.

new.mortgages.detroit

The decline in lending is not unique to Detroit. Credit standards nationwide remain very tight relative to the early 2000s, but the state of Detroit’s housing stock make it particularly affected. For example, access to loans for low-cost housing has been especially limited, an issue for a city where the average home sale price was less than $40,000 in each month of 2015, according to Urban Institute calculations from CoreLogic data. Furthermore, Detroit leads the nation in its proportion of vacant properties, many in need of repair. The Motor City Mapping project’s 2014 survey found that roughly 1 in 3 residential or commercial properties was blighted, including 73,035 residential structures. The many properties requiring rehabilitation and high vacancy rates mean home values are very low, which in turn has made credit tighter where it is most needed: 80 percent of applications for home-improvement loans in Detroit from 2009 to 2013 were denied due to insufficient collateral, according to a Zillow analysis of records released under the Home Mortgage Disclosure Act. In other words, the cost of repair most often exceeds a home’s appraised value, creating a vicious cycle that further reduces home values. “The appraised values are based on a decimated housing stock,” says Colleen Schwarz, vice president of Affordable Housing Lending at Community Reinvestment Fund, USA (CRF), a nonprofit Community Development Financial Institution (CDFI) lender participating in the program.

Existing programs meant to provide credit for rehabilitating homes, such as the Federal Housing Administration’s (FHA) 203(k) insurance program, have gained little traction in Detroit due to the sheer scale and degree(s) of vacancy and disrepair. FHA 203(k), for instance, cannot insure a loan of greater than 110 percent of property value. For a home in disrepair that appraises at $50,000, this limit translates to a $55,000 budget for acquisition and repair[2], often far below what is needed homes which sat vacant for years, experiencing vandalism and deterioration.

With these challenges in mind, DHM’s collaborative partners designed a program that could sustainably extend credit to homebuyers to purchase and rehabilitate properties with depressed values and high repair costs. Eligible buyers include prospective owner-occupants who can meet credit history standards similar to those of an FHA loan, such as a minimum 3.5 percent down payment, mortgage payment expense to gross income ratio of 31 percent, and total credit obligation payments to gross income ratio of 43 percent. In essence, DHM provides financing to FHA conforming borrowers with non-FHA conforming properties. Five participating lenders in the Detroit area will provide loans for buyers to purchase the property, while CRF makes a second loan that covers the projected rehabilitation costs, and a roughly 15-20 percent contingency allowance. The second loan balance also covers the cost of a project manager to support the buyer in overseeing the rehabilitation. To ensure that buyers are aptly prepared for the potential risks and complications of purchasing a home in need of rehabilitation, buyers must complete special education on high combined (purchase and rehab) loan-to-value (CLTV) home financing and home rehabilitations. The education emphasizes staying within budget by prioritizing safety and livability during the construction process. Given the added complexity of DHM relative to a typical lending program, Schwarz believes that CRF’s significant experience in loan servicing and program management will be a key component of the program.

Launched in February of 2016, DHM is already working with prospective borrowers and hopes to close loans within the next 60 days, according to Schwarz. Initial interest has been high and the program has been advertised aggressively across the city. Not surprisingly, the time needed to approve an applicant and close their loan is longer than a typical loan due to some unique features of DHM, such as estimating construction costs and required borrower counseling. The process of rehabbing a home may be daunting to a perspective homebuyer, Schwarz said, but there are no other viable financing options that allow loan principal to exceed appraised value by up to $75,000 to make needed repairs, let alone one that provides education and construction support. Five lenders are participating in the program, and while they must retain the first mortgages in portfolio, they may stand to gain in the long-term from a healthier housing market and from potential CRA credit for serving low- and moderate-income communities. Funding from the Kresge Foundation supports operating costs, credit enhancement, and helps to allow a hardship exemption for borrowers facing an unexpected job loss. This means that in the case of life events (death of the borrower, divorce, major medical issues) that reduce family income, necessitating a sale, the CRF second mortgage may be forgiven.

If successful, DHM may serve as a model intervention for other cities struggling with a dilapidated housing stock and limited access to mortgage credit.

CDPS is committed to researching and understanding new innovations in mortgage lending as they emerge, and to encouraging dialogue among policymakers, community groups, action coalitions, and financial institutions working to improve access to residential mortgage credit.

[1] These figures include only owner-occupied, 1-4 unit, first lien, purchase originations.
[2] This total assumes a sale price equal to the appraised value of the home.
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CDPS Update

Every year, Community Development and Policy Studies (CDPS) researches issues that affect low- and moderate-income (LMI) communities in the Seventh District that relate to, among other topics, economic/worker mobility; access to competitively priced credit and financial services; small business development; health disparities by socioeconomic cohort; bank closure/consolidation; and affordable housing availability. Throughout 2016, CDPS will again engage individuals whose work in LMI communities can help us find ways to address the challenges faced by lower-income populations. A key tool in this endeavor is online surveys. This year, CDPS will again explore facets of various topics as they impact lower-income and lower-wealth populations including workforce development, student loan debt, small business and mortgage credit availability, and affordable rental housing, among others. Survey respondents represent a broad range of voices from the private and public sectors. This blog summarizes responses from the latest CDPS survey.

For the second survey of 2016, CDPS focused on two topics: (1) community bank closures/acquisitions and (2) student debt.

Smaller, locally-based banking institutions often have close ties to customers and communities. If the bank closes or changes hands, this can have significant ramifications on a community. Since the financial crisis, numerous community banks have been rendered insolvent and either closed or acquired by other banks.

As the chart below illustrates, close/acquire rates for all banks within the five states in the Seventh District have recently increased. The trend is more pronounced for banks with under 100 million in assets, which includes many community banks that serve remote, rural, or lower-income urban and suburban markets.

emily.blog-chart1_cropSource: FDIC Summary of Deposits data

CDPS wanted to get a sense of the perceptions of practitioners related to bank closings and consolidations. Some contacts noted that the transitioning or closing of banks had impacted the whole community. One contact summarized the economic impact for their whole community best: “Households and businesses don’t get the same kind of service from the large banks; they don’t get personalized attention (which they often need to succeed) from the large banks; and support for local foundations, charities, schools, and youth programs all decline because the big banks don’t support those initiatives the way that the local community banks did.” However, other contacts noted that closures or acquisitions have not happened in their communities or people have changed banking relationships with little to no impact.

For the second question, all respondents (who answered the question) agreed that an area of increasing concern among consumer advocates is the extent to which student debt burdens preclude or forestall major financial decisions for people in their communities.  The item that was mentioned most often is housing. Our contacts noted that student debt is impacting the whole housing market. It affects the rental market because people are living at home longer and impacts home sales because people do not want to take on more debt. Respondents also mentioned that student debt affects the loan underwriters because of GSE (i.e., Fannie Mae and Freddie Mac) policies regarding how to underwrite loans to people with outstanding student loans. Among other considerations, borrowers cannot get student loans discharged in bankruptcy under current law.

As illustrated by the chart below, student debt is the highest among the four categories of nonmortgage debt and it is steadily increasing.

emily.blog-chart2

A few contacts also mentioned that some for-profit colleges may not consider students’ interests their top priority. One respondent said: “People think they are investing in themselves but are actually making a poorly informed decision.” Sometimes students drop out of the school before they are finished and have debt but no degree, which is even more of a problem. One contact did point out that “efforts like the federal government has made to publish more data and factors about colleges is a great step to helping the student consumer make a prudent choice. It’s all about creating the savvy consumer and often people in low/mod neighborhoods are bombarded by advertising” (promoting mostly for-profit institutions).

One intervention mentioned by many survey participants was to refinance student loans at a lower rate. If this was ever an option, refinancing could help people lower their student debt payments and possibly invest in their communities, by buying property for instance, or starting a business.

The other issues impacted by student debt that contacts noted include saving for the future, starting businesses, getting married, and starting families.

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