“The good thing about the Federal Home Loan Bank programs is that they are bottom-up, not top-down,” says Alex Pollock, former president of the Chicago FHLB. (Photo: Bloomberg News)
“The good thing about the Federal Home Loan Bank programs is that they are bottom-up, not top-down,” says Alex Pollock, former president of the Chicago FHLB. (Photo: Bloomberg News)

The thrift crisis of the 1980s seems a little quaint now. But it was a true disaster, shuttering hundreds of savings institutions and causing hundreds of billions of dollars in losses. Yet it also prompted the start of two low-mod housing programs that have been going strong to this day.

Actually there was more than one good thing that came out of the thrift crisis. The Resolution Trust Corp., which sold off failed thrift assets, jumpstarted today’s commercial mortgage-backed securities market by packaging commercial mortgages into securities. And the Financial Institutions Recovery, Reform and Examination Act, the Dodd-Frank Act of its day, directed the Federal Home Loan Banks to implement two grant and lending programs to generate more affordable housing.

Those two efforts, the Affordable Housing Program and the Community Investment Program, have generated some $5 billion in grants and $68 billion in loans since inception, according to the Federal Home Loan Banks. According to the group the affordable program has helped finance 810,000 housing units, 475,000 of them very-low income, and the community program has facilitated 772,000 units. It’s tempting to add these two figures and get 1.5 million units, but in fact some projects get funding from both programs.

The AHP is a grant program. It works as gap financing to support other funding sources, with the money coming from a set-aside of 10% of the district banks' profits. The FHLBs tout it as the largest private source of funds for affordable housing: "Many are designed for seniors, the disabled, homeless families, first-time homeowners and others with limited resources."

The leveraging aspect is important, as affordable housing finance tends to be a rickety structure. I can remember an Arizona project that had ten separate financial institutions involved in a $25 million mortgage bond, with multiple sources of funding. It was great for the 400 families that got new houses, but so complicated it could never be used as a model for other financings.

The CIP is a loan program. It targets housing efforts but also economic development and infrastructure. According to the group, "Lenders have used CIP to fund owner-occupied and rental housing, and to construct roads, bridges, retail stores, sewage treatment plants and provide small business loans."

The FHLBs do not fund the affordable housing projects directly. They fund their member institutions (these used to be primarily thrifts but now are dominated by commercial banks), who bring them projects from local developers that they sponsor.

"The good thing about the Federal Home Loan Bank programs is that they are bottom-up, not top-down," says Alex Pollock, former president of the Federal Home Loan Bank of Chicago.

The affordable program finances rental and ownership units, but the typical housing unit is a rental. According to a study of AHP projects between 1995 and 2004 by the FHLBs' former regulator, the Federal Housing Finance Board, just over a third went to single-family or multifamily ownership units, with the balance going to single-family and multifamily rentals.

The Federal Home Loan Bank of New York, one of 12 district banks, committed $900,000 through the CIP to Provident Bank to finance construction of Spruce Senior Housing, 90 units of housing for very low income seniors in Dover, N.J. This project illustrates my point about multiple sources of financing. It also has received two AHP grants, for more than $1.2 million. "The Morris County HOME program, the New Jersey Department of Community Affairs Balanced Housing program, and Low Income Housing Tax Credits rounded out the funding," according to the district bank.

The New York bank finances projects mostly in its service area, which includes New York, New Jersey, Puerto Rico and the Virgin Islands. (It can also finance out-of-district projects as long as the sponsorship comes from a member based in the district.)

Last year it committed $35.5 million to the affordable program. The projects are an interesting mix. A grant of $1 million went to finance the El Barrio Artspace project in the Manhattan borough of New York City. This is a 90-unit apartment complex which will convert an abandoned school into homes for low and very-low income artists and their families. Signature Bank is the sponsor and Artspace Project Inc. is the developer.

Then there's the Son House Apartments in Rochester, N.Y. This project by the Provident Housing Development Corp. got an award of $250,000 through First Niagara Bank. That will help fund 21 supportive housing units for very-low income homeless people.

Why is an apartment project in Rochester being named after one of the kings of the Mississippi Delta blues? Son House spent more than three decades of his later life in the Rust Belt city.

One thing I'm sure of. News of the award was enough to banish the blues in the developer’s office that day.

Mark Fogarty, Editor at Large at National Mortgage News, is starting a regular blog of analysis and commentary based on his 30 years covering the mortgage industry.