Peter Schaeffing, President
During Black History Month, we appreciate the progress made and the long journey ahead toward racial equity and the destruction of structural racism. Being involved in lending, we have a front-row seat to some of the hallmarks of structural racism. The concept of CDFIs originated in large part due to the economic exclusion of minorities from mainstream financial institutions and, through the pernicious and institutionalized practice of redlining, particularly from the mortgage market. In the present day, many of our clients now have successful programs supporting BIPOC developers as a direct response to the same issues. The necessity of these programs is, indeed, the legacy of redlining—for many Black developers, their network of family and friends have been blocked from building up the wealth and available capital needed to kickstart a career in real estate development. We commend our many clients, past and present, who recognize that need and are pursuing it rigorously—from Philadelphia Accelerator Fund, to the Leviticus 25:23 Alternative Fund, to Capital Impact Partners, Low Income Investment Fund, and LISC Fund Management. There is much work to be done, and many of our clients are boldly leading the way. We hope that this month offers the opportunity for our staff, clients, and partners to reflect on where we are, think about—and really deeply contemplate—how recently segregation and assassinations of Civil Rights leaders were the news of the day, and consider how we can aggressively move the ball forward now. My hope is that by the time I retire, we are not still working on programs supporting BIPOC developers—because by then, the need will have been met by the mainstream capital markets. For that to happen, we can’t lose our focus on this critical issue today, even as more years separate us from the jolt of action and infusions of capital that resulted from the tragic murder of George Floyd. We have to keep doing whatever we can to support projects by Black developers who are motivated by mission and who lack only the capital to impact our lowest-income and most under-resourced communities in a way that will reverberate for generations. We pledge to continue to do what we can to support this important work.
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Dashboards provide critical insights through visual representations of key data and trends that are easy to interpret and direct focus to the most important information and takeaways. Effective dashboard packages utilize a combination of Summary and Supporting schedules. Summary dashboards focus on KPIs as well as key trends, ratios, and metrics, while supporting pages provide more granular insights and can leverage interactive features to support deeper analytics. For example, while a summary page might focus on total portfolio growth, supporting dashboards would include insights on the funds, products, and/or geographies driving that growth. So, what information should you include in a CDFI dashboard package? That depends on your audience. CDFIs have many different stakeholders—both internal and external—and they all need different information to meet their needs. Remember, information overload can be just as detrimental as a lack of information. Connecting stakeholders to the right information so they can act upon it is your primary goal in designing a dashboard package. This is where our High Impact Portfolio Analytics service shines. Once data modeling is complete, you have full control over which content your various audiences can access, and the data in the system can be used to create any number of targeted, interactive dashboards with specific audiences in mind. Here is our take on the top five dashboards that CDFIs need to ensure that the right data are available for the right stakeholders at all times.
#2: The Board Dashboard CDFI Boards of Directors are responsible for the overall strategy and oversight of the organization. Their needs are best met by monitoring the big-picture numbers and strategic direction. Adding in a taste of impact is critical.
#3: The Chief Lending Officer Dashboard Chief Lending Officers are often charged with both generating originations and ensuring that only good loans are made. An effective dashboard will keep an eye on both.
#4: The Resource Development Dashboard Staff focused on raising funds need to be able to effectively tell the impact story of the loan fund. Equipping them with clear, concise dashboards that communicate the success of the CDFI is critical.
By making these dashboards easy to access and update, all your critical internal and external stakeholders will have the information they need to make sound, confident decisions. High Impact configures and manages dashboards for CDFIs using our High Impact Portfolio Analytics Service in Microsoft Power BI. For more information, contact us at analysis@highimpactanalysis.com. In 2024, the team at High Impact is taking turns sharing quotes that are meaningful to them. February's quote is a bold one from staff member Alex Vazquez, Portfolio Manager, care of Teddy Roosevelt: Here is Alex's explanation of what this quote means to him:
"I keep this quote close to me because it reminds me in my personal life that our efforts are what’s truly important. We cannot control outcomes nor what others have to say - but we can control our efforts. Life and especially our work can be discouraging because of not being able to see our impact in a way the moves the needle tremendously, but our efforts play a big part in moving the needle. Subconsciously, our efforts also give others permission to dare greatly as well. And together, we can move the needle of impact further than we can by ourselves!" We hope it inspires you to dare greatly, too. As we have grown from a one-person startup to a more mature 10-person company, High Impact’s growth has been made possible by our commitment to the concept of “everyone has a seat at the table.” At High Impact, “everyone has a seat at the table” is one of our four core values because we know that we will be stronger as a company if we hear everyone’s voice and insights. Embracing this principle fosters a culture of inclusivity, where diverse perspectives converge, creating a vibrant ecosystem of ideas and innovation. In such an environment, every team member, regardless of title or tenure, feels empowered to contribute, propelling the company towards ingenious solutions and fostering a sense (and a truth) of collective agency in the company's evolution.
For a company operating within an industry that cherishes bottom-up approaches as we do, this value becomes even more pivotal. It ensures that insights and viewpoints from every level are not only heard but are actively sought after and integrated into the decision-making process. Just as CDFIs and other impact lenders understand that solutions are most effective when they are arrived at collectively, we know that we will have our greatest impact by inviting contributions from all corners. This value not only enhances problem-solving capabilities but also cultivates a culture worth working in—it is a lot more interesting to dedicate your professional time to a company that wants to hear what you say, and often acts on what you say, than one that believes that all the wisdom lies with management. “Everyone has a seat at the table” has served us very well in our first 10 years, and I have no doubt the ethos will be with us as a company forever. When managing a portfolio, easily attainable information often draws attention away from more relevant and critical data. Too often, the tendency is to fixate on accessible details, such as guarantor financials, while overlooking the deeper, potentially harder to quantify indicators of primary repayment risk. Since many loan agreements require the guarantor to submit quarterly financials, spreading them and writing a quick update on changes in financial condition feels productive. And yet, the guarantor is the secondary, or in some cases even the tertiary, source of repayment—so clearly this approach is falling short of the ideal for proactive portfolio management. It is analogous to the continuing efforts on the impact measurement side of CDFIs to find ways to go beyond housing units produced, jobs retained, and other quantifiable indicators to get to true, lasting community impact.
For this reason, we advocate for a paradigm shift—a deliberate emphasis on scrutinizing the primary source of repayment over the easier to analyze secondary or tertiary sources of repayment. Our approach prioritizes a holistic assessment, rooted in monitoring risks identified during the initial underwriting and identifying new risks that emerge during the loan term. While it demands a more thoughtful approach, this methodology yields indispensable insights crucial for proactive portfolio management. By steering focus towards the most urgent and relevant risk factors, our methodology equips lenders with the information they need to truly manage their portfolio proactively. This deeper, more nuanced approach to portfolio management capitalizes on the insights gained during the underwriting process and maintains a pulse on evolving conditions to keep a clear view on actual credit risks. Yes, we still do spread guarantor financials and monitor for changes in financial condition, but we put the spotlight on more immediate indicators of risk. This allows our clients to adapt strategies, proactively consider restructuring needs, mitigate threats, and ultimately safeguard the health and stability of their portfolios while also positioning their borrowers for success. By embracing the challenge of diving deeper into underwriting insights and continuously monitoring for emergent risks, community development lenders position themselves not just to react but to anticipate, ensuring a resilient portfolio and the best chance for success for borrowers and lenders alike. This year at High Impact, our team is sharing words of inspiration with each other. At the end of 2023 we gave each staff member a frame with the same inspirational saying in it--and each month this year, a different staff member will select a new phrase to be shipped out and put in these frames for the new month. It's a simple way to connect us all from our headquarters in Albany to the home offices of our remote staff across the country. The first phrase is this: Hopelessness never got anything done. It struck me as having two important applications to our work. First, the work we do is hard--and I’m not talking about the day-to-day work of underwriting or portfolio managing, I’m talking about the work of creating more just and equitable neighborhoods where everyone can thrive. In fact, at times it can be discouraging to think about how long the impact lending industry has been around, and how many problems persist today. But you know what? Despairing won’t do us any good. There’s no doubt that doing the next loan is a good thing. Taking the next step makes some progress. While I can’t guarantee that we’ll solve our country’s problems, I can guarantee that giving into hopelessness and doing nothing certainly won’t. So we keep pushing..
The other application for us is from the perspective of our neighbors that we are trying to help. If you grow up in an environment that exposes you daily to structural racism, failing schools, a lack of accessible job opportunities, and unaffordable housing, resorting to hopelessness is one logical response. And in that state, it becomes very hard to find those few opportunities that might exist, or believe in yourself, or, in short, get anything done to improve your situation. We want to build the affordable housing, create the excellent schools, and provide for job opportunities that can undo that--give hope where there is none. That’s critical work and can have such an impact on someone’s life. So once again--we keep pushing. We look forward to continuing to do what we can with you, our clients and partners, in 2024, all while also thinking about how to do more and do differently to make a bigger difference than we have already. This is the final segment in a three-part series on the likely impacts of a recession on the CDFI industry. Part 1 focused on the negative impacts, Part 2 focused on potential opportunities, and this final installment offers guidance on how CDFIs can position themselves to thrive--even in a recession.
In the days since we published Part 2, more signs of recession have emerged—August inflation came in higher than anticipated, markets are forecasting as much as a 100-basis point rate increase, and stocks had their worst day since pandemic-driven volatility in 2020. The urgency to prepare for resiliency in a recession is clear. Read on for our recommendations for the impact lending industry. Know your ALM. Asset-liability matching (“ALM”), or the process of ensuring capital inflows from your portfolio are sufficient to meet required outflows to your capital providers, is easy to underemphasize in a strong economy. During a recession, we no longer have the luxury of assuming that strong repayment and easy access to capital will prevent ALM challenges. Lenders need a dynamic model with scenario forecasting to understand how a changing economic landscape could impact their ability to perform on their liabilities. This should inform all aspects of an impact lender’s operations, from credit standards to portfolio management and fundraising. Two specific liquidity pressures during a recession are increasing payment defaults and, especially for predevelopment and minipermanent lenders, maturity extensions. A dynamic ALM model, such as the customized model offered by High Impact, can allow CDFIs to stress-test their cash position under different delinquency and extension scenarios, giving staff and the board the insights necessary to proactively manage risk. Having a strong understanding of your ALM position can also help you live out your mission. Providing payment deferrals to borrowers is a great support CDFIs can offer in a recession, but this can only be done responsibly if the CDFI can model how deferrals will impact its cash position. Once again, a dynamic ALM model can offer those insights on-demand. Lenders interested in improving their asset-liability matching practices can reach out to High Impact here to talk about our dynamic model, or get started with the free, simplified model offered in the resources section of the CDFI Connect platform maintained by the Opportunity Finance Network (“OFN”). Prepare to onboard staff transitioning from traditional finance. Banks will shed staff as a recession worsens, particularly in originations. For the many CDFIs who have been struggling to hire, this is a meaningful opportunity to add talented staff. To capitalize on this, CDFIs first need to get these potential new hires in the door. Aligning job titles with traditional banking job titles, keeping a presence within your local chamber of commerce, and acting quickly if layoffs at a local lender occur are all helpful steps. Perhaps most importantly, communicating the mission of your institution and your cultural differentiators in job posts will help convey why your ‘Senior Credit Analyst’ opening should rise above the rest in an applicant’s search. Once new hires are made, training must be the focus. For many CDFIs, this will require changes in how training is approached. Staff coming into the industry from traditional finance will likely be strong in lending and credit fundamentals but will need to change how they deploy those strengths. As an example, a bank underwriter may be accustomed to a rigorous market analysis as the cornerstone of a market-rate multifamily project underwriting, while in our field the market is emphasized much less given the massive demand for affordable housing in most communities. Similarly, key subsidy sources and certain loan types, like unsecured predevelopment loans, may be entirely new concepts. These differences can make even experienced bankers feel out of their depth initially, making good onboarding practices critical so that they can get comfortable quickly and maintain their confidence. Creating a full-fledged training program for workers transitioning to impact finance is likely too large a task for any one CDFI. We would love to see OFN or a collective of industry players come together to work toward a training program to make this transition easier—this is an opportunity that is too great to be missed. Increase risk tolerance—and show how resilient you are. This may be an unexpected perspective from a firm whose core practices include underwriting and risk mitigation. However, the CDFI industry is entering this recession in a very strong position and now has decades of extremely low loss rates to support its efficacy—as noted in Part 1, OFN found that the peak average delinquency and charge-off rates among unregulated CDFIs from 1994 to 2013 were 5.8% and 2.1%, respectively. Based on our work in portfolio analytics and portfolio management, we can anecdotally attest to the high performance of CDFI portfolios. This may be the time to strategically increase risk tolerance to double down on our core mission of filling capital gaps and providing financing to empower the most vulnerable borrowers. For impact lenders willing to take more risk, the key is to do so strategically. First, identify the specific vulnerable population you want to support. Is it small businesses with high-cost debt? Minority-owned developers waiting to realize developer fees? Homeowners who lost their jobs? Making this group as specific as possible will increase the likelihood that you can target them successfully and tailor a higher risk product or approach to achieve the intended impact. Next, see 'Know Your ALM' above—make sure you can model how the downside scenario of this strategy could impact your liquidity. Finally, get investors on board by demonstrating to them how much you could lose without failing to repay them, explaining how your strategic approach mitigates risk to the extent possible, and by dedicating specific grant funds or other sources to credit enhance the strategy. Lenders who are bold and purposeful in a recession will strengthen their communities in their darkest hour while fearlessly pursuing the ultimate vision of our industry. Thank you for reading this series. We invite you to leave your own thoughts in the comments, respond to our post on LinkedIn, or reach out to us at analysis@highimpactanalysis.com if you’d like to discuss how we can help make sure your CDFI is resilient in a recession. This is the second in a three-part series that will consider the likely impacts of a recession on the CDFI industry. Part 1 focused on the negative impacts. Part 2 focuses on the positive impacts. Part 3 will provide suggestions for how CDFIs can position themselves to thrive—recession or no recession.
The prospects of a recession are unsettling to us all in the impact finance space—a recession means people losing their jobs, entrepreneurs closing their doors, and opportunities for homeownership vanishing. It makes the work we do and the mission we strive for even harder to accomplish. It also amplifies the importance of CDFIs and other impact lenders and investors. As markets retrench in the face of inflation and economic contraction, the impact finance ecosystem must work hard to find innovative ways to blunt the impacts of economic turmoil on the most vulnerable residents in our communities. With that in mind, this post considers the potential opportunities within a recession that can help us all propel our mission forward no matter the economic headwinds. Part 2: Favorable Impacts Higher Credit Loan Requests As conventional lenders tighten their lending parameters, impact lenders will start to see applications coming in from businesses who were bankable just a few weeks or months prior. This offers the immediate and mid-range benefits of adding very high credit quality loans to the portfolio. Impact lenders can leverage this in two ways—most conservatively, to offset a potential influx of delinquencies and losses in their existing portfolios as economic conditions worsen, or, perhaps more bravely in service to mission, to justify new, higher-risk lending to traditional CDFI borrowers as they face the recession. Leaning into riskier loans during a recession is a high-risk, high-impact strategy, but CDFIs may be able to do so prudently if they are closing higher credit quality loans at the same time. Experienced Lenders on the Job Hunt The impact finance industry has not been immune from the macroeconomic trend of staff departures and staffing shortages. Nearly all of our clients at High Impact—and our firm too, for that matter—have experienced higher than normal staff turnover in the last two years. Hiring new staff has been difficult given the number of institutions with competing offers and the friction caused by individuals changing industries or stepping back from the workforce. In a recession, as banks cut back lending activity, we can expect to see layoffs and slower hiring trends among traditional financial institutions. CDFIs who are ready for this will be able to hire and train finance professionals who are newly on the job market and want their next job to have a real impact in their communities. This could be the influx of qualified personnel that the industry has been looking for. At High Impact, we’ve had several good experiences hiring staff from traditional financing institutions. Once they get past the initial culture shock—“there’s no collateral at all?” and “you want me to honestly tell you what I think about our workplace?”—their skills are highly transferrable, and the different perspective can be a major benefit, particularly if other staff come from more of a grassroots community development background. Continued Spotlight on the Importance of Impact Finance The visibility of the Black Lives Matter movement in the wake of George Floyd’s murder and the unprecedented economic shutdown caused by the pandemic have put CDFIs and impact finance into the spotlight like never before. The capital inflows from both government and private resources that followed have positioned the industry to not just be resilient during a recession, but to continue growth and increase impact. If the industry can use this newfound spotlight to demonstrate how to drive just capital allocation even during a recession, impact lenders have the opportunity to cement their place in the consciousness of Americans as the economic first responders that they are. The long-term benefit that could come from that could be industry-changing. What’s Next With the most likely negative and positive impacts of the recession behind us, the final post in this series will present proactive steps CDFIs and others in the industry can take to ensure that we are all ready to react strategically and proactively when a recession hits. As economic indicators increasingly point to a recession, understanding a recession's likely impacts on our industry can help us react strategically as the economy changes. This is critical for any sector, but for CDFIs it is not just an existential moment to ensure self-survival, it is an urgent call to action to be economic first responders for our most vulnerable neighbors and communities. Just as airplane passengers should put on their own oxygen mask before helping others, CDFIs should ready themselves now so that they can support their constituents when an economic emergency arrives. This is the first in a three-part series that will consider the likely impacts of a recession on the CDFI industry. Part 1 focuses on the negative impacts, Part 2 focuses on the potential silver lining, and Part 3 provides suggestions for how CDFIs can position themselves to thrive—recession or no recession. Part 1: Negative Impacts Goodbye to Easy Money? The CDFI industry is enjoying an unprecedented infusion of capital from multiple sources—our industry’s version of “easy money.” The CDFI Fund airdropped over $1 million straight to the net assets of most CDFIs in 2021, and initiatives from LISC’s Black Economic Development Fund to OFN’s Finance Justice Fund and many more are deploying capital raised from corporate treasuries that in many cases had never invested in CDFIs before, or never at such scale. A recession, however, could slow or reverse this trend. As government budgets tighten and corporate boards increase an emphasis on cash on hand to mitigate recessionary risk, we can expect that the flow of new money into the industry will slow. Rising Default Rates A natural first concern for lenders in a recession is that delinquencies and charge-offs will increase. Data show that this concern is well-founded. An OFN study* of unregulated CDFI data from the 20 years from 1994 to 2013 found that the highest average delinquency rate and net charge off rate occurred in 2009 and 2010, respectively, correlating to the Great Recession (note that these high watermarks were still very manageable, at 5.8% for delinquencies and 2.1% for net charge-offs). While CDFIs should be ready for an uptick in problem loans, the impact is likely to be worse for small business lenders rather than real estate lenders. As the graph below shows, small business closures peak in recession economies. Real estate lenders, on the other hand, will likely see more resilient portfolios. Rents at a multifamily complex are paid by tenants who may collectively source income from dozens of employers and several public subsidy sources, decreasing the likelihood of broad nonpayment that could dent cash flow available for debt service. In the charter school lending sector, while a recession may hit government budgets and flow through to school budgets, charter schools tend to have many levers to pull to tighten their budgets and remain in operation—only the highest leveraged, and those with the most expensive leases or debt, are likely to be severely impacted by recessionary budget cuts. Given these factors, it is the same small business lenders who are only recently emerging from pandemic-driven havoc in the portfolio that should prepare for a new uptick in problem loans. *Source: 20 Years of Opportunity Finance 1994-2013: An Analysis of Trends and Growth. Published by the Opportunity Finance Network on November 10, 2015.
As interest rates continue to rise and before inflation moderates, gaps in construction budgets will only become more frequent. A hard recession could have the compounding impact of lowering bank profits and therefore lowering the appetite for tax credits, driving down LIHTC pricing. In 2016 we saw a similar issue with a different cause, as reductions in corporate tax rates resulted in LIHTC pricing dropping by 5-10 cents per credit or more—creating million-dollar-plus gaps in projects. Real estate developers will need to get creative to cobble together sources of funding or reduce costs to get projects to the finish line, often requiring more time than anticipated when their predevelopment funding closed. For projects that ultimately fail to move forward, by the time a project is finally abandoned corporate guarantees may be weaker than they were pre-recession, as the compounding impact of project delays and lower income from operating properties lowers developer fee receipts and cash flows from partnership waterfalls.
What’s Next Now that we’ve covered the most likely negative impacts of the recession, the next post will review the potential opportunities that lie within a recession. After that, we will cover the steps CDFIs and other industry stakeholders can take to ensure that we are all ready to react strategically and proactively when a recession hits. April 1st will be a “first First” for us at High Impact—the first day celebrating our new company policy, First Fridays Off. This policy makes the first Friday of each month a company holiday, meaning High Impact will be closed for business each first Friday going forward. It represents a radical expansion of our PTO and holidays policy—12 new days off in one fell swoop—and the biggest change in our benefits policy since our founding. We are making this move as the first step in revamping staff benefits in 2022 to acknowledge the changes and challenges of the post-pandemic business environment and reemphasize that the well-being and development of our staff comes first. This move will reinforce the attractiveness of becoming and staying a High Impact employee and position our team to continue delivering best in class client service.
Implementing this policy is further operationalizing our B Corp values to consider the interests of all of our stakeholders when making business decisions. We view this policy as a meaningful way we can encourage work-life balance and support our employees’ mental health. By forcing a free weekday once a month, our staff will all receive the mental health benefit of a “breather”—a day to slow down, give attention to our personal needs, and enjoy the “life” side of the work-life balance. We strongly believe that deliberate breaks, and not just longer (but infrequent) vacations, have an important mental health benefit. We understand that some of our clients may have concerns about how this impacts our workflow and ability to provide them with the excellent service that they rightly expect from us. At the micro level, we are confident that one day of company closure per month will not materially impact workflows—our staff have time and time again shown their capacity to meet deadlines while delivering superior analysis. Taking a longer-term view, we firmly believe that by further reinforcing our staff’s wellbeing this change will actually result in improved service for our clients. As we implement this policy, we thank our clients for their continued confidence and trust in us. And most of all, we thank our staff for their unwavering dedication to using their skills to benefit mission-driven lenders and the at-risk communities they serve. First Fridays Off is a celebration of that dedication and an acknowledgement of the hard work that they do, day in and day out. We are excited to see how everyone uses their first First Friday, whether it be by exploring the great outdoors, catching up on household needs, visiting out-of-town friends and family, or enjoying hobbies. We hope everyone finds the time to relax, reflect, and recharge—and don’t worry, we’ll be back on Monday. |