CDCs & Real Estate Investment Trusts help house homeless people?

Tom Boland (
Mon, 14 Jun 1999 17:47:36 -0700 (PDT)

Do "Real Estate Investment Trusts" and "Community Development Corporations"
help or hinder homeless people's efforts to get affordable housing?

What is the track record of REITs and CDCs where you live?

See below for a related article:

FWD  Associated Press - June 8, 1999


     By Patricia Lamiell

NEW YORK (AP) -- When Judd Levy retired as Merrill Lynch's head of housing
finance in 1988, he spent seven years running a 19-room Vermont country
inn. But he never really left high finance -- all along he's considered it
his mission to bring Wall Street innovations to low-income housing development.

Last week, Levy, having become the president of a tiny nonprofit housing
organization, helped create the first real estate investment trust, or
REIT, to specialize in affordable housing and community development.

REITs operate much like a mutual fund for real estate. Through a REIT,
investors own a diversified portfolio of properties and mortgages.

Levy's group, the Community Development Trust, purchases fixed-rate
mortgages on homes for lower-income people and then packages the loans into
securities to be resold to investors at a profit. By creating a market for
these loans, the trust makes it more attractive for lenders to make them in
the first place.

``I'm loving this now,'' Levy said. ``The ability to take a market that's
somewhat asleep, and be able to introduce these techniques that have worked
elsewhere and adopt them, is really interesting.''

To fund its purchases, the trust last week sold $29 million in stock to
such heavy hitters as the Allstate, Prudential and Metropolitan Life
insurance companies; banks Citicorp and First Union; and Fannie Mae, the
mortgage financing company.

The stock sale signals ``an evolutionary trend toward using more
sophisticated financial strategies,'' said Kenneth Bacon, a senior vice
president at Fannie Mae, which invested $4 million in the project.

``This is in many ways consistent with what you've seen happen all over the
world. In emerging markets, Latin America, Asia and Africa, people are
being very innovative, and there's no reason why it can't be done here.''

Created in 1960, REITs have been used by real estate developers to finance
projects from outlet malls and hotels to prisons. REITs bought low-income
housing in the past, but only to convert it to more upscale units.

By contrast, Levy's group has pledged to only buy mortgages and buildings
that primarily benefit low-income people and to maintain any property that
it acquires as affordable housing. The trust will also purchase low-income

``Our REIT is going to own tons of mortgages, tons of buildings,'' said
Merilyn Rovira, vice president at the Community Development Trust. ``We're
going to end up with $200 million worth of assets.''

In some ways, Community Development Trust's genesis traces the evolution of
community development financing.

The trust was formerly known as the Local Initiatives Managed Assets Corp.,
a non-profit group that packaged low-income mortgages into collateralized
bond obligations, or securities backed by monthly mortgage payments.

LIMAC, in turn, was affiliated with Local Initiatives Support Corp., a
nonprofit that started in 1979 by lending foundation money at below-market
rates for housing and community development.

LISC ``made a lot of loans that a lot of people thought were crazy''
because they were to non-profit groups in poor neighborhoods, said Rovira,
who helped structure the new real estate investment trust. Banks, concerned
about borrowers' ability to repay the loans, might shy away from making them.

But, Rovira said, ``these groups, for the most part, paid them back,
interest and principal.''

LISC began to think about raising more money by packaging loans into
mortgage-backed securities, a financing innovation that changed the
mortgage industry by making loans much easier to get.

But LISC's loans were tiny by Wall Street standards and secured by
properties scattered around the country. And they had been originated by
community organizations ranging from sophisticated to those that kept
mortgage payments in a cigar box.

Enter Judd Levy.

``There's no such thing as a lack of capital for community development
lending,'' Levy said last week from his Manhattan office. ``If we can
securitize defaulted car loans ... then we can't say the problem in
community development loans is credit risk.''

With the creation of Community Development Trust, LIMAC changed from a
nonprofit organization to a for-profit REIT.

REITs don't pay taxes provided they return at least 95 percent of their
taxable income to shareholders as dividends. They tend to pay high yields
of 5 percent to 10 percent, or more.

The REIT structure held several attractions for LIMAC. The potential high
yield would entice people who wouldn't otherwise invest in low-income
properties. A network of state and local housing authorities would keep the
REIT supplied with mortgages.

Levy is confident the REIT is a much better investment than, say, loans to
Russia and Asia that went into default over the past two years.

``You have never, ever seen a headline that such-and-such a bank took a
$100 million hit on their community development portfolio,'' Levy said,
``and you never will.''

AP-NY-06-08-99 1320EDT


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