Exploring CDBG Rehabilitation Loan Sales

Exploring CDBG Rehabilitation Loan Sales

Many cities have used the flexibility of the Community Development Block Grant Program (CDBG) to create housing rehabilitation loan programs that generate income through loan repayments. However, some cities have found that the rate of repayment is inadequate to meet their needs and are seeking buyers for their CDBG loan portfolios, with mixed results. Secondary Markets for City-Owned CDBG Loans, a new report from HUD's Office of Policy Development and Research, examines the potential of secondary markets for CDBG rehabilitation loans.

The results of two surveys of CDBG entitlement grantees indicate that the grantees have a significant amount of their grant allocations in rehabilitation loans. However, nine case studies of localities that have turned to the secondary markets indicate that potential investors are likely to consider many of the loans to be "low-quality" because of below-market interest rates, relatively long terms, unusually high loan-to-value ratios, or borrowers with poor credit or uneven loan repayment histories.

The national secondary market institutions studied in this report -- Fannie Mae and Neighborhood Housing Services of America (NHSA) -- have purchased some loans, but have not yet successfully devised a plan to market CDBG loans to their investors. Encouraged by Community Reinvestment Act requirements, banks may be more likely to consider purchasing CDBG loans. The report concludes, however, that there is not yet a competitive market for city-owned CDBG rehabilitation loans.

The report notes several considerations for communities contemplating selling their loans:

First-time sales can take anywhere from 7 to 18 months.
The highest quality loans are most likely to sell, leaving the riskiest holdings in a city's portfolio.
Cities should be prepared to sell their loans at a substantial discount if their portfolio is considered to have "low-quality" characteristics.
Cities may want to upgrade their portfolios before turning to the secondary markets -- a strategy that, however, may conflict with the social purpose of the loans.

To facilitate the sale of city-owned CDBG loans, the report also suggests that States could share some of the loan risk or offer purchasing subsidies.

Secondary Markets for City-Owned CDBG Loans is now available from HUD USER for $5. Please contact HUD USER to obtain print copies.