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Community banks have used the Federal Home Loan Bank program to create hundreds of thousands of affordable housing units

Although a strong economy has led to nearly full employment, there are still people who have trouble making ends meet. In the southern Minnesota community of Mankato, for example, an organization called the Partners for Affordable Housing (PAH) operates a short-term transitional housing facility that served more than 100 people in 2000. For years, the organization has kept an eye open for opportunities to provide more permanent housing to low-income people. Rivertown Homes, an eight-unit, two-story apartment building, is just such an opportunity. The property is for sale, and PAH plans to buy it, renovate it, and create housing for eight low-income families. It is a $900,000 project and PAH was looking for help.

Keith Luebke, PAH executive director, turned to the Security State Bank of Mankato, through which it applied for an Affordable Housing Program (AHP) grant from the Federal Home Loan Bank of Des Moines. Ultimately, PAH only sought a small portion of the total funds needed $36,000 - but it proved to be a crucial piece in a complex funding package that included money from the U.S. Department of Housing and Urban Development, the Minnesota Housing Finance Agency, the McKnight Foundation and other sources.

David Knopick, president of $80 million Security State Bank, said effort on his part was minimal. He is happy his bank could do something to help create more affordable housing, he said. It was the third time Knopick had worked with Luebke and his organization to obtain AHP money; it was the second time they succeeded in winning a grant.

Rivertown Homes is typical of the kind of projects funded by AHP money, a grant program that his been around since the Financial Institutions Reform, Recovery and Enforcement Act changed the charter of the Federal Home Loan Bank system in 1989. The law requires the Federal Home Loan Banks to set aside 10 percent of annual earnings, or $100 million, whichever is greater, for housing grants. As a wholesale bank, the law requires the money to be disbursed through member financial institutions - usually community banks like Security State Bank.

For banks, AHP sounds like a dream program. A bank teams up with a sponsoring agency - usually a developer, local government unit or non-profit housing group - and submits an application to the Federal Home, Loan Bank. Often, the sponsoring agency fills out the application, leaving the banker little to do other than sign on the bottom line. Federal Home Loan Bank staff reviews the application and selects winners. The odds on being selected are fairly good. At-the Federal Home Loan Bank in Des Moines, for example, 69 applications Were funded in 2000 out of 130 submitted.

The -money is awarded to the bank, generally wired to an account held by the sponsoring agency. The agency is usually grateful to the bank, and the bank might get a little public relations mileage out of the deal through ensuing newspaper articles. The bank does retain a monitoring responsibility after disbursement of the funds to ensure they are used as the application specified. This involves completing a Federal Home Loan Bank form every quarter and, in some cases, occasionally visiting the project site. "The monitoring responsibility is not burdensome, but it is there," Knopick commented.

In the early years of the program, many banks were interested in AHP as a way to earn credit toward Community Reinvestment Act compliance. But that has changed. In the mid 1990s, the emphasis on CRA compliance shifted toward the make-up of a bank's loan portfolio, and away from its relationship with local community groups.

Nonetheless, those who have used the program say it is a great way for a bank to contribute to its community. "It builds a lot of goodwill," Knopick said. "It helps us be a good corporate citizen."

Sometimes a bank can get a little extra business by helping a community group get an AHP grant. At the Community First National Bank in Decorah, Iowa, for example, the bank will provide financing to the Northeast Iowa Community Action Corporation so it can convert a historic woolen mill into a 15-unit apartment complex. Michael Harman, vice president and senior lending officer, said the bank handles the organization's

deposits. The loan business is nice, he said, but the bank offers it at a reduced interest rate because the group is a non-profit organization.

A close-up look

Curt Heidt, vice president and community investment officer for the Federal Home Loan Bank of Des Moines, said bankers generally get involved in AHP in one of two ways. "Either a community group comes to the bank with a project in mind, knowing the application must come from a bank, or the banker is familiar with a community group and suggests it pursue an AHP grant to fund a project they are working on," Heidt said.

In the cases involving Security State Bank and Community First National Bank, the relationships between the bank and the community group were long esablished. Knopick came to know about PAH through his Work on the local United Way Board. Harman said a hank employee serves on Northeast Iowa Community Action Corps board of directors. But in other cases, the community group approaches the bank even if there is no established relationship. In Clinton, Iowa, for example, a group known,as Information, Referral & Assistance Services approached the Clinton National Bank about sponsoring an AHP application to construct a 16-unit" transitional housing complex. Tom Fullerton, president of the bank, said the community group filled out the application, and the bank agreed to be a sponsor.

"The community groups know about is," Heidt said. "It is actually more common for a community group to approach a bank with a project."

The Federal Home Loan Banks regularly conduct seminars where participants are instructed about how to apply for an AHP grant. Heidt said these meetings typically attract a crowd equally made up of bankers and community group people. The meetings generally attract 25 to 100 people, depending on the location. The Federal Home Loan Bank of Des Moines just completed a series of AHP grant seminars presented in Sioux Falls, S.D., Fargo, N.D., Columbia, Mo., and Bloomington, a suburb of Minneapolis. In addition, a video seminar was conducted via the Iowa Communications Network.

Heidt said his staff will do just about anything to help applicants submit strong applications. He noted the bank's web site carries an application, along with the criteria for application scoring.

The scoring mechanism consists of 100 points, awarded according to nine categories. The highest possible score is around 80, Heidt explained.

"An application generally needs to score at least 50 to be awarded a grant," he said.

The two most important categories, according to Heidt, are the degree to which the project serves people with incomes below 50 percent of the area's median income, and the subsidy per unit cost. No points are awarded if the per unit subsidy is more than $15,000; the lower the subsidy, the more points an application receives. The specific number of points depends on the makeup of competing applications.

Rivertown Homes in Mankato made a strong application because all eight of its units were aimed at residents with incomes 50 percent or below the median incomes for the area. In addition, the per unit subsidy is $4,500.

Pre-app helps

Heidt said one of the best ways to assure the compilation of a winning grant application is for the applicant to complete a pre-application. "If applicants submit a pre-application, we can give them hints for completing a better final application," Heidt said. "Once the final application is in, however, we cannot help them."

Heidt said 20 percent to 30 percent of the applicants typically submit a pre-application. The number used to be higher, but Heidt said since the program has been around for 11 years, more people are familiar with the application process.

Knopick said applications frequently are rejected upon their first submission. "It is highly unlikely a project will get approved the first time," he said.

Heidt said that of the 130 applications received last year, 31 came from banks that had never participated in the program before. He said at least a few of those 31 received grants.