Revolving Loan Fund for Affordable Housing

The Basic Idea:

Develop a pool of loan resources used to finance construction of affordable housing units and their purchase. As owners repay the loans, the payments revolve back into the fund to support additional housing development.

How it works—The Essentials:

• A Community Development Financial Institution (CDFI) or other lead organization assembles a pool of capital from government and private grants and loans.
• The capital is used to develop affordable homes—with development by the lead organization or a nonprofit housing developer working as a partner.
• Families are recruited, screened and qualified for a loan, then usually required to participate in a home ownership education program.
• Families are sold the home with an attractive, affordable financing package, usually involving a low-interest loan.
• The lead organization services the loans, collects payments, and uses the resulting income stream to finance additional units and/or pay off investors in the loan pool.
• If a buyer defaults, the lead agency repossesses the property and resells it either to another low-income buyer or as market-rate housing to recapture as much of the value as possible and return it to the loan fund.

Who Does It:

• Primarily a CDFI
• Creative Community Action Program (CAP) agencies

Pros:

• It creates a permanent resource for affordable housing development.
• Federal and state housing development programs provide a steady, if competitive, source of new capital.
• Banks may invest to help meet their CRA requirement.
• It can be operated on a fairly large scale if sufficient resources are secured.

Cons:

• Because payments arrive over an extended period, it requires constant infusions of new capital to maintain volume.
• If a loan goes bad, the lead organization has the headache of foreclosure and collection, and loses part of its income stream to support new units.
• It requires substantial expertise in housing development and lending.
• The neighbors may not like it.

Simplicity Index:

A Tough Nut to Crack. Not for the faint-of-heart but offers substantial benefits and is sometimes the only way to get affordable or workforce housing in a community.

Examples and Resources:

Vermont Community Loan Fund operates an affordable housing revolving loan fund.

West CAP is one of the more impressive community action agencies that also serves as a rural housing developer.

Housing Assistance Council (HAC) is a trade group which promotes affordable housing revolving loan funds, and other strategies for developing affordable housing in rural America.