Fed's Kroszner: CDFIs Need to Bridge to Mainstream Finance

By Rebecca Christie

Washington, DC -- Federal Reserve Governor Randall Kroszner Monday called for closer ties between mainstream capital markets and Community Development Financial Institutions, or CDFIs. Kroszner said the subprime mortgage market, which has been in turmoil since last August, has much in common with the secondary market for community development loans. He said community investment groups need to learn from current conditions and look for ways to improve their offerings.

"There is a striking parallel with the challenges for the re-emergence of the subprime mortgage market and the adoption of innovations in the community development investments market," Kroszner said, in remarks prepared for the Community Reinvestment Fund's annual forum in Minneapolis.

"To overcome the unease of the current financial markets and attract a new source of capital, new market entrants must make particular efforts to reduce the uncertainty associated with their invest-ment opportunities.

For the CDFI industry, the challenges that need to be addressed are improving information about these products, developing models of risk and pricing, and standardizing these contracts. Address-ing these issues will be critical to jump-start sustainable private CDFI investments as well as to re-vive the subprime mortgage market," Kroszner said.

CDFIs will need to find new sources of funding, since governments and non-profit organizations are facing tight budgets, Kroszner said. He said the Community Reinvestment Fund has played a "pio-neering" role in developing a secondary market for community loans, a market that could become increasingly important.

"The turmoil in the subprime mortgage market, in particular, has affected liquidity of the larger sec-ondary markets. Given the cautious state of financial markets, how can the CDFI industry enhance the attractiveness of CDFI investments to private capital?" Kroszner asked.

"For CDFIs to expand the scope and volume of their financing activities, they need to develop new products and innovations that tap more predictable sources of funding. Accessing the broad depth of the capital markets as a self-sustaining funding source for community development would yield en-hanced benefits, such as more-efficient delivery of capital, greater funding and underwriting disci-pline, and reduced finance costs," he said.

Source: The Main Wire, April 21, 2008 Monday 2:19 PM GMT

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