Union Bank Honors Affordable Housing Finance Commitments Amid Financial Downturn

You head the Union Bank of California's affordable housing portfolio. Is that a good bank assignment in 2008, with the national credit crunch and global stock market fall? Are your challenges greater or less than they were six months ago?

We're not as big as a lot of banks, however, we're in the top 25 in the United States and we have been for years. That top 25 is maybe the top 20 now, because about five of those banks are gone. We're still standing and proud of it. Union Bank has a varied portfolio of properties and our affordable housing and community development portfolio has remained very constant. It's the same now as it was a year ago.

We can't do this interview without recognizing the turmoil in the financial markets. Address how these severe credit and financial challenges are affecting your banking responsibilities and the availability of fundable, credible affordable housing projects.

One of the things I am very proud of is that Union Bank is keeping our commitment to our customers in this time, unlike many lenders. We're not changing the terms of our deals; we're not re-pricing; we're not re-trading. This is consistent with our focus on building relationships, which we've done from the day Union Bank's community development finance group was put together. It underscores our role as a trusted adviser during these times. With that said, we're a bank, and we're inherently conservative. We're appropriately conservative about what is happening right now. We don't know what is going to happen in those first quarters of 2009. We see transactions that are in trouble right now. We're very pleased that they are not our transactions, but the affordable housing market is definitely disturbed.

Which project developers still have your confidence, which do not? What projects have you been able to close?

In this marketplace our relationships are critical. Interestingly enough, I have turned down 12 deals in the last two weeks. I turned them down because I didn't know the principals, I didn't know the companies, or they are companies I haven't worked with in the past. Most of our partners have a long history with the bank, or they are deposit customers. We're working with a very stable group of developers and we, as an institution, are also very stable. We also partner with several other institutions and banks that we consider stable and who we have good working relationships with, because you always need strong counter-parties in these transactions.

Our biggest success right now is that we're making deals happen. We are Main Street now, and we are experiencing a tremendous market disturbance in the affordable housing niche of finance. We just closed seven deals in Southern California within the last month. I just closed one deal today. As I mentioned, we've kept all of our terms, but not all of the counter-parties and institutions out there have been able to do that, for whatever reason. We are seeing deals where the investor has suddenly pulled away or re-priced. We are seeing lenders re-price or pull away as they make changes. We're very proud of the fact that our transactions are moving forward, but we are seeing transactions with other partners not move forward.

We've done up to seven deals that have anywhere from 16 units to 200 units. They have been a combination of acquisitional rehab-they are preservation transactions that without us investing in them would otherwise be lost as affordable. We are also working with developers who are building new construction for families and seniors. We have done a couple of developments that serve special needs populations that have special programming to go along with that, for instance, developments for people who are victims of domestic violence, emancipated foster youth, or transitioning out of homeless shelters. We run the gamut on the projects that have closed.

With the housing and credit markets under stress, is there a likely piece of legislation-or a stimulus package from the federal, state or local levels-on your radar screen? What are you seeing out there in the way of incentives or disincentives for the production and funding of new affordable housing units?

I typically follow what is happening with the State California Debt Limit Allocation Committee, the Tax Credit Allocation Committee, and what's happening out of Washington from HUD. A lot of the programs at the state level are statutory, and the executives of those allocating agencies at the state level are doing everything they can to respond to this financial crisis. But it's difficult to be flexible when you have statutory programs.

We certainly meet in panels with both state and local government representatives to give them feedback and help them figure out how to re-tool their programs. It's hard for them because they have evolved over time and have been historically competitive. For instance, the tax credit program in California last year funded one in five applications. One in five deals that applied were given an allocation and right now 25 percent of those allocations are now being returned. That is a dramatic turn around in less than a year. We just had the federal housing legislation (The Housing and Economic Recovery Act of 2008) pass, which is very important. The Housing Act includes many important provisions that will help finance affordable housing: increased tax credits nationally; changes in rules that will boost how much tax credit equity is given to a transaction; clarifications of median income rules; clean up of the use of HOME funds in a tax credit transaction-all important provisions to increase capital to affordable housing deals. It definitely needs to be implemented and it definitely has a lot of tools that will be useful.

On the local governmental level , what public policies concern and encourage the bank and you?

I am concerned that cities do not have enough funding to deal with the gaps that we're seeing in affordable housing developments. Cities are struggling right now, just like everyone else, because revenues are down.

I'm heartened by the fact that most cities are responding with great flexibility to the crisis. They are trying to meet with stakeholders and are trying to be proactive in anticipating what's happening in the market and their neighborhoods. Real estate development is cyclical. Affordable housing has been less cyclical and can continue to be built in this down cycle.

You worked for Jamboree Housing Corporation, LINC Housing Corporation, Bank of America, and for the cities of Santa Monica and Long Beach. What do you take away from your housing and planning background regarding how affordable housing developers might best get through this credit crisis and real estate recession?

I feel lucky to have sat in many chairs at the table of development. I see a project from many vantage points. I've been involved in projects from the city side from the flash of an idea at an agency, all the way to the management of the units once they've been built. I learned this at the city, I certainly know it as a banker, and I knew it when I was a developer: It's very important that experienced developers work with cities, lenders, and investors. We have a very good production model that's been developed, where the private sector builds the affordable housing.

At the city level I learned how important it is that local government and the private sector learn to work together and be flexible with each other. They sometimes don't understand each other. Because they have different goals, it's very important to try and understand each other's perspective and be flexible. Everybody has a bottom line need. It is usually the city that has the vision for the development, but it needs to bring in development partners. They usually can't do that without the private sector, without investment, without capital. I would say that a city that is a strong partner is flexible, understands the marketplace, and is able to work with conventional lenders and investors so that in the end we build the housing that is critically needed.

Given your experience, are there housing and financing programs you would either like or not like to see enacted or funded? If you were writing a letter to the HUD secretary, what would you advise regarding affordable housing policy?

Everyone knows what is happening. The world, between the financial sector and all the institutions, has been destabilized. In terms of affordable housing and community development, Southern California's real estate market is very shaky right now. The best thing that can happen is to stabilize the housing and financial markets. I am a practitioner and technician, but in terms of housing policies, there are a lot of programs already in place that can be used.

When I worked for a city, we experienced an earthquake that devastated large parts of Southern California. I remember Henry Cisneros showing up to a meeting, rolling up his sleeves and asking, "What do you need?" We said, "We need your HUD and your CDBG money and we need it with waivers." There are already vehicles and mechanisms in place to get money to localities that are already set up. You don't have to set up the systems it takes to funnel the money into localities. You have to make a few tweaks about how that money is used and prioritized. I would really recommend that we use the programs that are already in place, that we get waivers to use those funds. We need dollars at the local level.

Some people might say, given falling home values and escalating foreclosures, that we don't need affordable housing programs. This month's issue of TPR features an interview with Rick Bishop of the Western Riverside Council of Governments ,in which he shares a projection of a potential 300,000 foreclosures in the Inland Empire. Coupled with a drop in housing prices of 40 percent to 50 percent, is mothballing existing affordable housing programs being considered by any of the housing stakeholders?

Comparing ownership foreclosures to needed affordable rental housing is like comparing apples to oranges. Are there jobs in the Inland Empire? We certainly still need affordable housing and we need transit oriented development near affordable housing, for workers, for families, and for special needs populations. We don't need more single-family homes. As you just pointed out, we have an over-abundance of them, and they are in the wrong place. Not near our transportation; not near our jobs. We need higher density, or moderate density, attached units that build communities for people who are of limited income and working people who will never really increase their annual income beyond cost of living raises.

I don't agree that because we have foreclosed properties in the Inland Empire we don't need housing that is affordable. There is still a great need for affordable housing in Southern California and the greater Los Angeles region. Rents are still high. However, even if rents were to drop 30 to 40 percent, by most standards they are still not affordable to working families earning minimum wage. People working above minimum wage in two person households still can't afford rent at 30 to 40 percent less than market rate rents in L.A. We still have a critical need.

In the last 35 days, the average housing price is reportedly dropping-in Sacramento to below $200,000 and in L.A. to below $300,000. Should we adjust existing affordable housing programs?

Programs should be made available to homeowners in trouble. Certainly the re-tooling of the existing programs that I mentioned earlier is a way to get that money in to localities-to hopefully help people to not be foreclosed upon. At IndyMac they were talking about the same kind of loan workouts on the radio today. Banks can do it; cities can do it.

We've been publishing The Planning Report for 25 years. We've experienced a couple of downturns, but nothing like we're seeing now. Help educate our readers. In the next 90 days what does the bank and your unit think the challenges and deal flow will be?

It will be very quiet in the first two quarters of 2009. We're cautious. We rely, and have relied, upon a very good customer base of solid for-profit and non-profit developers. We don't know what financial partners will be there, however. We certainly didn't expect that in the last 90 days we'd lose several counter-parties. Did I know that AIG, Washington Mutual, and Wachovia would suddenly not be on the other side of my deals? What will happen in January? Will more of the same occur? We remain cautious. We want to move slowly and conservatively, and we want to evaluate risk for ourselves as well as for our customers.

In conclusion, what would alter your forward-looking attitude? What signals in government policy or in the marketplace would signal that we've reached the bottom and are starting back up?

I'd be making a lot more money if I could tell you that. Our goals and priorities haven't changed. We are saying the same things to our customers that we said a year ago. We're just more conservative. What will tell us that things are turning around: Rents stabilizing in the outlying L.A. region-where we don't see erosions. The cap rate stabilizing. Lower unemployment numbers. Right now the spreads on loans have gone from 75-150 basis points to 250-300 basis points. That's quite a rise. Capital is still frozen. The California Housing Finance Agency can't issue bonds. If you can't count on the state of California to issue bonds, wow. We will need to see more liquidity in the markets and stable banks and investors.