RON HOMER
CRA vehicle for banks
The Massachusetts state pension fund, which has $32.2 billion invested around the world, voted to reach out to low- and moderate-income residents of Massachusetts with its next $25 million investment in the 7-year-old $300 million Access Capital Strategies Community Investment Fund, which invests in mortgage securities in 220 Massachusetts cities and towns.
ACS is the oldest community economic development fund in the United States. More than 100 institutional investors from 38 states have assets invested in the fund, which is managed by Access Capital Strategies of Cambridge.
The investment is part of a new push, led by state Treasurer Timothy Cahill, who chairs the board, to invest up to 2 percent of the pension fund’s assets in housing and business development projects that are likely to produce economic and social benefits in Massachusetts.
“We looked at economically targeted investments and Access Capital brought the best proposal … it meets a need that is absolutely essential in Massachusetts and that is providing access to more affordable housing,” said Cahill. “And there’s very little risk involved.”
The ACS fund was established in June 1998 as a mutual fund investment in affordable housing and economic development in geographically targeted areas. The mutual fund invests in mortgage- and asset-backed securities with AAA-rate credit quality and government agency bonds that support low- to moderate-income individuals or communities.
According to David Sand, president and chief executive officer of ACS, “most of what we do is related to housing and affordable homeownership.”
Sand said the fund invests in affordable rental housing where ACS purchases the mortgage on a multi-family housing project.
“We take the geographic region that they [investors] give and invest in securities for that region,” said Sand. “It’s a regular mutual fund with investments in 38 states and over 100 banks and 10 non-bank investors. Massachusetts is our largest market.”
And Massachusetts is also the first state to invest in the fund.
Stanley Mavromates, deputy chief investment officer and senior investment officer for public markets at the state’s Pension Reserves Investment Management Board, said the PRIM board reviewed a consulting study that identified five criteria for investments, and ACS was the only fund that passed those investment criteria.
“There was a study done on state pension plans around the country on what has and has not worked … they came up with five criteria and ACS passed the five criteria rules and we decided to invest,” said Mavromates. “The hallmark of the study was the idea of double bottom-line investing, in which we receive appropriate returns without undue risk while at the same time benefiting the citizens of the commonwealth. Basically, we can invest in our own state and get a reasonable rate of return while helping our own state. ACS targets a geographic region, and in this case it’s the entire state of Massachusetts.”
‘A Good Investment’
The five criteria adopted under policies by the Pension Reserves Investment Management Board, which is statutorily required to earn 8.25 percent annually on its economically targeted investments, stipulate that: investments must target risk-adjusted, market-rate returns and provide net returns equal to or higher than other available investments at similar levels of risk; investments must not exceed a reasonable weighting in the portfolio, measured in part by the degree of exposure to the state’s economy and appropriate geographical diversification; investments must be placed with an experienced, capable manager; investments must target a “capital gap,” or underserved markets; and performance and benefits of investments must be tracked with the same rigor and discipline as other fund investments.
“ACS tells banks there is more capital to invest in communities, they [ACS] gather the demographics of the region, and we’ll report to the [pension] board the demographics of the ACS investments, and that was very attractive to us,” said Mavromates.
According to Mavromates, other states are interested in investing in the fund, and in return those states would have a larger amount invested back to their communities. However, he said, “we [Massachusetts] are the first state pension plan to invest in the fund.”
The pension fund posted a 26 percent return last year. Cahill said the Access Capital fund has posted a five-year return of 6.8 percent, which is comparable to other conservative fixed-income investments, and Cahill said the $25 million investment, while a relatively small commitment, could increase over time.
“$25 million is not a huge investment, but we want to be more diversified. The fund is only $300 million,” said Cahill. “Access Capital is working with other state pension funds [as prospective investors], so as the fund grows we may increase our investment if the returns are there. However, we are going to be consistent in our investments. I expect that not only will we make our full commitment, but we will increase it down the road. It’s not a huge amount of money, certainly not compared to the size of our fund, but we’re not giving anything up by making this investment.”
Regardless of the dollar amount invested, Sand said ACS has a strong reputation and a diverse portfolio for helping underserved communities.
“Whenever any investor commits, we [ACS] find the investments and get them targeted into the right geographic region,” said Sand. “As of Jan. 31, we were in 209 Massachusetts cities and towns creating low- and moderate-income housing projects. Some are $50 million projects and some are $5,000 projects. We are trying to be a source of stable income for underserved communities. Occasionally we will sell a property, but if we get new money generated in the fund we put it back to work in the targeted communities.”
Ron Homer, chief executive officer of ACS, said working with Fannie Mae and other government agencies helps provide better opportunities for investment in low- and moderate-income communities while at the same time the fund fulfills Community Reinvestment Act requirements for banks.
“The primary benefit of the fund is to help facilitate loans to low- to moderate-income homebuyers … we target homeownership and that is important because it’s a principle way for low-income families to provide for their family and anything that lowers that barrier for homeownership is positive. That is our goal,” said Homer. “Our fund helps banks meet CRA requirements and the regulators have endorsed the product, and we work with lenders and Fannie Mae to improve access to loans and homeownership.”
Access Capital officers said they could work with developers operating under the state’s so-called anti-snob zoning law, Chapter 40B, to help families realize the dream of homeownership. Access Capital has $70 million presently invested in 209 Massachusetts cities and towns, largely through banks seeking to meet their obligations under the Community Reinvestment Act.
“Principally, what we provide is the ability of lenders to have a secondary market for their loans. Every loan in our portfolio is CRA-qualified and we have 110 banks invested in the fund and the majority have received CRA credit,” said Homer. “The board [invested in] us because we have returns that are as good as the returns they would receive from mortgage-backed securities from anyone, and we help with the CRA guarantee. It’s great for the Massachusetts pension fund to target their money towards Massachusetts, especially given the housing costs in the state.”
While the process and criteria can seem complicated to some investors, Sand said he interprets the fund simply as “better for the community.”
“We try to keep it simple – most of our investors have been regulated financial institutions but we do have high hopes for more [diverse] investors,” said Sand.
Cahill said the board will evaluate the fund’s performance on a quarterly basis and review the social impact on an annual basis.
According to Mavromates, “I think it’s an important project and anytime that you can get reasonable investment returns and help your state economy, it’s a good investment.”
