Mission-Related Mortgages: How Heron’s Mission-Driven Investments withstood the 2008 Financial Crisis

Thinking On...

In an effort to be as transparent as possible, Heron has been posting the performance of its financial portfolio dating all the way back to 1992. And lately, observant readers have been sending us questions about the way in which Heron’s portfolio performed during the 2008 financial crisis.

How did Heron’s portfolio perform during the 2008 financial crisis?

According to the chart, Heron’s “traditional” portfolio dipped 40% in 2008 (from $245 million to $147 million). But the more mission-oriented part of the portfolio held relatively steady (from $63 million to $60 million).

 

Why did the mission-oriented segment of the portfolio withstand the crisis better than the traditional segment? There are two answers to that.

First and foremost, the mission-oriented segment had a higher allocation to fixed income securities than the traditional segment (which by their very nature are lower-risk investments). So they fared relatively well despite volatility in the markets (as did the fixed income allocation within Heron’s traditional segment).

But there is another, more nuanced, answer as well: Heron combined the wisdom of our community partners with the data and analysis from an investment manager to make a mission-driven decision that paid off financially.

Integrating Our Programs and Investments

Just prior to the financial crisis, Heron had a thematic focus on affordable housing, and we provided funding to many vertically integrated housing developers. Starting in 2006, Heron started hearing from our grantees and PRI recipients that families would come in looking for a mortgage, but wouldn’t be credit worthy. They would be enrolled in credit counseling around how to become mortgage-ready and yet they would return nearly immediately to purchase a home, having gotten a mortgage from a third party. These mortgages had one thing in common: They were never 30-year fixed mortgages.

We started to get concerned that these families were taking on mortgages that they could never really afford — and as philanthropic investors, we knew that an unaffordable mortgage is neither a path out of poverty, nor a safe investment. This was during the early days of integrating our “program” side and investments side, so we took the information we learned through our philanthropic partners and decided to call Barbara VanScoy, who was one of our bond managers at Community Capital Management (CCM) at the time.

We started to get concerned that these families were taking on mortgages that they could never really afford — and as philanthropic investors, we knew that an unaffordable mortgage is neither a path out of poverty, nor a safe investment.

 

Heron’s concerns, which were informed by that community feedback, were echoed by VanScoy. Heron and VanScoy discussed the fact that neither 15-year nor adjustable-rate mortgage products were appropriate for low- and moderate-income borrowers. Instead of investing in those products, CCM custom-created 30-year fixed-rate mortgage-backed securities comprised of loans to low- and moderate-income borrowers for clients like Heron.

As credit standards deteriorated running up to the mortgage crisis, Heron and VanScoy stayed in conversation and further tightened pooling criteria. The screening process was enhanced by minimum FICO scores, maximum loan-to-value ratios (LTVS), and ensuring that borrowers could afford their loans by limiting mortgage amounts to 2.5 times the annual income. Additionally, only owner-occupied loans were selected.

The Payoff of Mission-Driven Investments 

Heron’s decision to reflect and act on the knowledge of philanthropic communities resulted in a convergence of perspective with CCM. And, as a result of the stringent criteria put in place to ensure affordable, responsible mortgage lending to low- and moderate-income families, Heron’s mortgage-backed security (MBS) pools had relatively little exposure to foreclosures and defaults during the mortgage crisis.

Our engagement with VanScoy regarding these mortgages exemplified the pragmatism of incorporating mission into our investments. Heron merged the perspectives from our philanthropic partners and the data from our investment partners to make mission-driven decisions about the mortgage we were willing to own.

Our engagement with Vanscoy regarding these mortgages exemplified the pragmatism of incorporating mission into our investments.

 

Building Better Feedback Loops

For Heron, this was a proud moment — and one that we have been trying to recreate for the past 10 years by building better feedback loops between our investments and our philanthropic partners. We have yet to attain the same level of communication, feedback, and results, but we are constantly working toward similar outcomes.

In the years since 2006, Heron has shifted its approach from affordable housing to a focus on community systems — responding to place-based interests, needs, and initiatives. We hope that our emphasis on place will allow us to form deeper relationships with philanthropic partners and gain insight into the regions in which we work. Equipped with comprehensive place-based knowledge, we hope to make stronger connections between our mission and our investments on an ongoing basis. 

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