[Continued from yesterday's Part 1.]

Yesterday’s post opened the topic of payday lending as exploitive microfinance, designed not to maximize the borrower’s well-being but rather to hold that borrower on the razor’s edge of permanent default, as illustrated by this article from the Washington Post:

Meanwhile, big companies are muscling into a sector that has been dominated by independent operators, lured by the promise of a largely untapped $13 billion market. Wal-Mart, the world’s largest retailer, stepped up the competition earlier this year by slashing prices on its most popular financial services, such as check cashing.

Three years ago, I wrote about these ‘industrial loan companies,’ or banks by any other name describing them in favorable terms, although with a caveat:

“That’s caveat, not Cavett, as you know full well”

Pursuit of CRA investment test credit is a principal driver in LIHTC equity investment, leading to very high prices and resulting highly efficient use of government tax expenditures. And however much banks may tout their CRA performance, there’s no question it’s a burden to them, so if banks are competing against non-banks without a CRA obligation, they will be at a competitive disadvantage.

Consider then an entity that:

1. Has an enormous market capitalization.

2. Is active from coast-to-coast.

3. Takes deposits.

4. Makes loans and provides financial services to its depositors.

Is that a bank by any other name?

“O Romeo, that which we call a time-deposit, by any equivalent interest rate would yield as much.”

If it is, should it be subject to the CRA?

Ask Wal-Mart, as shown in this Economist article:

When Wal-Mart rolls into town, small shopkeepers quake. Now that the world’s biggest retailer wants to enter the financial business, America’s bankers are trembling, too. On April 10th the Federal Deposit Insurance Corporation (FDIC), one of America’s bank regulators, held the first day of public hearings on Wal-Mart’s bid to open an industrial loan company (ILC).

Industrial loan companies are a symbiotic species advantage – the ILC symbiotically lives inside the retailer, and provides the retailer’s customers with credit to buy the retailer’s products.  That’s powerful competition, and we’re all for it – if it’s properly regulated (as to capital, transparency, and consumer protection) and provided it bears the same social responsibilities banks do – namely, CRA.

Beyond ILCs, we are seeing a rebirth of American microfinance (a business model that I believe was born in the USA just over a century ago:

Start-ups have emerged to offer lending to niche groups, such as Hispanic immigrants, at dramatically lower rates.

Niche lending is key to establishing a microfinance institution (MFI).  Focusing on the niche gives the lender better touch on the customers, which reduces probability of default.

Even as non-banks are making small American microfinance loans, banks too are finding their way into the space:

Some credit unions offer short-term loans as an alternative to payday lenders. North Side Community Federal Credit Union in Chicago, manager Ed Jacob said, introduced a six-month, $500 loan with 16.5% interest several years ago.

Microfinance, American style, coming to you from the streets of Chicago

Five hundred bucks for six months?  That’s the very definition of a normal microfinance loan worldwide.

Mohammad Yunus would be proud of you, NSCFCU

The credit union has since made 5,000 such loans, and it has become one of the most popular products.

Meanwhile, start-ups such as Progreso Financiero in California are targeting new niches. James Gutierrez founded Progreso in 2005 to make short-term unsecured loans of $250 to $2,500 to Hispanic families lacking credit scores and banking records. The company charges 36% interest, significantly less than other payday lenders charge but still more than double the average consumer credit card interest rate.

While we think of America as exporting financial innovation, here is Gutierrez importing innovation, proven in Mexico and Peru and Brazil, into El Norte. 

With Progreso’s main Web site in Spanish, he probably doesn’t even have to translate the forms.

Financiero has made about 25,000 loans to its customers in California but needs to make 100,000 before it can turn a profit because the loan amounts are so small and the cost of doing business is high, Gutierrez said.

Let’s take him at his word, and return to that ‘usurious’ 36% interest rate.  Convert that into 3% per month, apply it to a $500 loan and a six-month average duration, and you get a princely sum of $90 gross revenue per customer.  Out of that must be paid costs of money, costs of administration, loan loss reserves, cost of collection, cost of marketing and advertising …

Hence the challenge of microfinance, American style.  To make a profit from inception, you have to charge rates that seem very high expressed as a pure percentage.  Then, even if you charge a rate that will take many people aback, you make so little per loan you need 100,000 customers to turn a profit.

To get the rates down, get the customer volume up

Jacob said the credit union doesn’t make any profit from its payday-loan alternatives.

Motivation matters.  If you sell a drug to cure someone of addiction, that is very different from selling a drug to get someone hooked.

Too much payday borrowing

Instead, it hopes to boost members into good financial standing so they can then apply for profitable products such as auto loans.

Moving someone up the bankability pyramid makes the prospect profitable to you because you can lend them a larger sum for a longer interval.  Lending profitability isn’t about interest rate so much as it is about the total ‘loan area’: Amount x Term.

Motivation matters.  So does the lender’s use of profits, since that influences the lender’s orientation on rate compression – something to pursue, or to resist?

Some industry veterans are also moving into the sector. Just this year, Wal-Mart lowered the price of its prepaid debit card to $3 and its fee to cash checks to a maximum of $3.

The more nodes, the lower marginal cost

Finance scales.  Like other network-based businesses, it has a substantial establishment cost of intangible and intellectual infrastructure.  As those costs are shared across an expanding customer base, higher marginal profits ensue, allowing lower fees – which in turn expands the market further.

It also allows shoppers to pay many of their bills in stores. The giant retailer estimates that about 20% of its customers are unbanked.

20% of the people who buy there have no bank

Except on the historical context of microfinance born in the USA, I have yet to post structurally on how retailers are natural entrants into the business of financing.  They have interactions with the unbanked – Wal-Mart’s 20% figure is simply staggering.  They are motivated to extend credit so they can sell more products, and they have a hidden pricing advantage in that the profit component of each object sold is, in effect, marginal first-loss exposure for them.  They develop extensive credit histories on their customers and can use computer analysis to provide credit scoring.  Given these facts, the wonder is not that Wal-Mart is in the banking business, but that more such retailers aren’t.

“Our customers are living paycheck to paycheck and watching every penny,” said Jane Thompson, director of Wal-Mart’s financial services.

Wal-mart may be creating the Model T Bank.

The next global bank?

But perhaps the biggest hurdle the industry faces is improving customers’ financial literacy. Many are afraid of leaving their money in banks, do not have the documentation to open a bank account or have had accounts closed. They also may not understand how loans are structured.

There lies the regulatory and policy challenge – how do you distinguish between Bad and Good microfinanciers, when your prospective customer is unable to do so for himself?

D.C. resident Gregory Warf, 20, said he doesn’t want a bank account. He turns his savings over to people he trusts, like his brother, or hides it.

Familiarity dulls people’s risk sensitivity; we have many examples of unworthy siblings.

Oh, you can trust me, Simba

If he needs to cash a check, he goes to the nearest liquor store, which charges him a fee. And if he needs money – say, $10 to put on his SmarTrip card – he asks a friend.

Not trusting anyone dooms Mr. Warf to high transaction costs and cuts him out of the banking system.

“I’d rather have my money in my possession,” Warf said. “I don’t really trust anybody else.”

Except that those two statements are contradictory over time.

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In business, does motivation matter?  Or are markets sufficiently rational that our apologias are meaningless, and we should be judged exclusively by our actions?  This philosophical question lies submerged under every new lender and loan product, for every action – extending or denying credit, charging too high a rate – can be criticized. 

“In many ways, the job of a WaPo columnist is easy …”

After the fact, we can always criticize:

Lenders who refuse good credit.

Lenders who charge ‘excessive’ or usurious interest.

Lenders who extend ‘teaser’ credit to people who cannot repay.

While bad lenders make bad loans, some bad lenders also make good loans, at least in the sense that the loans are repaid, albeit at ruinous cost to the borrowers.  Who then lends to the unbanked – and what are their motivations for that lending?  This compound question runs through a lengthy profile in the Washington Post showing the perils and surtaxes of being unbanked:

For years, the country’s makeshift network of payday lenders and check cashers has operated with little competition or federal regulation.

If, like me, you’re part of our formal financial system, you need sharp eyes to spot the unbanked.  My downtown 7-11, for instance, in addition to doing a land-office business in Mass Lottery tickets and cigarettes, also sells a stream of money orders, typically at $2 or so apiece.

Check-cashing around the corner and around the world …

… and cheap refills on Grotesque Gulps!

While the marginal profitability of each such transaction cannot be terribly high, it’s a legitimate service – and a much more honorable profession than that of payday lending, about which I posted 2½ years ago in Payday lending: doing well …?

Ev’ry evening you will find him,

Around our neighborhood.

It’s the old dope peddler

Doing well by doing good.

“By do-oo-oo-ing good.”

The lenders’ interest is in the very simple question: can we get our loan repaid? By taking a postdated check, the lender jumps the payment queue, assuring itself Mr. Milford pays his loan first, leaving his Christmas presents for last.

A postdated check is not in and of itself a bad thing, but there is certainly something vampiric in the payday lender’s approach.

But I’m so innocent and small …

In many states, including New Mexico, lenders also make no effort to see if customers have borrowed elsewhere, which is how Mr. Milford could take out so many loans at once. If they repay on time, borrowers pay fees ranging from $15 per $100 borrowed in some states to, in New Mexico, often $20 or more per $100, which translates into an annualized interest rate, for a two-week loan, of 520% or more.

Who takes out a two-week loan? People who have difficulty envisioning the future. People living from paycheck to paycheck. People who lack financial literacy or the habit of saving. Such people are vulnerable:

In September, Congress, responding to complaints that military personnel were the targets of “predatory lenders,” imposed a limit of 36% annual interest on loans to military families.

As I made clear in that post’s second part, Part 2 … by doing good?, I found the whole notion of payday lending barely this side of despicable. 

It’s despic-ic-icable!

For decades we have tolerated the payday lenders, largely unregulated, on the reasonable theory that people are under no compulsion to seek them out.  That is changing now:

But as the financial crisis sparks a new wave of consumer protections, lawmakers and the private sector alike are training their sights on an industry that caters to the most vulnerable of populations: the estimated 40 million households on the margins of the nation’s financial system, with limited, if any, access to banks or credit.

Catastrophe being a precondition to fundamental financial reform, when once the groaning granite blocks of legislative inertia start to move, their grinding weight scrapes all before them.  Regulation advances, turn by turn.

You hope it comes out as sausage!

Congress is debating the creation of a Consumer Financial Protection Agency that would provide federal oversight of the industry for the first time.

If as government you think consumers are being bilked, you can do three things: shine a light on the bilking in hopes of making smarter consumers, cap charges, or ban the business altogether.  Yet lending – providing credit to people who need it – is not illegal per se, and most lending is desirable for everybody, particularly the borrowers.  Thus, throughout Congress’s approach will run two possible structural remedies: (1) greater disclosure/ transparency (as everyone becomes a Bank of Glass), and (2) usury limits.

In addition, several bills have been introduced to cap the often-triple-digit interest rates on payday loans, long considered by many one of the industry’s most abusive practices.

Just the phrase ‘triple-digit interest rates’ sounds usurious.  Framing it that way is easy, because payday lenders generate their revenue not through fees but through interest.  Yet at the same time, those payday lenders normally quote interest not in whirling-odometer percentages but in dollars per period, which brings in the second feature: the small sums advanced.  Introducing our protagonist:

If I could just get rid of these debts

Anthony Jeffers lives in North Carolina, where the unemployment rate is 10.7% –

Only on close reading did I catch that bit of urban-sophisticate snobbery.  North Carolina is a big state, and its unemployment rate varies dramatically between the coastal and rural areas versus (say) Charlotte or the Research Triangle.  But to the Washington Post’s editors, it’s all one big Tobacco Road blur.

Where the smokes are grown …

– and he travels to Washington every other month to hunt for construction work.

We don’t ask why Anthony feels compelled to live in North Carolina, instead of bunking with roommates in Washington. 

The costs are high – he pays for an apartment in both places.

Probably he has a wife/ girlfriend and child/ren.  His circumstances should be relevant to his story

The expenses overwhelmed him last year, so Jeffers turned to a payday lender to get $800 for his rent. When he repaid the loan two weeks later, he owed about $1,100, meaning he paid more than 30% interest, or 975% on an annualized basis.

Even making allowance for risk and processing fees, there’s no question $300 for a two-week loan of $800 is brutally expensive – but one does have to ask, Anthony, what are you doing maintaining two apartments?

It comes in handy, in a Mad Men sort of way

“All you’re thinking of is getting your money to take care of your situation,” said Jeffers, who was standing outside a check casher in the District on a recent afternoon after buying a money order to pay his rent back home. “It just seems like a lot of interest to pay back.”

It is – and Mr. Jeffers should find one of several possible solutions – move to Washington, find a roommate or bunking situation for when he is in Washington, find work in North Carolina (presumably harder), or borrower from family/ friends – but all these things are really easy for me to say.  I’ve spent a lifetime thinking about finance; Mr. Jeffers is just trying to keep body and soul together.

“People are always damaged by these products. . . . This can be the thing that pushes them over the brink,” said Rachel Schneider, innovation director of the nonprofit Center for Financial Services Innovation.

Schneider

“In a recessionary environment, the consequences of using predatory products are more apparent.”

Enter the question of motivation.  Mr. Jeffers and other payday-lending customers find themselves in these pickles because they’re not well capitalized, they’re not financially literate, and they lack the luxury of options.  They are desperate.  Encountering those who are desperate, we who are not have power and that makes our choice of action a moral one: do we help or hurt?

Industry representatives say they provide necessary services for households that have become alienated from traditional financial institutions. Many of their customers have poor credit and may not qualify for basic bank accounts [Meaning loans – Ed.].

Microfinance seeks to help.  Loan sharks and shysters seek to hurt. 

We’re all one big happy predator-prey ecosystem, aren’t we?

Though the number of unbanked is difficult to track, Schneider said anecdotal evidence suggests that their ranks increased as the recession deepened.

One thousand?  One hundred thousand?  Nobody knows. 

How many ice creams does it sell?

[We could probably dimension it by measuring the number of payday lenders; speculating as to how many payday-loan customers each one has; and multiplying out.  – Ed.]

Being unbanked does not necessarily mean falling into the clutches of a payday lender – but I’m sure it correlates.

The center estimates that median household income for the unbanked is $26,390 – about half of the national median – and many have little to no savings.

In other words, the median unbanked customer is Very Low Income as federally defined (50% of Area Median Income, AMI), and eligible for Housing Choice Vouchers – which are unfortunately in short supply.

Three bills in the House and one in the Senate that were submitted this spring seek to curb one of the industry’s most controversial practices: charging triple-digit interest rates for short-term loans to risky customers. The bills would impose caps as low as $15 for every $100 borrowed and, in some cases, require greater transparency of the lending terms.

Transparency absolutely.  Caps are more complex:

The cap’s too tight

The payday-lending industry has opposed capping interest rates, and its trade group, the Community Financial Services Association, is raising $1 million from its members to lobby against the bills. CFSA spokesman Steven Schlein said the group has reserved judgment on the proposed Consumer Financial Protection Agency.

Opposition is not necessarily proof of malevolence:

“It’s all in the details,” he said. “It would be a big change for us.”

Right.  The CFSA’s members’ business model is built around on-the-spot credit decision-making, high interest rates (to cover for default and costs of collection), minimal regulation and minimal paperwork.  Even if we grant them the noblest of motives, to overlay government disclosure and government regulation will drive up their unit costs of originating and servicing a loan.  That will disrupt their business model, and it’s certainly possible that the post-regulation, post-reform “better” loans might be more expensive and less available than the lend-first-collect-later model that the payday lenders now use.

The Financial Service Centers of America, which represents check cashers, said that it supports increasing transparency to customers but that additional federal regulation “is unnecessary and duplicative and will only increase the cost of financial services to consumers without any corresponding benefit.”

The FSCA could well be right.  Check cashing is also a form of credit decision, and if the check is bad, the cashier is out the money with no hope of recovery.  So there are transaction costs, and they can rapidly mount up as a percentage of a $20 or $50 check.  One could so burden the hummingbird that it could never fly.

The trade group for payday lenders said it began requiring members to display their fees on posters in their stores last year.

Good!  Why do I have the feeling the members are doing this only because they are running scared?

Industry advocates argue that innovation – not legislation – is the key to reform.

Why not both?

You may need both

Might the innovative response to payday lending be the emergence of 21st century American microfinance?

[Continued tomorrow in Part 2.]

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We just want to help you, here in the employment zone

As the world globalizes information – which also implies globalizing capital – we observe a mobility of labor unprecedented in global history.  With that labor mobility comes the ebb and flow of people and money – people moving to cities to earn money, then sending that money ‘back home’ (wherever that may be), via capital’s underground river of remittances.  Although remittances are unquestionably a good thing, and among the largest forces driving slum upgrading in the global south, for every bright new invention there is a dark side.  One dark side that I’ve already profiled is human smuggling and extorted remittances.  Another is demonstrated by this Jenara Nerenberg article/ post from The Next Billion:

To serve Nepalis?  Nepalis returning to Qatar

In Development and Base of the Pyramid (BOP) circles, we often discuss remittance economies and innovative ways to send remittances home; what we don’t always think or talk about is what forces people to leave their home countries in the first place and what they experience when they go abroad.

To someone from a rural area, the job might as well be on the far side of the Moon – a completely alien, hostile environment, and one embarks on the journey in a state of excitement, hope, and trust.

Off to a great new adventure, honey!

The lure of earning money abroad is among the most powerful of vaporwares. 

Handbook of a multi-planetary conglomerate?

From Irish migrating in droves to Boston in the 1850s (buying one-way sailing ship tickets and expecting they would be able to keep pigs and chickens in their back yards) to Chinese peasants coming to California in the 1870s, people focus on the top line – how much they can earn – not the bottom line, how much they keep after their new expenses. 

1869: sixteen miles of track laid in one day in a frantic race across America’s West

Today’s gold rushes and property rushes are in China’s cities and in the Persian Gulf oil kingdoms, and they draw labor from all around:

In the case of Nepal, as I’ve written about before, migrant laborers most often travel to the Middle East and Southeast Asia –

A comfortable bunk in a strange place

Yet the individual, removed from his habitat, is vulnerable, and the shift in power relationships leads to a natural potential for exploitation:

– often having their passports taken away from them upon arrival and not getting paid for months at a time.

We’re just looking out for your long-term interest

So would systems that facilitate sending remittances home actually encourage and facilitate such an unjust ecosystem?

Technology is amoral – it facilitates outcomes without regard to whether they are moral or immoral.  That’s as true for financial technology as for physical.  It’s not the remittances’ job to stop worker exploitation; rather, it’s the workers’ job, or the job of governments, either Nepal’s or Qatar’s.

But what if the government – either or both governments – finds it convenient to look the other way?

It’s a public-private partnership

I took the opportunity to interview one such laborer, Aslam, who spent 18 months in Doha, Qatar.

[A video of the interview is available here, on YouTube – Ed.]

In Kathmandu, he is a widely respected mason, but in Doha he simply broke stone and his skills were not put to full use.

Not the stuff of romance, is it?  Modern-day Kathmandu

That Aslam did not immediately leap into a professional discipline is a consequence of moving from a lower-skilled to higher-skilled labor market.  Ask any New York cabbie about the challenges of re-establishing yourself in a new land. 

Aslam wanted to see the world; while abroad he went to the ocean for the first time and flew on an airplane for the first time.

Travel brings experience, and Aslam sounds young.

Jenara Nerenberg, NextBillion.net: Why did you go to Qatar?

Aslam, Nepali mason: I went to Qatar to find work. I wanted to make extra money from work so I could eat happily.

There, in a nutshell, is the lure of urbanization.  Cities are wealth generators, beacons of economic promise.

Jobs, knowledge, and freedom, all in the Emerald City

They are also famous, even notorious, for bustle and stress.

JN: What did you experience there?

Aslam: Work is a lot harder there than here. It’s a lot hotter over there. It’s twice as hot there. They don’t care how bad the weather is there; they just want you to work. If you don’t go to work, they cut your pay.

Pulled out of their normal situation, people lack choice, which saps their power, and they are vulnerable to exploitation. 

Chinese coolies cutting railroads in the Sierra Nevada snows

JN: How did they treat you?

Aslam: Some of the managers are nice, but others are very untrustworthy.  Some people don’t have a lot of kindness. They tell you, “You came from Nepal to work. Whether you live or die, it’s all the same. You came here to work. If you work, we give you money. If you don’t work, we don’t give you any money.” They don’t let you take any time off from work either.

As with any work environment where men are congregate, you are there to work, as fast as possible.  As in any human environment, people given power wield it differently based on their character.  We have labor laws because it takes government to protect those who whose economic weakness makes them vulnerable.

Aslam: I even filed a case against the company. I even went to the Nepali embassy. After two or three days, I got into an argument with the Embassy. I asked them, “Why do you even have an Embassy here? Go back to Nepal. You’re just here to spend the government’s money. You’re not doing anything while so many Nepalis are in trouble. While there are so many Nepalis suffering, you’re just sitting in a comfortable chair and eating good food.”

I got into a labor dispute and I even took them to court.

When you are a contract worker concentrating on remittances, every game is an away game, and when playing on the other team’s home field, the deck is always stacked against you.

Why am I worried about the referees?

“They don’t care what Nepalis have to say. They call Nepali people “jungly.” That’s how much unhappiness there is for Nepali people abroad.”

But in the end, the money he earned in Doha only paid off the loans he had to borrow in order to go to Doha in the first place, essentially breaking even and not profiting.

To travel a vast distance, to the dark side of the moon and beyond, is to put yourself at the presumptive mercy of people who, for all they look like you, think in ways so strange and distant they might be as aliens.

What strange world will they find when they land, with such people in it?

Aliens who may see you only as fodder:

“I finally translated the rest.  It’s a cookbook!”

JN: Are you happy with the amount of money you earned while there?

Aslam: How can you be happy bringing back money that made you so unhappy?  I earned about 150,000 rupees.  I used that to pay back my loans.

If not devoured for their meat, remittance workers can be devoured for their finances.  Over and over again throughout history, we find the ‘company town’ springing up to work the mines, or lay the railroad track, or drill the pipes – and once the laborer is separated from his culture and his support network, he’s easy to exploit.  As Tennessee Ernie Ford sang it:

Load sixteen tons and what do you get?

Another day older and deeper in debt

Saint Peter don’t call me ’cause I can’t go

I sold my soul at the company store

JN: Would you tell others to go abroad or stay in Nepal?

Aslam: I got some phone calls asking me if I wanted to go to Dubai. But I told them, I’m going to stay in Nepal and work. For people who want to go, they will spend at least 140,000 rupees. You might as well spend that much money here.

You mean I won’t get rich and be happy?

JN: What do you want to tell other Nepalis who are thinking about going abroad to work?

Aslam: If someone wants to go, it’s obviously their choice. Once people don’t find work in Nepal, they will go. They think that going abroad will earn them more money. I will tell them, “Don’t go.” Try to work in Nepal and if you can’t find work, then take care of your home.

Concludes the Next Billion author:

So when we in BoP circles think about remittances, let’s also think about what forces people to leave their homes in the first place and what they endure and sacrifice in order to send those remittances home. We need to create jobs at home- that is certain. But when those are not available, is it a better option for people at the base of the pyramid to travel abroad where they make the same or even less money, are separated from their families, and are treated like second class citizens?  

As phrased, the answer is No – it is not better to make less money sundered from your culture.  That’s why so many remittance workers live in ethnic communities in their work-country, and why smarter worker-host countries require worker and human-rights protections for anyone legally working in the country.

As Rod Serling put it in voiceover:

The recollections of one Michael Chambers, with appropriate flashbacks and soliloquy. Or more simply stated, the evolution of man, the cycle of going from dust to dessert, the metamorphosis from being the ruler of a planet to an ingredient in someone’s soup. It’s tonight’s bill of fare from the Twilight Zone.

I want to be with my friends!

JN: Are you happy to be home in Nepal?

Aslam: Yes, I am happy to be back in my own country.  Once you come back to your country, you’re happier whether you have money or not.

Concludes the author:

In the case of Nepal, I think we are better off creating jobs at home. 

That’s the conundrum, isn’t it?  Without jobs, some towns die, and when they do, the workers must migrate, to heaven or to the dark side of the Moon.

Any life in the vacuum?

[Hat tip: Yousuf Marvi.]

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We seek out new posts and new inspiration

1.1 Atlantic Yards Report

Ever since I first encountered the Atlantic Yard report blog, I’ve considered it essential reading for understanding Atlantic yards, an enormous and seemingly endless current eminent-domain-like redevelopment in Brooklyn.

Single-handedly putting the New York media to shame:

Norman Oder

Single-handedly researched, written, and posted by the indefatigable and Pulitzer-prize-deserving Norman Oder, it is a sole-source reference, using the Web to publish documents obtained via Freedom of Information Act requests, chronicling public hearings, and mercilessly comparing what officials said once with what they say now.

Putting elected officials on the record:

One of the hundreds of documents posted by Norman Oder

I’ve been agog at two things:

* The extraordinary diligence that Mr. Oder has poured into his blog, even quoting people like me.

* The significance of Atlantic Yards on discussions (for or against) of eminent domain for economic development (ED4ED), which often bears on affordable housing.

Over and over, Mr. Oder had exploded public pronouncements with evidence, leaving the developer’s credibility (and that of many of its supporters, such as ACORN) in tatters.

Nonsense, everything’s fine

Most recently, his quest for transparency and truth has led him, to discover that leak-tolerant architect Frank Gehry’s original design was impossible, and that, as shown in the following excerpt, virtually nothing about Atlantic Yards will be what it was sold as:

This got the approval; who knows what will be built?

What we learned

But we did learn some important things:

* The Independent Budget Office (IBO), recalculating its 2005 cost-benefit analysis, concluded the arena would be a money-loser.

* The Metropolitan Transportation Authority (MTA) is willing to compromise with Forest City Ratner on the timetable (and perhaps the total) for the $100 million owed, as well as the quality of the new Vanderbilt Yard.

* Neither the state nor the city have updated their analysis of new revenue–already deeply flawed, because it excludes costs–to acknowledge current conditions

* The New York City Housing Development Corporation is waiting for Forest City Ratner and ACORN (which is in hock to the developer) renegotiate the configuration of the affordable housing.

* The Empire State Development Corporation (ESDC) likely will produce a revision of the Modified General Project Plan (GPP) in the next month or two, which will trigger a new public hearing.

There are many known unknowns, and we don’t know when we won’t know them

What we didn’t learn

Some other important things we didn’t learn:

* How long the project might take

* When construction might begin

* When affordable housing might begin

* Whether there are enough bonds for affordable housing

* How the per-unit cost of affordable housing compares to other projects

* Whether architect Frank Gehry is on the project

* Whether officials realized FCR decided to seek more subsidies well before the economic downturn.

* Why the ESDC lets private companies benefit from naming rights to public buildings.

Though I generally support eminent domain for economic development, Mr. Oder’s investigative reporting – all of it, I might add, from public-domain sources and out of his own pocket – reveals a seamy side to glitzy projections and hollow promises. Long may he prosper.

1.2 India Development Blog

Because we are doing some modest work in India – Slum Dwellers International in Mumbai, and SEWA Bank in Ahmedabad, almost anything to do with Indian affordable housing is interesting to us, and because India is the world’s fastest-growing democracy, and quite probably its fastest growing middle class, anything to do with Indian affordable housing is important for the wider world. Over at the India development blog [Hat tip: Yousuf Marvi], we came across this post is the next challenge scale or flexibility?

Indian MFIs typically offer very general and standardized products.  The 1st loan is often in the range of Rs 6,000-10,000 (USD $120-200), and is paid back weekly over one year.  The 2nd loan is typically about Rs 12,000 (USD $240) and the 3rd loan is about Rs 15,000 (USD $300), and repayment is done the same way with both of these cycles as was done with the 1st loan.

Microfinance remains among the last quarter-century’s greatest financial innovations, yet its very success has led to a tyranny of sameness. The more financial products, the more robust the financial ecosystem, and the greater the consumer choice.

One size does not fit all.

You might want to rethink that …

Even the most successful entrepreneurs would fall under this rigid structure, and would only be able to receive about Rs. 15,000 (USD $300) in their 3rd year of successful repayment.  If they need more capital, they will need to go to a moneylender or another MFI, regardless of their track record.

I think MFIs in India should better tailor their microcredit products to their clients.  Some clients need larger loan amounts, a monthly infusion of cash, or daily loans (e.g., auto-drivers that rent their autos at a daily rate).

Just as birds can fly only if they are smaller than a certain size, classical microfinance has upper-bound limitations.

Nothing bigger can fly: the Andean condor

When the scale reaches above a particular size, new engineering is involved.

For that load, you need new technology: the gossamer condor

In our view, microfinance will never scale to housing; instead we must introduce new products, such as what we at AHI are calling Home Asset Finance.

It could be difficult to train loan officers on how these different loan products work, and which type of client may benefit from these differentiated products, but it’s crucial that Indian microcredit becomes more flexible.  In my mind, more flexibility would benefit clients more than the growth in scale of the microcredit available today.

Yes, and we’re working on it.

Seeking the elements of a new form of housing finance

1.3 Bldg blog

On a lighter note, we [Hat tip: Janaki Blum] found the Bldg blog, which presented a great post on urban X-rays:

See the blog post’s structure?

At one point Beard refers to the “theaters and porticoes” built in ancient Rome using wealth taken during Pompey’s “eastern campaigns” in Armenia and elsewhere. However, she writes:

The term “theaters and porticoes” hardly does justice to this vast building complex, which stretched from the present day Piazza Campo del Fiori to the Largo Argentina, covering an area of some 45,000 square meters. A daring – and, for Rome, unprecedented – combination of temple, pleasure park, theater, and museum, it wrote Pompey’s name permanently into the Roman cityscape. Even now, though no trace remains visible on the ground, its buried foundations (and particularly the distinct curve of the theater) determine the street plan and housing patterns of the city above; it remains a ghostly template which accounts for the surprising twists and turns of today’s back-streets, alleyways, and mansions.

The not entirely surprising realization that the present-day street grid of Rome is actually an articulation of other, previously buried cities – cities not lost to history, then, but accessible in outline through the indirect archaeology of contemporary urban planning – reminds me of something that came up back at Postopolis! LA.

[Image: Fallen Fruit's map of the lost orchards of Silver Lake].

During their presentation, the ingenious duo Fallen Fruit mentioned that, when they were mapping fruit trees in today’s Los Angeles, they stumbled upon the borders of much older, abandoned fruit orchards. In other words, what appeared simply to be a random fig tree growing in someone’s front yard was, when seen on a map together with other such trees, actually the remnant presence of a now-forgotten farm. Those trees, to use Beard’s term, are the “ghostly template” from an earlier phase of land use.

As I’ve written elsewhere, streets and other lines of transportation are a city’s nervous system, so even today main tunnels come into New York at the Battery, because that is where the trains started, because that is where the ferries docked.

A tunnel to connect to railroad lines that have since vanished …

There is a different grid inside the grid, you might say – where each tree becomes something like a legal document, marking the outer boundaries of a lost landholding.

I love this evocation of the past still around us, forgotten. The front yard of our old house on Avon Hill Street, had two bearing pear trees, one a Bosc, the other a seckel. Every fall, Nancy used to gather both kinds, which made good eating.

Who planted the tree whose fruit I ate?

After we bought the house, I learned that our neighborhood had indeed been an orchard, and I allowed myself romantically to think that these trees were in fact survivors of that bygone age.

Perhaps I wasn’t being so romantic after all.

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Yesterday’s post on my experience teaching a brand-new course, Mortgages for the Poor; An Overview of Products and Supporting Infrastructure at the world-famous Boulder Microfinance Training Program (MFT), brought us to the point of wanting to follow the customer. 

Whoever gets the customer first, wins!

The MFI customer needs and wants a housing-finance product, because traditional microfinance can’t lend enough money to buy large fixed assets (new homes, a one-room addition, installation of in-home toilet), and if you’re going to lend for long intervals (3-5 years may not seem like much to us, but it’s 6-10 times as long as the typical microfinance loan).  Banks won’t enter the space, I said, because it’s too small and they’re afraid of it, so if housing finance is to come to informal housing, it’s going to be you MFIs as the change-agent MEEs.  As I’ve put it before:

Though drawn into the space by a sense of mission, they are enterprises and subject to the normal business imperatives:

It’s got a mission, but it’s also a bank: SEWA in Ahmedabad, Gujarat, India

* They need initial capital to set up the business. 

* They generate revenue to sustain their operating costs (or reduce their costs to match their revenue).

* They make ongoing capital investments whose payback is long-term — either hard costs like land sites or pilot schemes, or soft costs like political advocacy and the catchall phrase ‘capacity-building’. 

* They hire and retire staff; manage and account for their capital; secure resources via negotiation; protect themselves against malfeasance and waste by their executives; handle organizational turnover; and manage organic growth and evolution as their business ages. 

In short, NGOs need business models.

All these problems are compounded because the entities tend to be short of classical business expertise and experience, despite their entrepreneurial approach to their missions.  Nor does the technical assistance that reaches them emphasize entrepreneurship. 

You have to bring the expertise to the customers, and you have to adapt what you know to what they need.  Portability and flexibility are important.

With that as a preamble, I put the class through a role-playing exercise called Let’s make a loan –

When you lend on housing, you’d better know what’s behind Door Number 3!

– a role-playing game using this extremely cheesy graphic showing the roles in a home-purchase value chain:

I’d printed up name tents for each of the major roles I wanted played:

Home seller

Home buyer

Loan originator

Appraiser

Underwriter

“Funding desk”

Securitizer

Security holder

One by one, we introduced our dramatis personae, and I took volunteers from the group.  It wasn’t hard; give people who know something a chance to ham it up, and you’ll be amazed at the results.  Sure enough, the Brazilian district attorney volunteered to be the home doctor; Muaffaq the Palestinian community organizer was ready to be the buyer, and Hemantha the Indian microbanker (from Hand-in-Hand) was happy to be the loan originator. 

Originating loans in Tamil Nadu and India

As we introduced each one, we asked:

What does he or she want from the transaction?

How does he or she get paid?

What are his or her incentives?

When it came to the question of appraising the house, we got into a lengthy discussion about whether we needed an appraiser.  “Why not just have the estate agent do it?”  [Estate agent is Brit-speak for broker – Ed..]  So we drafted Marianne of DIG to be the estate agent, and then deconstructed her qualifications and motivations (when it comes to a realtor, who really works for whom?).

I’ll give you a hint: I get paid only if it sells

Meanwhile, we’d already established that Hemantha the originator wouldn’t be on salary, so during the break I asked him sotto voce to interrupt me every few minutes with “I want my commission!” 

Adding people to the role-play reversed the normal teacher-class dynamics; instead we brought out the people who knew quite a bit about the subject and could contribute it.  Maria-Teresa from Habitat had plenty of experience in Peru’s Credito MiVivienda and Techo Propio programs, which she put to good use in her role as underwriter.  Anwer and Muhammad, loan originators from Pakistan’s Tameer Bank, told how they mitigate risk both before and after the loan, by counseling borrowers on their home improvement plans, and by assigning a relationship manager who calls each borrower a few days before the monthly payment’s due date.

Making loans that people can pay back

As often happens, the roles took possession of the players.  When it came time to foreclose on our homeowner Muaffaq, I tugged at the table representing his house but he maintained a firm grip on it.  Looking impishly at me, he asked, “What if I don’t want to leave?”

“I’ll get the bailiffs and they’ll remove you and your goods.”

“They’re friends of my brother’s.  Why don’t you pay me three hundred to go?”

I turned to the class.  “Is that immoral?”  Lively discussion ensued.  As it was raging, I asked, “is it illegal?”  No.  “Well, is it bad business?”  Another lively discussion: several participants pointed out that the minute we pay off one delinquent homeowner, everybody else will expect the same payments to vacate – so there’s a value to consistency.

Day 3 brought us the case studies, and to illustrate how programs evolve, I took three successive experiments in one country (Peru):

MiVivienda

Techo Propio

Mibanco

(A useful comparison, commissioned by Cities Alliance, is available here in pdf.)

I finished with my personal favorite, which isn’t even a housing loan product per se: Patrimonio Hoy run by Mexico’s largest cement company, Cemex.

For each case, the class worked through the essential questions to ask about any MEE’s` financial product:

Who’s their target customer?

What’s their core product?

What’s their business model?

Questions to ask about any MEE: Part 1

What’s their value proposition?

What’s their core competency?

What’s their comparative advantage?

Questions to ask about any MEE: Part 2

Which led me, as my class was flagging – it was Saturday morning, after all, and they’d had a solid week of these topics and more – to present this definition of a housing finance company:

A functional description of a housing finance company

“If you want to be in the housing finance business,” I said, “you can test market a product.  You can limit your risk by piloting it.”

And if it doesn’t work, you try something else

“You can offer it only to repeat customers, or your best customers, or customers who live in particular neighborhoods.  You can cut the rates after six months’ of good payment history.”

Somewhere in this sermon skeptical Samantha, who’d asked why do it, piped up with, “it’s just tweaking what we do now.”

That, it seemed to me, was a fine place to finish the class.

“My work here is done.”

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