SOUTHERN MUTUAL HELP ASSOCIATION, INC.:
SOUTHERN LOUISIANA RURAL HOME LOAN PARTNERSHIP
IN IBERIA, ST. LANDRY, ST. MARTIN, ST. MARY, AND
VERMILION PARISHES, LOUISIANA

From a quaint and historic planter's home on the outskirts of New Iberia, Louisiana, Southern Mutual Help Association, Inc. (SMHA) directs its now 30-year-old campaign to improve social and economic conditions of low-wealth families in lower Louisiana. Formed in 1969, SMHA focuses on distressed rural communities in this region whose livelihood is interdependent with land and water. The organization works primarily with pervasively poor agricultural communities, women and people of color. SMHA is nationally known for employing asset-building strategies to build wealth in extremely poor isolated communities of Southern Louisiana.²⁰

As a multi-faceted organization, SMHA has developed programs for rural homeownership, self-help development, and quality of life among indigenous farmworkers and fishers. In its early years, SMHA was instrumental in advocating for the rights and well-being of local sugar cane workers. They organized one of Southern Louisiana's first self-help housing programs and has developed numerous housing preservation and homeownership initiatives since then. SMHA have also been active in local environmental and sustainable agricultural ventures. The organization's most recent efforts have concentrated on helping displaced sugarcane workers and fishers find economic alternatives and obtain better housing. In 1997, SMHA created a wholly owned housing subsidiary, Southern Mutual Housing Development Cooperation (SMHDC). The subsidiary has over $2 million available to it through investments made by socially responsible entities. SMHA is a licensed contractor in the state of Louisiana and serves as the general contractor on all of its own development projects. In 1998, the Fannie Mae Foundation named SMHA on of only ten national Sustained Excellence Award winners for a decade of continued excellence in housing.

One of SMHA's most monumental ventures is its pioneering role in the Rural Home Loan Partnership (RHLP). The RHLP is a nationwide multi-million dollar initiative for revitalizing rural America. SMHA was one of only nine community development groups selected to be a pilot participant in the now nationwide programs. The RHLP creates leveraging opportunities between local nonprofit organizations, local lenders, and the United States Department of Agriculture's Rural Housing Service, the Federal Home Loan Bank and other partners. Southern Mutual has utilized the program's flexible and leveraging resources to provide affordable homeownership options for low-wealth families in the Delta.

The case study demonstrates how effective collaboration between a range of partners can impact housing production at the local level.

Overview of the Region

In the southernmost portion of the Delta, the mighty Mississippi River runs into the Gulf of Mexico depositing much of its contents along the rich alluvial plains and swamps of the Louisiana bayou. Southern Louisiana has distinct economies, cultures, and even languages, which set it apart from much of mainstream America. In some ways it appears to be a place frozen in time. Antebellum mansions are set amidst endless acres of sugar canes, surrounded by massive trees embellished with hanging Spanish moss. Hamlets of dilapidated shotgun shacks, although more secluded, are equally common. Both are legacies of a fading agriculture economy and the race-based system which drove it. However, change and modernization have also come to this area. Strip malls, new ranch homes, and other trappings of middle class life are increasingly emerging. Yet lower Louisiana, much like the rest of the Delta, endures a systemic and long-term economic depression which stifles the quality of life for many of its inhabitants.

Flanked by the gulf of Mexico to the South and the Mississippi River tho the East, and encircled by swamps, South Central Louisiana has traditionally been a place connected to land and water. Agriculture and fishing are two of the area's primary industries. Yet both have undergone drastic changes in recent years which have had profound impacts on the local economy. The most significant of these was the rapid mechanization of the sugar cane industry. During the 1970s and 1980s thousands of farmworkers and their families were displaced. More recently, actions by the Louisiana state legislature have dramatically impacted the local fishing industry. A 1995 law which restricted commercial fishing displaced over 17,000 local fisher families practically overnight.

These recent transitions have only exacerbated the poor economic conditions of the area. In the five South Central Louisiana parishes served by SMHA, the average poverty rate is over three times the National average at 26.9 percent.²¹  A legacy of racism and economic control by large landholders is inextricably linked to the area's social and economic predicament. Over half (52 percent) of African Americans in these same five parishes live in poverty. The Parishes' unemployment rate is twice the national average and 43 percent of the local population does not have a high school diploma.

In addition to poor social and economic conditions, decent, affordable housing also continues to be a problem. The rate of substandard housing in these five parishes is nearly twice the national average.²²  Much of the housing stock occupied by low-income families is old and deteriorating. Some homes and even entire communities are remnants of old plantation-owned housing. Several factors indigenous to the region exacerbate these housing problems. One in particular is land availability. Much of Southern Louisiana is covered with uninhibited swamp land. Further, a significant portion of land that is not under water has traditionally been held by large landholders for agricultural production. Therefore, available land in this area is at a premium and often out of the price range for affordable housing production.

The Rural Home Loan Partnership Program Mechanics

The Rural Home Loan Partnership is a collaborative program between the Federal Home Loan Bank (FHLB) system, Rural Local Initiatives Support Corporation(LISC), and USDA's Rural Housing Service (RHS). The national partners work with local nonprofit partners to effectively utilize RHS Section 502 leveraging loans to provide housing for qualified low-income families. The partnership creates leveraging opportunities between RHS, local nonprofit organizations. Local lenders. And the FHLB. In this partnership the nonprofit organization is responsible for packaging the housing applications, providing home ownership counseling, and helping families find a home or find a developer to build a home. The local lender and RHS underwrite the loan and provide long-term mortgage financing. The FHLB extends money to the local lender, which are FHLB member institutions. Through their Affordable Housing Program (AHP) or Community Investment Program (CIP) at lower than market interest rates.

The Southern Louisiana Rural Home Loan Partnership (RHLP) serves households at or below 80 percent of the area median income on the five south central parishes of Iberia, St. Landry, St. Mary, St. Martin and Vermilion. There are five major players in the partnership. Their roles and contributions are discussed below (See Figure 4.1):

Figure 4.1  Southern Louisiana Rural Home Loan Partnership

1) Southern Mutual Help Association: SMHA plays an integral role in the local RHLP. Serves as the developer, packager, and intermediary between all of the partners and homeowners, it is the "glue" that holds the project together. Initially, SMHA identifies and counsels potential homebuyers, and then coordinates the financing. One of SMHA's most important activities is the underwriting and packaging of all loan documents. This process has been streamlined by SMHA so that no replication occurs throughout the packaging process. For example, all parties accept the same appraisals, contracts, and loan documents. Local Partners universally agreed that reciprocity in the underwriting process is the key ingredient that makes leverage packaging work. SMHA also serves as the general contractor, coordinating and overseeing all subcontracts work during the development and construction phase.

2) USDA Rural Housing Service: The Southern Louisiana RHLP has generated a blended mortgage product through innovative partnerships with local banks, RHS, Rural LISC, and others. The cornerstone of this lending product is the RHS Section 502 leveraged loan. The Section 502 direct loan program has traditionally been a significant source of federally subsidized financing for low-income home ownership in rural areas. The Section 502 leverage funds used in the RHLP have special components which make them more conducive for the collaborative nature of the program. First and most significant is the provision for a set-aside of Section 502 dollars to be exclusively utilized by the local CDC in the partnership. SMHA's set-aside is approximately $2 million, which is a combination of both state and federal allocations. A second major provision of the special RHLP 502 funds is a clause which subordinates RHS's lien position to a secondary lender. Typically, RHS is the primary lender contributing somewhere between 60 and 70 percent of the entire loan package. The subordination clause was implemented to provide and additional incentive for private institutions to enter into the partnership with relatively little risk.

3) Tri-Bank Partnership: Bolstered by the subordination clause, SMHA has cultivated an innovative tri-bank partnership with three local banks. The banks, Iberia Bank, Mid-South Bank, and Teche Federal Savings Bank, help cover the programs entire five parish service area. In each RHLP loan, on of the three banks provides between 30 and 40 percent of the financing at below-market interest rates. Funds for the banks. portion originate from the Federal Home Loan Bank (FHLB) of Dallas, of which all three banks are members. Typically the banks utilize the FHLB's Community Investment Program (CIP). CIP funds are loaned to the banks at below market rates to then be re-loaned for low-income community development purposes. In addition, the tri-bank partnership also provides much needed grants to cover "up front costs" such as down payments and closing fees. Funds for this gap financing also come from the FHLB through its Affordable Housing Program (AHP). Currently the partnership has $240,000 in AHP funds to be distributed for principal reduction grants of $8,000 per loan package.

4) Support Partners: Other intermediaries such as Rural LISC, The Fannie Mae Foundation, and private, religious, and philanthropic organizations are vital partners in the implementation of the local RHLP. These organizations provide much needed training, technical assistance, pre-development capital, and monetary contributions toward implementation of the partnership.

5) Homebuyer: The home buyer also plays an active role in the development process. Each participating household contributes a minimum of 300 hours of what SMHA terms "Human Development" toward the homeownership process. Such activities include contributing sweat equity, attending homeownership and budget counseling, and skill training sessions. Homebuyers in the partnership acquire their own permits and licenses, and are encouraged to provide input in the plans and design of their home. Further, each household is eligible for a small educational scholarship provided by a philanthropic charity. SMHA describes the input process by homeowners as part learning, part transitioning, and part labor.

Outcomes

In 1997, the pilot year of the partnership, six homes were constructed through the Southern Louisiana RHLP. The following year that number increased to 21. In 1999 the partnership is slated to build approximately 35 homes. Most homes in the partnership range from 1,000 to 1,100 square feet in size, and average somewhere between $75,000 and $85,000 per unit in development costs, including land acquisition. The majority of new homes have been purchased by very low-income households below 50 percent of the area median income. Most are headed by single women and almost all have children present.

The partnership expects to leverage approximately $6 million from RHS, FHLB, and other private capital by the end of 1999. (See Figure 4.2.)

Figure 4.2  Project Financing
                   Southern Louisiana Rural Home Loan Partnership

The Southern Louisiana Rural Home Loan Partnership is an ongoing project and the partners expect to increase production annually. Currently SMHA is in the process of developing several subdivisions through the partnership. One particular project, "Caribbean Winds," in West St. Mary parish will use the RHLP to finance 12 mixed-income (moderate, low and very low) units of housing. In the spirit of the project's name, the homes in the subdivision are designed in a traditional Carribean theme. Each brightly colored home is set on piers and adorned with decorative trim. These design enhancements are not solely for aesthetic purposes. For relatively minor cost, SMHA designed an attractive community that helps instill pride in homeowners and defies the misconception that affordable housing has to be purely functional and dull (See Figure 4.3.)

Figure 4.3  An elevation drawing of The Claire I, one of the home designs featured in SMHA's Caribbean Winds Subdivision.© 1999 Southern Mutual Help Assn., Inc.

Lessons Learned and Replicability

The Southern Louisiana Rural Home Loan Partnership is significant because it was one of the first experimental sites of a new national initiative. Virtually no precedent for a housing development collaboration among such varied partners existed. The road was not always smooth. One primary obstacle identified by all partners was the coordination of efforts between groups. Each partner was accustomed to its own style and rate of production. The effects of adjusting schedules and styles produced friction between some groups. However, this obstacle was remedied through a process of increased communication between the partners. This included weekly meetings between the primary partners to discuss problems and brainstorm for solutions. All partners stated that each entity had a learning curve, and that each had to change its mind set on how to provide their services together. But through persistence and a willingness to communicate, most of the obstacles have been remedied and the program is running smoothly.

Another impediment, particularly for SMHA, was the challenge of underwriting and coordinating the development process with several different funding sources. Leveraging is generally popular but it presents many challenges for the coordinating partner. All of the different funding programs have different regulations, guidelines and timelines, which require significant amounts of time, effort, and cost to coordinate. This problem was in part remedied by SMHA's ability to obtain additional administrative financing and technical assistance to coordinate the complexities of leveraging. SMHA maintains this venture would not have been successful if it were not for large amounts of financial and technical support from organizations such as the Fannie Mae Foundation, Rural LISC, and private donors who bolstered their administrative capacity.

SMHA credits four major factors for the success of the Southern Louisiana RHLP. First was the assigning of a set-aside of 502 dollars to the community development organization. This was greatly beneficial for SMHA from a management standpoint. It allowed them to know their parameters and plan according to an established level of resources. Secondly, the provision that gave banks first position on the loan was a great incentive to get them involved. With this enticement the local banks encounter minimal risk with a relatively small investment. SMHA also credits USDA for its willingness to send high level authorities to help transition state and local RHS offices into the new program. The final component was the vital administrative and capacity building support of groups like the Fannie Mae Foundation, Rural LISC and other private and religious organizations.

Both RHS and the tri-bank partnership equally praised SMHA for their hard work in streamlining the application and packaging process. They maintain that each package received was impeccably complete and flawless. As one bank official noted, "They [SMHA] provide a perfect package... In fact every one we´ve sent to FHLB has been approved." RHS and the tri-bank partnership also agreed that SMHA's role with the homebuyer was important.  For example, the partners noted that some of the homebuyers had never been in a bank before.  "Naturally they felt intimidated," said one bank official. SMHA's ability to work with each homebuyer helps them feel comfortable with the process and facilitates each partner's role.

Representatives from the tri-bank partnership note that the RHLP has also opened up new markets for them. It is common practice for many low-income residents of the community to patronize sub-prime lending agencies, such as finance companies, for their lending needs. "However, if they become customers with the bank they will find that they can typically get better rates and deals with us [conventional bank], sentiments were offered by RHS officials who maintained that without the partnership and in particular the FHLB principal reduction grants, they would have been unable to assist many of the very low-income applicants who became homeowners. Further, they also pointed out that they were able to build more homes with less subsidy and fewer overall dollars.

In addition to the 60 homes for low-income families in need of decent housing, the Southern Louisiana RHLP accomplishes other less tangible, but equally important outcomes. One of the most significant benefits is the partnership's ability to build community both literally and figuratively. It is a perfect example of nonprofit, government, and private groups working together toward a common goal. The partnerships created have forged strong relationships in the community which will serve to foster future positive relations. The homebuyers are principal beneficiaries in the partnership's community building efforts. With a new home they are assimilated into the local economy and have a greater stake in the community. Furthermore, the partnership's inclusion of private partners reduces the stigma of government hand-outs. Partnership homebuyers now make a payment at the bank like other homeowners in the community.

The success of the local RHLP extends beyond the Southern Louisiana Bayou region. Nationwide the partnership has become politically popular for its infusion of private capital and decreased reliance on federal subsidy. Thus, more homes are being built with fewer taxpayer dollars. The Southern Louisiana RHLP's hard work and persistence was instrumental in the program's nationwide success. As one of the pilot programs, it encountered and worked through the early logistics and unforseen problems. In just four years the national RHLP has grown from nine community development corporations (CDCs) in nine states to 78 CDCs in 35 states. Those initial sites built 37 homes in 1996. In fiscal year 1999 the partnership is slated to build 633 homes. Throughout the nationwide partnership, banks have invested over $10.6 million which has been leveraged with over $22 million from RHS.²³

The RHLP has proved itself replicable throughout the nation. Yet its success in the Delta may not be as easily reproduced. The Partnership is designed to be very flexible and conform to each community’s particular needs and resources. However, the aspect of nonprofit resources may be of concern for many Delta communities. SMHA is one of the oldest and most established nonprofit housing organizations in South Louisiana, if not the Delta itself. They have accumulated years of experience and more importantly significant financial capacity from reliable funders. These factors are essential to make a program such as the RHLP work, particularly with the program’s reliance on leveraging. Typically the role of coordinator and financing facility rests with the local CDC in the partnership. Therefore, as SMHA staff pointed out, significant amounts of funds are needed to finance the large administrative costs associated with putting together a leverage package. Overall local CDCs operating the Lower Mississippi Delta are underdeveloped in administrative and funding capacity. If the success of the Southern Louisiana RHLP are to be replicated throughout the Delta they must also include increased capacity building among the local nonprofit sponsors to which the burden of work in this leverage partnership falls.

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