CDFIs can help solve the wealth gap and affordable housing crisis - Commercial Observer

Is it possible to buy a house, send kids to college or weather emergencies with a net worth of just $211,450? Probably not, but that is the case average net worth of black families in America This is evident from the Federal Reserve’s latest survey of consumer finances. Latino families fared slightly better ($227,490), but both cohorts stood in stark contrast to the median wealth of white families: $1,367,170.

Fed statistics show that the racial wealth gap is vast, persistent and growing. But it can be reduced by supporting community development financial institutions (CDFIs), federally certified entities that offer innovative financial products and programs specifically designed to promote economic opportunities for disadvantaged people and communities excluded from mainstream sources of funding. CDFIs develop affordable housing, teach financial literacy, support creative homeownership programs, finance minority small businesses and more.

All CDFI programs target the wealth gap, and can do so more effectively today because of ongoing measures federal regulatory changes These will come into effect next year and give them the flexibility to expand their activities beyond their historically mandated geographic boundaries. These changes will enable CDFIs with proven community development models and competitive financial returns to replicate their methods nationwide. This includes Community Capital of New Jerseythe CDFI that I lead.

The racial wealth gap is deeply rooted in centuries of systemic discrimination and economic inequality, but it hasn’t always been this wide. It declined dramatically after the Civil War and until the mid-20th century Blacks and whites accumulated wealth at similar rates. But post-World War II discrimination, from redlining and segregation to unequal access to education and jobs, has put the country back on an upward trajectory. Today, this gap has serious consequences for Black and brown communities, limiting access to quality housing, health care, and education and stifling upward mobility.

Ironically, this growing divide exists as American national wealth is also increasing. But white households make up 60 percent of the U.S. population and own 84 percent of the country’s wealthwhile black Americans make up 13 percent of the U.S. population, yet own only 4 percent of the total wealth. What makes matters worse is an intergenerational wealth transfer historic proportions passes an estimate $57 trillion to 26 percent of American Gen Xers and millennials. Only 8 percent of black families will receive inheritances.

The growing wealth gap and lack of investment in Black and Latino people, businesses and communities create a vicious cycle of poverty, unemployment and poor social services, perpetuating and reinforcing negative impacts and harming the U.S. economy. McKinsey found that failure to close the wealth gap could lead to lost consumption and investment trillions of dollars well over a decade.

Affordable housing and homeownership are critical to wealth creation. Both provide a stable foundation for building financial security and upward mobility by lowering the share of income that families and individuals spend on rent or mortgages, allowing them to devote more resources to savings, education, and other wealth-building activities . Fiscal stability leads to better health outcomes, higher educational achievement and benefits entire communities.

But that of our nation affordable housing crisis has led to an increase in the percentage of income that many renters spend on housing climb steeply up. The hardest hit are disproportionately non-white, lower-income renters. Homeownership is also out of reach for many, yet it has been the most proven way to build and preserve wealth for generations. Fed data shows that the average net worth of homeowners is the same 40 times bigger than that of tenants. Yet only 45 percent of black and 48 percent of Latino families own a home, compared to 74 percent of white households.

Despite making loans to higher-risk borrowers, CDFIs have triumphed in making loans, repaying them, and building financial strength. Citi Foundation reported this earlier this year. The promise of CDFI products and initiatives to alleviate the nation’s growing wealth gap and the intensification of the affordable housing crisis has increased their numbers, programs, and assets under management (AUM).

Coupled with their track records of driving social impact during delivery competitive financial returns And improved portfolio stabilityassets under management of CDFI-certified entities grew from $187 billion to $452 billion in 2023.

In the investment world, returns count. The strong performance and sustainable financial returns of CDFIs, supported by their expertise in high-risk, high-needs markets, make a compelling case for this in diversified portfolios. Given federal regulatory changes that allow the most effective CDFIs to expand their products by type and geography, now is the time to start paying attention to this often overlooked investment vehicle.

Bernel Hall is president and CEO of Community Capital of New Jerseythe largest CDFI in New Jersey.