The “electronic marketplace” allows participating buyers and sellers to exchange information about market prices and product offerings, with a goal to establish buyer-seller relationships. This article explores how to foster these relationships with community development lenders and investors.

Laura Choi

English

Research Papers in Economics

Community Development INVESTMENT REVIEW
FEDERAL RESERVE BANK OF SAN FRANCISCO
Creating a Marketplace: 
Information Exchange and the Secondary 
Market for Community Development Loans
1
Laura Choi 
Riverside Housing Development Corporation
T
he lack of information exchange between community development lenders and 
capital investors limits the growth of a secondary market for community devel-
opment assets. This obstacle also limits the ability of community development 
lenders to tap into the virtually endless capital resources of the secondary market, 
thereby limiting the valuable services these organizations provide to underserved commu-
nities. Participants from the Federal Reserve’s Conference on the Secondary Market for 
Community Development Loans in 2006 suggested solutions modeled after popular social 
networks, such as MySpace, speed dating, and Match.com. The area of social networking 
may initially appear to be an unexpected source of inspiration for a community development 
finance model, but the underlying benefits of economic efficiency, widespread visibility, and 
reduced search cost make these models viable solutions. 
Central to the academic discussion on information exchange is the theory of asymmetric 
information, which George Akerlof introduced in his seminal study on the market for used 
cars.2 Another important article in the academic literature of information theory is George 
Stigler’s “The Economics of Information.”3 The article analyzes one of the most important 
economic considerations of information—ascertaining market price. For buyers and sellers 
seeking to uncover the appropriate market price for a good, the cost of searching is the 
time associated with finding a willing counterparty. This is especially pertinent for “unique” 
goods, or those that exhibit a high degree of heterogeneity, such as community development 
loan portfolios. A Congressional Budget Office study on the securitization of small business 
loans finds that “where secondary markets have been slow to develop, the high cost of trans-
actions seems to be a major inhibitor.”4 By reducing the search time associated with identi-
fying buyers and sellers, and by improving the flow of information between parties, finding 
the optimal market price for a product becomes less costly and more efficient. 
1  This article is a summary of findings from a longer working paper prepared for the Federal Reserve Bank of San 
Francisco’s Center for Community Development Investments. For more in-depth discussion on this topic, see 
http://www.frbsf.org/publications/community/wpapers/2007/wp07-01.pdf.
2  G. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of 
Economics 84, no. 3 (1970).
3  G. Stigler, “The Economics of Information,” Journal of Political Economy 69, no. 3 (1961).
4  Congressional Budget Office, “Developing a Secondary Market for Small Business Loans.” Inter-Agency 
Report, 1994, available online at http://www.cbo.gov/showdoc.cfm?index=5013&sequence=0Community Development INVESTMENT REVIEW
FEDERAL RESERVE BANK OF SAN FRANCISCO
Modern applications of information technology make the social-networking models rele-
vant solutions for addressing the information problem. Information systems linking different 
organizations, also known as interorganizational information systems (IOS), can make use 
of information technology to increase economic efficiency. The “electronic marketplace” is 
an IOS that allows participating buyers and sellers to exchange information about market 
prices and product offerings with a goal to establish buyer-seller relationships.5 Markets serve 
a number of functions in an economy, and the increasing role of information technology 
in these markets facilitates their operation. The introduction of an electronic market system 
reduces search costs and increases efficiency by reducing the cost of unproductive searches, 
and it allows buyers to locate products that better match their needs.6 In the absence of an 
efficient IOS, high search costs lead to efficiency losses and eventually cause the market to 
break down or prevent an efficient market from being established at all. 
The implication for current research is that while data remain central to the growth of 
investor activity in community development, a mechanism must be developed that allows 
lenders and investors to easily share and access these data. Mary Tingerthal, president of the 
Capital Market Companies, Housing Partnership Network, stated that “any investment is 
possible only if the investor has the necessary information—the data—to decide whether to 
make an investment or purchase an asset.”7 It is vital that CD lenders improve their data-
collection processes, and it is equally important that they have an efficient mechanism for 
finding a willing investor with whom to share this data. 
A reputable institution could significantly advance the development of such a mecha-
nism by establishing an online information-exchange platform that would allow buyers and 
sellers of community development loans to: (1) efficiently identify suitable counterparties, 
and (2) effectively share the appropriate type and amount of data to facilitate a sale.
Most community development lenders borrow the majority of their available capital 
from mainstream banks through a term loan or line of credit, shown as “lending to the 
lender” in the diagram below.8 In contrast, the secondary markets financing model, shown 
as “purchasing from the lender,” allows lenders to replenish their capital supply through the 
sale of receivables. The characteristics of these two models differ greatly, and the industry 
needs to change the way it communicates with investors in order to transition from the 
present model to the secondary market structure.
5  J. Bakos, “Information Links and Electronic Marketplaces: The Role of Interorganizational Information 
Systems in Vertical Markets,” Journal of Management Information Systems 8, no. 2 (1991).
6  Ibid.
7  Mary Tingerthal, “Turning Uncertainty into Risk: Why Data Are the Key to Greater Investment,” Community 
Development Investment Review (Federal Reserve Bank of San Francisco) 2, no. 2 (2006).
8  An interview with Dan Letendre of Merrill Lynch on January 29, 2007, informed this section on capital 
financing models.Community Development INVESTMENT REVIEW
FEDERAL RESERVE BANK OF SAN FRANCISCO
Lending to the Lender  Purchasing from the Lender
•  Full recourse to investor  •  No recourse to investor
•  Investment in the lender  •  Investment in the assets
•  Assets on balance sheet  •  Assets off balance sheet
•  Institution level data  •  Portfolio/loan level data
Development  
of secondary 
market structure
The creation of an online platform would facilitate this transition by allowing parties to 
share the specific types of data most relevant to the sale of community development loans. 
Lenders would share organizational data and provide data points related to their individual 
portfolios available for sale. For example:
•  Loan-to-value ratio
•  Debt service coverage ratio
•  Interest rates
•  Expected investor pass-through yield
•  Portfolio size (amounts and number of loans)
•  Types of loans in the portfolio (for diversification)
•  Geography (to meet CRA objectives by reaching certain markets)
This list is only a preliminary estimation of the specific data investors are seeking. The 
development of an online platform requires a collaborative process that actively engages 
the investor community, in order to discern what these specific data needs are. The online 
platform would facilitate only the introductory phase of information sharing, where buyers 
and sellers identify the potential for transactions. Any actual legal sale of assets would occur 
through subsequent one-on-one conversations outside the sphere of the platform. 
Another consideration for the development of an information-sharing mechanism is the 
type of secondary market activities that will occur. Whole loan sales and securitization are 
two distinct types of secondary market transactions. Securitization is better suited for large-
volume loan pools (typically in the range of $100 million) because of the significant trans-
action costs associated with the complicated legal and financial structure.9 In contrast, the 
sale of whole loans allows each loan to be sold as a separate investment with buyers often 
purchasing more than one loan at a time. Whole loan sales are often used when the volume 
of loans to be sold is relatively small or the sales of loans are infrequent.10 The community 
development field at present does not originate loans at a sufficient volume to support wide-
spread securitization, but the development of an online platform can facilitate whole loan 
sales as a precursor to larger-volume transactions.
The platform host can play a significant role in implementing this online information-
sharing tool. Some important considerations for implementation include:
9   Interview with Frank Wilary and Doug Winn, February 5, 2007.
10  HUD (1995), Notice: CPD 95-05.Community Development INVESTMENT REVIEW
FEDERAL RESERVE BANK OF SAN FRANCISCO
•  The platform host should be a highly credible and neutral third party. 
•  Access to the online tool should be limited, requiring that participants be involved 
in the financing of community development activities.
•  The online platform should have a strong educational component.
•   The beginning focus should be on whole loan sales as opposed to securitization.
•  A mix of strategies should be used to attract participants and encourage continued 
involvement.
•  Enforceable policies must be introduced to keep the data current.
The  community  development  industry  can  benefit  from  increased  secondary-market 
activities, but the present landscape of information sharing between lenders and investors 
remains a significant barrier. The lack of understanding of what investors want in relation to 
loan purchases is compounded by the lack of an information infrastructure. 
Although the limited scale of the industry is a concern, it is valuable to develop the 
infrastructure to support the ongoing growth of the industry into the future. If the industry 
waits for lenders to increase their originations to a scale large enough to address the lack of 
information-sharing infrastructure, a lag will occur between the need for a mechanism and 
the implementation of that mechanism. The community development industry should seek 
early-stage solutions that can be modified and adapted as it grows in its lending capacity and 
becomes comfortable with the capital markets. The other benefit of taking proactive steps 
to improve market infrastructure is the likelihood that the information-sharing mechanism 
will act as a catalyst for secondary market growth. Just as eBay created a secondary market 
for heterogeneous goods (where people were suddenly able to find buyers for their old lamps 
and used books), the introduction of an efficient electronic marketplace may similarly spur 
the growth of purchases of community development assets. 
The prospective platform host has the opportunity to take a leadership role in supporting 
community  development  lenders  in  their  capital  financing  strategies.  The  creation  and 
operation of an online information-sharing platform will allow lenders and investors to 
connect efficiently with one another in order to build trust and professional relationships. 
The formal implementation of a new platform also signals to the industry that the growth of 
the secondary markets requires a transition from the status quo—moving from the lending to 
the lender model to the purchasing from the lender model. 
Both community development lenders and capital investors have opportunities for mutual 
gain in the growth of secondary markets. The ultimate beneficiaries are those communities 
that depend on this market for scarce financial resources. Strong, healthy communities are the 
surest sign of this industry’s success. Improving information exchange will ensure that a solid 
infrastructure will be in place to support the community development industry in the future. 
Laura Choi is Housing Project Manager for Riverside Housing Development Corporation, a nonprofit 
developer of affordable housing in the Inland Empire region of Southern California. She is a recent 
graduate of the Goldman School of Public Policy at UC Berkeley, where she obtained her Master of 
Public Policy degree with an emphasis on community development.

Creating a marketplace: information exchange and the secondary market for community development loans

http://www.frbsf.org/publications/community/review/122007/choi.pdf

Creating a marketplace: information exchange and the secondary market for community development loans

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