​Exploring Community Development Advances

FHLBank Boston offers Community Development Advances to members to support affordable housing and economic development initiatives in New England. In 2019, 44 member institutions took advantage of discounted funding through these programs. There are two types of Community Development Advances: CDA and CDA Extra.

CDA is a discounted advance that supports a variety of economic development and mixed-use initiatives including loans for small businesses, social-service or public-facility initiatives, and infrastructure improvements. These advances can also be used to support commercial, industrial, and manufacturing initiatives that:

• Benefit households with incomes at or below 115% of area median income (AMI) for a rural initiative or 100% of AMI for an urban initiative for a family of four based on the income guidelines as published annually by the Department of Housing and Urban Development.
• Are located in a census tract at or below 115% of AMI for a rural initiative or 100% of AMI for an urban initiative.

CDA Extra is a deeply discounted advance that supports:

• Affordable housing initiatives serving households at or below 115% of AMI.
• Economic development or mixed-use initiatives serving households at or below 80% of AMI.

Since CDAs are offered at discounted rates, they can help improve net interest margin and ultimately support earnings. The chart below shows how the discount to the Classic Advance trends higher as the term of the CDA extended — with savings as high as 34 basis points at 10 years. CDAs can also be combined with other types of advances in a blended funding strategy to bring down the total cost to the member in a variety of scenarios.

The Member-Option Advance can be used to manage exposure to the prepayment risk of assets such as residential loans. This advance provides members the option to cancel the advance on specified cancellation dates without a fee. The option is a benefit to the member and increases the cost relative to a Classic Advance. However, combining this structure with discounted CDA funding can bring the cost of the Member-Option Advance closer to or below the cost of the Classic Advance.

Let’s show an example using rates as of January 14, 2020:

• The cost of a five-year Member-Option Advance (callable after three years) was 2.26%.
  
• The cost of a five-year Classic Advance was 2.05%. Essentially, the member is paying an additional 21 basis points for the flexibility to cancel the funding after three years. However, by utilizing the CDA Extra version of the five-year, three-year Member-Option Advance, the rate drops by 28 basis points to 1.98%.
  

That is seven basis points below that of the comparable maturity Classic Advance (and just two basis points above the Classic rate at the first call date), while providing the member the added ability to shorten the funding if interest rates move lower.