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Sustainable Investing

This ETF’s Mission Helps Those in Poor Neighborhoods Build Homeownership

How investing in mortgage-backed securities can create equity and chip away at the wealth gap.

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Editor’s Note: This interview was originally published on Feb. 10, 2023. It has been updated to reflect 2023 performance and portfolio loan data.

The mortgage-backed securities market is a dull affair that accounts for a third of a typical bond benchmark. You don’t associate it with helping tough neighborhoods like, say, Compton in Los Angeles, Detroit’s Tireman East, or West Philadelphia. That makes Impact Shares Affordable Housing MBS ETF OWNS, launched in 2021, doubly interesting. The fund invests in mortgages from some of America’s poorest communities, with the intent of building homeownership and creating equity. It makes closing the white versus nonwhite wealth gap more feasible and creates wealth for borrowers. (For more on funds that address systemic racism and the wealth gap, read this.)

In 2023, the exchange-traded fund returned 4.13%, versus 3.88% for the Morningstar US Treasury Bond Index. OWNS is subadvised by Community Capital Management, which has made a name for facilitating affordable housing by buying mortgages issued by banks under the U.S. Community Reinvestment Act. The fund is sponsored by Impact Shares, which helps organizations translate social values into ETFs such as OWNS and Impact Shares NAACP Minority Empowerment NACP. We caught up with Marvin Owens, a former NAACP official who now serves as chief engagement officer for Impact Shares, and Andy Kaufman, Community Capital’s chief investment officer. Following are the edited excerpts of our conversation.

Leslie Norton: How does OWNS work?

Andy Kaufman: Community Capital has a unique mortgage process. We custom-create every single pool and get them securitized by government-sponsored enterprises like Fannie Mae, Freddie Mac, and Ginnie Mae, so the credit risk is removed. We own the interest-rate risk, the prepayment risk, the extension risk. The agency mortgage space is the second-largest fixed-income market in the world. It’s a very liquid homogeneous product. But the agencies are only allowed to record what they deem as material to the public: loan size, number of loans, state breakout. For privacy reasons, you can’t show addresses on a large scale. But because of what we do, and because our fund also qualifies for the Community Reinvestment Act, we’re able to see those loans to low to moderate income borrowers, and specifically, those that are also minorities.

Marvin Owens: The mission of Impact Shares has always been to leverage the power of capital to really impact social change. This approach was able to drill down and both help minority homebuyers but also track how they build wealth, how equity increases on these particular mortgages. It was a no-brainer. The goal here is, How do we drill down to ensure that the benefit from what we do is really being seen by the homebuyer, the actual person getting the mortgage? We structured this so the end user gets the real benefit, and the investors get a product that gives them market returns with the important social and economic impact that we are committed to.

Norton: Can you be more specific?

Kaufman: The loans included in the ETF are those in census tracts where more than 50% of the population is nonwhite and at least 40% of the population is living at or below the poverty line. OWNS also includes loans in counties where 20% or more of the population has lived in poverty for more than 20 years and loans to minority borrowers or loans originated in a census tract where more than 50% of the population is a minority. OWNS also looks to invest in MBS backed by pools of loans from nontraditional originators such as Community Development Financial Institutions (CDFIs) and minority-owned banks.

One of the goals is long-term wealth creation for the borrower. Just buying a home was just not enough. I’ve worked for many years in this field. The goal is not just the initial hit of buying a home but to stay in your home. The way you create wealth or close the wealth gap is to transfer the wealth from one generation to the next.

Norton: What’s the evidence that it’s actually closing the wealth gap?

Kaufman: We get certain loan-level data prior to securitization such as location and income. This gives us the ability to really understand the communities we’re investing into and help drive capital into persistent poverty economies, majority-minority census tracks, and racially or ethnically concentrated areas of poverty. Then we partnered with Redfin, where they allowed us to access their database for our loans. Because we have specific levels of understanding at the loan-level basis, we’re able to get the original value of the property at origination of the loan. Then we run that against the Redfin database, pull in the current value of what they estimate the property to be, and then we add in amortization because as you pay down your loan, you’re building equity and wealth. As of Dec. 31, based on the approximately 600 loans in our portfolio, there’s a weighted average wealth effect of $38,579. That’s a total of over $18.9 million in equity built in the last two and a half years. Based on originator data postsecuritization that is available to us, approximately 55% of the loans originated are to BIPOC [Black, Indigenous, and people of color] individuals. However, we believe this percentage is higher given that approximately 82% of the loans are to borrowers in majority-minority census tracts.

Norton: Doesn’t that violate the borrower’s privacy?

Kaufman: No. The investment team doesn’t see any specific borrower information like race, gender, or ethnicity until after the loans are securitized.

Norton: Who is investing in this?

Kaufman: Investors who are interested in making the kind of social impact that we all said we were committed to, particularly after what happened to George Floyd. How can you remain focused on that ultimate goal? For this fund, we have an advisory group that frames what we’re doing, including financial institutions, Habitat for Humanity, a national African American housing counseling and homeownership education organization, because the goal is sustained ability to manage homeownership to the place where you can transfer that wealth from one generation to the next.

Owens: It’s also for investors who desire to get involved, and some won’t ever join a march or be part of a protest. There are varying levels of engagement for people to respond. It’s a way to drive your capital toward products that are really having an impact on these social issues.

Norton: The problems besetting Black communities have been severe, and the recent killing of Tyre Nichols by the Memphis police underscores that. Tell us how closing the income gap helps solve some of these problems.

Owens: When I was at the NAACP, we used to do these research studies called economic inclusion plans, and one was after the experience of a police shooting—in the cases of Michael Brown in Ferguson, Freddie Gray in Baltimore, Keith Lamont Scott in Charlotte, Philando Castile in Minneapolis-St. Paul. We went back to those cities after those police encounters happened. We found that the issue around policing was just the tip of the iceberg. The kind of policing that you saw in those communities was directly connected to the fact that those communities were also economically depressed. You had low wages, lack of economic opportunity, low homeownership, really poor educational statistics around graduation rates. A number of factors help define those communities, and then add on this issue of policing, which then became a catalyst for so many other negative things.

This style of policing is almost always focused on communities of high poverty, where there’s a lack of opportunity, where there’s a lack of wealth. You don’t find a Scorpion police unit in affluent communities. So it’s important that we don’t miss the economic underpinnings to these social realities that these communities are facing. It’s important that we leverage whatever tools we have to be able to change that dynamic. OWNS is just one of those tools.

Kaufman: We’re not saying that OWNS is the solution to everything. There’s police reform, voting, protesting, grant-making, using capital in your common balance sheet for good. Where we can help is with this wealth creation piece. That isn’t just a roof over someone’s head. There are benefits such as less absenteeism at school, some sort of food security, building wealth, community development. It’s more of a bottom-up driver than a true top-down, but it has an impact.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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