by Lynn Adler and Jim Mayer
When Self Help first started we were interested only in starting small businesses. We felt like jobs were the key piece that would make a difference for most poor families. And, it took us--we were very slow learners-- took us maybe five to six to seven years before we came across what I call one of the key facts of Self Help. That fact is the disparity of wealth between black and white. Now, I knew this personally, growing up in a predominantly black community, but I didn't know it in an intellectual way. What we found really startled us and made us angry really. We found that black families, and minority families in general, have an average net wealth of about $4400. Well, you can say that sounds not so bad, until you then hear that the average net wealth of white families is $44,000. That's basically an 11 to 1 difference between black and white. That one factor translates into every single other dimension of economic life that you can imagine. We then found that 60 to 70 percent of the wealth of both families, white or black was held in the equity that people own in their home. So, we ended up, not because we cared about shelter per se, but because we found that for minority, and rural and women entrepreneurs to have the kind of stake to get started in a business they had to first be able to own a home. So, we became these preachers for the importance of owning a home. Really, I still think, there are two legs that any kind of economic justice stands on. One, looks at wealth, the other looks at knowledge. Unfortunately, in many ways in this country, we are unwilling to talk about either, about wealth or knowledge. I believe you can measure a civilization by how well it creates opportunity for its bottom half. You don't have to worry about the top half; the top half will always find its own opportunities because it has wealth. So, for us, becoming involved in home ownership was the single way of trying to undo the legacy of slavery in North Carolina.
LA: So, the issue of home ownership is linked also to the kinds of folks that you decided to target. I know there's sort of the common perception that low wealth people, particularly women, single moms, are bad debts in terms of repaying loans.
ME: I have an interesting story with the North Carolina legislature. In 1988 the legislature gave us a small appropriation that we had asked for to be able to make loans specifically to minority and women-owned businesses. I had hundreds of different people tell me this that you will absolutely loose your shirt because you are making loans to people that no one else will lend to. I didn't know any better. I thought, maybe they were right. Over the next six months we loaned a total of about $2 million to 38 different small businesses all over the state. Over the course of the next year not a single one of those businesses failed--not one. Which just showed how deep the need was, how great the opportunity was. I remember going back and reporting to the state legislature that, no matter what they thought, no matter what stereotypes they had heard, the distribution of talent and creativity was much broader than the distribution of wealth and that, ultimately, a market system could only work if you could link those two together. I remember this black legislator who came up to me afterwards, and he says, you have helped us in more ways than those 38 businesses because everyone believes that any black family, or any family headed by a woman is basically shiftless. We're not going to solve poverty by making one loan after another. We're too small. The way we can make a difference is by dispelling the myths. One of the myths that is just the most pernicious is that particular groups of people can not succeed. What I have found is that people have the same dreams, the same motivation. If someone has a chance to own a home who has never had a chance to own one before, they will do anything to keep that home. I can remember a woman who spoke at our annual meeting. She was a black woman, about 55, and we had made a loan to her to buy her very first home. She said, "I grew up in a family where both my parents were alcoholic. We never had anything. Now that I've bought this house, what I did after I took the keys home was I sat in the living room for the entire evening. I didn't go to bed the whole night. She said, "What I did was I looked up on the wall at the thermostat and I watched the heater turn on and off all night long, because I'd never lived in a house that had a thermostat. We used to heat our house with an open oven. That was how we would try to warm ourselves." The miracle of a thermostat was what for her symbolized being in control of her own home. To me, it was like, "Well I'm good for another five years. Now I know why this work is worth doing. And no one can ever tell me that that woman did not deserve to own a home. She had worked for over 30 years, 40 hours a week, in full-time employment and had been unable to buy a house until that point. So, that's what I think this work is about. It's trying to identify the people who have dreams and want to do something with them who simply don't have the capital and money to get started.
LA: Now, one of the things you want to do is to get more capital, which means making partnerships with banks. Now, how do you get banks to believe what you believe? How do you get bankers to see?
ME: When we first started working with banks our strategy was to go in with a piece of paper that showed why a business might succeed. They basically didn't want to hear that. You can't convince anyone really with a piece of paper. It's the reason that we decided to start lending ourselves. We wanted to be able to go to someone and say, this is not some academic theory that we believe in. We're willing to put our own money on the line to prove that a single mom, who happens to be a minority, can raise her family and pay back a home loan. We didn't have very much success in our early days convincing bankers that these families we were helping were good risks. But, we went for ten years, we have had our first loss of a home loan of $10,000 in a total of $120 million of lending directly and indirectly we have made, to mostly minority, single moms. We had our first $10,000 this past year. So, whatever people believe, the truth is, if someone has a chance to get a toehold and own a home, they will be far better borrowers than most of the rest of us. That is just a fact. Well, I couldn't convince people of that until we had done thousands of home loans to people all over the state, so it's not just an experiment that just happens to work in one town. But, basically, I'd like to say that we were really smart and we picked out the right people. But, that's just not true. What we found were families that just needed a little helping hand. It didn't take a whole lot of smarts on our part to realize that the credit blemishes on people's credit reports were related to the fact that they didn't have cash reserves or a bank account to fall back on if a child got sick or if they had a divorce or an illness. A middle-class family can buffer that with their cash reserves. Families that do not have a lot of cash don't, and they have been excluded from being able to start businesses or buy homes for that simple fact. And it's really stupid.
LA: Would you say though that every poor person could be a homeowner?
ME: No. Clearly not every family is ready to be a homeowner yet, although I have found that the dream and the desire to own a home is pretty pervasive across cultures, across income, across gender. But, it's a path that you have to walk and some people are close to the path... close to the end, and some folks have a ways to go. It takes discipline, but it doesn't take rocket science. You just have to make one payment every month. So, a lot of families are not there yet. I think they could be if our policies were more sensible. We have subsidy programs that basically help subsidize home ownership for the middle class, but because people who have little stake can't get started, they can't take advantage of the tax deduction for interest on mortgages. I think that's just pathetic. One of the other things that we learned, that was really a hard lesson for me in particularly, is I did believe when we started 17 years ago that every single person could be an owner and a manager of a small business. I continued to think that for the first four or five years that we worked and we helped start about 40 businesses. Half of those businesses really survived and thrived. The other half failed. What I learned was that running a small business is a very hard, difficult 18 hour a day task that is not right for every person. We're not saying that everyone should be a small business owner. What we are saying is that anyone who has the talent and has the drive, has the energy and discipline to work 18 hours a day should not be held back simply because they are black or female or happen to have been born in the wrong place. That's our mission--to try to take away that one little constraint, and provide capital where the talent is there to succeed.
LA: The secondary market demonstration that you have now with banks, obviously banks are now becoming involved with you. You've proved something to them.
ME: I tell this story sometimes about one bank that we were trying to convince to make home loans to minority families. I would go about every 3 months and meet with the president and say, "This is a wonderful thing for you to do." It was a $30 billion bank, and finally the president said, "I tell you what. If you will just get out of my office and quit bugging me, just leave me alone, we'll set up a program of $10 million to make loans to minority single moms. I think we're going to lose half of our money. But, if you'll just leave me alone, then we'll give it a try." I said, "You got a deal." Well, they loaned that $10 million out in less than 6 months and then they said, "Well, it seems to be working pretty well. We don't understand why, but let's try a little bit more and they went to $20 million, and then $40 million and then $80 million, and then ultimately they had done close to $200 million of loans to low wealth families. What the bank then started telling us was "Martin, we are now convinced--our experience has convinced us--that minority families and single moms are great borrowers But, we can't keep making these non-standard loans that don't look like regular loans and are 30 years in length. We just can't keep doing that. We have to figure out a way to do with those loans what we do with normal home loans, which is resell them to a secondary market--Fanny Mae and Freddy Mae." So, basically Self Help stepped in and said, well, we will buy the loans from you. We'll take the risk if you'll continue to make them. I could tell my banker friends that what they have that I don't have is the ability to distribute and reach every little corner of the state of North Carolina because there are 2000 branches and 20,000 loan officers for various banks throughout the state. What I have the ability to do that they don't want to do is take the risk. I don't think there's any risk in these loans. So, if they'll make them, I'll buy them and take the risk of failure.
LA: That just seems a little bit backwards to me.
ME: Well, it's funny. We had a press conference when we were announcing the first $100 million of home loans made by banks to be purchased by Self Help. And this reporter from NPR called me and left me a voice mail and said "I just got your press release and it has this huge error in it." If you've ever done a last-minute press release you'd know that's possible and I went, "Oh my God, what did I leave off?" I called her back and she says, "Well, this press release says you're buying loans from these big banks instead of them buying loans from you." And I said "Thank God. That was not a mistake. That's exactly the way it works." And she said, "Well that can't be, that's like a minnow of trying to nip at the tail of a whale." And I said, "Well, I guess that's a pretty good image." We're a little minnow trying to nip at some whales tails.
LA: Who's getting the money now?
ME: Self Help will never make a difference if we feel like we have to do everything. We're simply not big enough. We never will be big enough, and no CDFI anywhere in the country, no matter how big they are or how big they think they are, will ever be able to meet the needs of a community by making loans directly, as their sole strategy. That's simply not enough. I look at it and say, we're one of the larger community development credit unions in the country, and we do 200 home loans per year. Well, that's 200 home loans per year, in a state that has 3 million households and probably 300-400,000 households who should be homeowners but can't get a loan right now. We will never reach 400,000 families, 200 at a time. So, we have no choice but to partner and link up with large institutions that already have developed a network that we can work with. We have no choice. We can either choose to be arrogant and wrong, or irrelevant, or we can understand that we play a fairly humble role of taking risk and trying to assemble of what can succeed. We just have no choice.
LA: I guess it just bothers me that you're taking the risk and these institutions that have huge amounts of capital are basically not risking anything.
ME: Well, many of those financial institutions have helped us be able to take the risk. We've had state government, catholic churches, corporations and others who have donated funds who say, "Well, we think you're going to lose this money, but we're willing to give it to you to see." And, we couldn't take the risk if we hadn't had help from a lot of different sources. What banks are really capable of doing is providing market rate capital in very large quantities. They don't have the ability to do deep subsidies. What they have the ability to do is make loans through thousands of branches through out of state. And most CDFIs do not have that power, and never will. So, there's this perfect linkage. The banks take some risk, but we can take a risk because we know the community better than they know it.
LA: I like the term that you used once about banks being sort of the midwife between the community groups and larger institutions.
ME: Well, we had this incident where there was a meeting of community non-profit activists and bankers who came together. And the person who was leading the meeting stood up and said: "Would everyone who is a lender please stand up." So, all this one side stood up and I stood up, because we were a lender. And then, "Would all of the nonprofit groups please stand up." And I stood up again and I realized I was the only person standing in the isle, halfway between, basically a bridge between two different groups who spoke very different languages. I sometimes make the joke that it reminded me of growing up in the Baptist church where we always had the boys sit on one side and the girls sit on the other. The only difference was that when church was over, we were all running outside to see who could kiss who, and in this group, there was a little bit of reluctance to kiss. So, Self Help's role, as a nonprofit, maybe is not as a midwife. Maybe it's a kissing coach. We're trying to get the community and the large, dominant institutions to be able to talk the same language and to communicate, because you can not solve community problems with one side only. It takes both.
LA: Access to credit, is that poverty alleviation? Or is there need for subsidies?
ME: Most people believe that credit is a panacea, that it will solve all problems of poverty. And I sometimes use the metaphor of a poker game. To be a successful poker player--which is essentially what a market economy is--it takes two things. You have to have chips that you can bring to the table, but you also have to have knowledge of how to play the game. If you take either of those two away, either wealth or knowledge, the other cannot stand on it's own. If you go to a poker game and you say, "Well, I've got a lot of chips." But you've never played before, it only takes a very short little time before your nest egg has been redistributed to everyone else. On the other hand, if you come to a card game and you have knowledge, but you have no chips, you can be run out of the game by someone who's willing to bet a little bit more than you have. So, our basic philosophy is that opportunity is created by the marriage of a small stake of wealth and a small stake of knowledge. I think many communities and many small business people underestimate the power of knowledge and think-- a lot of people come to us and say--if I just had the money I could make this business work. We believe one of the things we can give to a small business that's getting started that is probably more important than the money is honest feedback, the ability to say, "You're not ready for this yet. You're accounting is really pretty horrendous." We provide that kind of step by step guidance--not in a classroom, because entrepreneurs have our own ideas of how the world ought to work, and we want to pursue it and make it work. What we found is that people learn in a business by trying and doing and experimenting, progressing, failing, starting, moving forward. Our role is to try to be there each step, and say, "Well, here's what we think. You don't have to follow it. It may be helpful, it may not." We have now looked at over 10,000 small businesses in North Carolina over our short history, so there's a wealth of experience that no single entrepreneur can have in a lifetime. That's one of the reasons we've become involved in some very controversial lending in the past year. We started lending to charter schools, and we're already one of the most active lenders to childcare centers throughout the state. One of our thoughts there is that knowledge and the educational process and having it be chaotic and bubbling and different and having the right to fail is really important for kids to be able to learn and develop that second leg of opportunity. Knowledge and wealth. Knowledge and wealth. You gotta have both.
LA: One point that we're trying to make in our program as a whole is that a lot of the idealism and the dreams and the energy and creativity that came out of the Civil Rights movements. But a lot of our failures back then were in part linked to a lack of financial savvy. I wonder if you could speak to how CDFIs seem to be almost, at this point, a marriage of the two.
ME: When Self Help first started our original mission was to translate the Civil Rights and women's movements into the economic arena. We felt that many of the legal battles had already been fought and won, but that they would basically be irrelevant if it did not have real impact on the economic side. I read this book recently that talked about the two components of creativity. I thought it was really superb. What it said was there are two pieces, and they are both equally important. One, is the ability to generate totally wild ideas. The second piece is the ability to logically discard and test the ones that don't work with cold dispassion. Essentially, that's idealism and financial savvy, where those two come together. That's what is important for CDFIs to be creative is to not have one or the other. If you have great wild creative ideas, and no financial feasibility, they end up being disasters, worse than if you had not started the project in the first place. If you end up being a drone and you're just turning out a loan here and there and not thinking about how can we translate that into state government, how can we translate that somewhere else, then you really will have no impact whatsoever. So, to me, the real role of the CDFI is to take these two different strands, the ability to be idealistic, to generate wild ideas, and to test it with a cold hard logic. I have had people ask me--"What kind of politician are you?" and I tell them that I call myself a bleeding heart conservative. And, really that's what I think it takes--a compassion for trying to make a difference in communities, but very hard-nosed, and saying, you have to present to the community the message that Self Help presents. That we will meet you exactly half way and not one step beyond. We're not going to make someone into a homeowner. All we can do is offer a loan that enables someone the opportunity to own a home. But, they've got to do the other half, and I tell people sometimes, "If you don't pay us back on this home loan, that's another family that I can't help, and we'll come foreclose on you in a heartbeat, faster than a bank would foreclose. So, don't get any illusions by the name Self Help that we're going to do it all. We're going to meet you exactly half way, and not a inch beyond."
LA: Do you think there are unique factors to operating in a state like North Carolina that make your approach work, whereas it might not be applicable someplace else?
ME: My vision is that Self Help is one model, and we've had people from all over the country who have come and visited and said, "Well, we'd like to do this same thing back in our home state. " And I grab them by the shoulders and say, "Go do something, but whatever you do don't have it look like this." Not because we think what we've done is wrong, but basically Self Help developed into a lot of different programs in lending arenas that were very tailored to the environment in North Carolina. So, I think if you're doing something, a community development in, say, South Dakota, it will be very different than it is in North Carolina. So, my prescription or my advice is go and start and do something. Don't wait for a perfect model. Don't wait to be large, like CDFIs who've been here for 17 years. Go make one loan out of your own pocket for $500. Start there, and that's enough. And then you'll either fail, or you'll succeed, and you'll learn and you'll do another loan. And that I think is the way that CDFIs should develop wherever they're located. North Carolina is very gifted in that it has progressive banks, a progressive state government, private foundations that can help provide seed funding to start a CDFI. Other states may or may not have that. They may have other resources. So I think the worst example, the worst conclusion of any community effort is to say, "Here is the model, and now let's follow that." So, I hope that we never see another Self Help anywhere in the country because it will mean that someone didn't experiment with their own local community.