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Julia Gordon, Executive Vice President, National Community Stabilization Trust
A decade after the start of the financial crisis, today's U.S. housing market remains uneven. Many areas have rebounded significantly from the recession and have a robust housing market. Others—especially communities of color, lower-income areas, and cities where economic activity remains depressed—continue to grapple with high rates of vacant, abandoned, and distressed properties.1
Established in 2008, the National Community Stabilization Trust (NCST) is a nonprofit organization that works in partnership with banks, mortgage servicers, secondary market institutions, and other partners to support healthy neighborhoods and fight blight. Our real estate owned (REO) and distressed asset programs move distressed and vacant residential properties into the hands of those who will rehabilitate the houses either (1) for sale to an owner-occupant or (2) for rental as safe and affordable housing. Additionally, the NCST engages in housing policy research and advocacy, and provides a source of capital to organizations engaged in housing acquisition and rehabilitation work.
One problem that has destabilized many communities is the persistence of vacant and abandoned homes, which are exposed to vandalism and continued decay. In some instances, mortgage servicers and investors make an economic decision not to complete the foreclosure process, particularly for low-value properties. The result, which is often described as "zombie foreclosures," is that properties continue to deteriorate and exert a viral influence on the community. This virus can weaken nearby home values, create health and safety risks, reduce local tax revenues, and contribute to further neighborhood decay.
In many of these distressed markets, moving vacant properties into the hands of new owner- occupants or responsible landlords faces significant barriers. Home values in these markets often suffer from a valuation gap, because the costs to acquire and rehabilitate one of these properties for safe and healthy occupancy exceed the fair market value of the home.2 If these properties are not acquired and rehabilitated, they may remain vacant, falling further into disrepair to the point where demolition is the only option.
The housing recovery in distressed communities depends on efforts to responsibly acquire and rehabilitate properties. Investors, at times from outside the community, have shown an appetite to purchase distressed properties, but often do not make repairs to bring the properties up to code, and simply opt to rent to low-income tenants or leave the property vacant with plans to flip it once values increase. In the worst-case scenario, investors have abandoned properties entirely when values remained low.
There are a number of efforts to stabilize these communities by affordable housing developers and nonprofit organizations. These buyers want to acquire and rehabilitate these properties for sale to low- and moderate-income homeowners or to expand the stock of affordable rental housing. (For more information, see the "National Community Reinvestment Coalition GROWTH Fund.") The NCST's community partners report, however, that stiff competition from investors with deep pockets remains one of their biggest obstacles in stabilizing neighborhoods and fighting neighborhood blight.
First Look, powered by the NCST's online REOMatch platform, is the NCST's longest-running and largest program. For financial institutions with REO portfolios, First Look provides a mechanism to sell those properties to community partner organizations such as local nonprofit groups, community development corporations, and other neighborhood stabilization-focused buyers that are pre-qualified by the NCST. Current First Look sellers include Fannie Mae, Freddie Mac, and other private financial institutions.
First Look gives local NCST partner organizations working to stabilize communities an opportunity to purchase REO properties before they are listed on the Multiple Listing Service (MLS) or auction sites. Selling properties through the REOMatch platform saves repair, maintenance, and marketing costs and reduces the risk of further property value declines from vandalism or other damage.
The First Look program solves two of the most daunting problems facing distressed communities. First, because the sellers often pass on their savings to local buyers, the property pricing can help fill the valuation gap between low market value and higher rehabilitation and purchase costs. Second, giving NCST partners the opportunity to acquire properties before they are offered on the MLS or auction sites reduces investor competition and solves the problem of sourcing suitable properties in communities that are being targeted for revitalization.
NCST buyers, our community partner organizations, appreciate the cost savings and look for additional savings wherever possible. One NCST community partner has formed partnerships with local banks, which provide a resource for "flexible capital" that helps further hold down costs. Read more about this program in the sidebar "Florida Minority Community Reinvestment Coalition."
When First Look sellers take possession of newly foreclosed properties, they immediately place those properties on REOMatch. The REOMatch platform gives local buyer-partners an opportunity to customize their property searches. Updated daily, REOMatch provides NCST buyers with immediate notice of any properties that become available in their target neighborhoods.
Buyers have 48 hours to indicate initial interest in the properties, and then have eight days to inspect the property and determine whether they would like to receive a purchase price from the seller. After receiving that price, they have 48 hours to accept the seller's offer price. If no NCST buyers are interested in obtaining pricing, or if the buyer rejects the pricing after inspection, the financial institution is free to prepare the property for marketing to the general public, having lost very little time.
Although the volume of REO properties available through the platform has declined as foreclosures have decreased, the program received a boost in recent years with the participation of Fannie Mae and Freddie Mac. These entities now use the NCST's REOMatch system for their Neighborhood Stabilization Initiative, which offers Fannie- and Freddie-owned REO properties to local affordable housing and community development organizations in 28 strategic markets around the country, mostly east of the Mississippi River.
In collaboration with the Housing Partnership Network, a business collaborative of the nation's leading affordable housing and community development nonprofit groups, the NCST owns and manages a small portfolio of long-delinquent mortgages donated by financial institutions, including national banks. This program, known as the ReClaim Project, contributes to overall neighborhood revitalization efforts in markets still recovering from the housing crisis. By offering a community-positive resolution for pre-foreclosure loans on low-value properties, the ReClaim Project addresses situations that otherwise might result in a zombie foreclosure.
The ReClaim Project has accepted donations from national banks of low-value nonperforming mortgage loans along with a financial contribution, sized to pay the costs associated with resolution of the properties. This contribution can cover costs for servicing and loan remediation or property resolution expenses, such as homeowner counseling, property security and maintenance, title and property tax deficiencies, property repairs, and, when necessary, demolition. After transferring the loan, a specialized servicing firm that has experience with this asset class handles all servicing functions and initial loss mitigation efforts.
The ReClaim Project team and the special servicer then work with local government and community housing partners to create the best property-specific resolution. This partnership leverages the on-the-ground expertise of the NCST's network of community-based providers and the Housing Partnership Network's local members, along with community, city, and state officials, to identify a disposition strategy for each property. The team considers several factors, including the borrower's financial condition, the property's condition, alignment of a disposition strategy with community goals, and any local ordinances related to tax foreclosure, property preservation, and other relevant issues.
After weighing all factors, the team either modifies the loan so the borrowers can afford the monthly payments or arranges for a foreclosure alternative, such as a short sale or a deed in lieu of foreclosure. When the team is unable to contact the owner or work out a foreclosure alternative, the foreclosure process is completed and the property is moved into the NCST's First Look program to end up in the responsible hands of a local NCST partner.
Participating financial institutions can benefit in several ways. Most important, conveying a mortgage note or a pool of mortgage notes to the ReClaim Project avoids the cost and economic uncertainties associated with foreclosure and property disposition. By prioritizing homeowner retention and community-focused solutions, this initiative reduces a bank's potential reputation risk. Additionally, partnering with a single national intermediary is more cost effective than negotiating individual conveyances to hundreds of local organizations with varying levels of note resolution experience.
The NCST also operates the REO Capital Fund, which aggregates capital from philanthropic and social investment sources to provide financing for local organizations to acquire and rehabilitate single-family homes. Effectively deploying this fund has been challenging, however, due to the cost of these monies and limitations on their use that screen out too many applicants. While the fund has provided capital for a number of important efforts, the NCST's experience in administering the fund has underscored how great the need is for better, more flexible capital sources. The NCST is looking for financial institutions to partner with in this effort.
For more information, please visit the NCST website.
1 See Michela Zonta and Sarah Edelman, "The Uneven Housing Recovery," Center for American Progress, November 2, 2015.
2 See Kendall Baer, "The Valuation Gap: A Growing Issue for Housing Market Recovery," The M Report, February 29, 2016.
The Florida Minority Community Reinvestment Coalition (FMCRC) is a nonprofit organization dedicated to improving the quality of life for low-income and minority communities in Florida. The FMCRC's goal is to empower low-income and minority communities and the organizations that serve these communities. The FMCRC advocates for attracting investments in community revitalization, health, education, homeownership, employment, and minority entrepreneurship. Over the last 24 months, the FMCRC has completed the rehabilitation of 66 homes, including single-family homes, condominiums, and townhomes.
"The demand in minority communities for affordable, decent housing is enormous," said Al Pina, Chairman and Chief Executive Officer of the FMCRC. "And capital is critical to increasing the stock of affordable housing. Community development financial institutions cannot be the only source of this capital. Grants and government funds are finite; there will never be enough. We need other sources of flexible capital to accomplish our best work." Pina noted that a community development organization must first set up a proper financial system to build relationships with banks. The flexible capital his organization has received from banks allows it to scale its work more effectively than small organizations typically can. He uses a construction line of credit, which has currently allowed the FMCRC to build a pipeline of almost 100 homes—homes that will provide affordable housing for Florida families.
"Whether we renovate a home or build a home from the ground up, the neighborhood is our top customer," said Pina. "Our goal is to raise the values in that neighborhood, which then helps the people living nearby, and it helps the banks as their mortgage customers are now achieving equity in their homes."
Over time, Pina has learned how to reduce the costs associated with renovating and building homes, such as buying construction materials like tile and granite in bulk. With flexible capital raised from banks, he can purchase the materials and avoid upcharges typically requested by a contractor. These savings allow the FMCRC to build a quality product for home buyers, yet keep the end price affordable.
Pina said the banks are also much faster in releasing capital for the projects, at about 40 days on average, compared with an average of 180 days for community development financial institutions. He added, "Participating with an NCST community partner organization in revitalizing our communities is good business for the banks. They profit from interest on the money they loan, plus they may receive CRA [Community Reinvestment Act] consideration." He also said banks may benefit by acting as the mortgage lender for customers purchasing the homes.
For more information, visit the FMCRC website.
In 2014, the National Community Reinvestment Coalition (NCRC) established the GROWTH initiative—Generating Real Opportunities for Work Through Housing. GROWTH's objectives include the following:
The NCRC Housing Rehabilitation Fund describes itself as "a self-sustaining, for-profit, mission-driven LMI neighborhood investment fund." The fund attracts both capital for lending and investment funds for equity. Together, the fund manager and each investor can tailor the investment target to best meet the investor's social impact needs.
Through the fund, homes in need of renovation are purchased, usually in LMI neighborhoods; the renovation is completed; and the houses are offered for sale to qualified buyers or as rent-to- own opportunities for families not financially ready to buy. Both home buyers and lease-to-own participants agree to participate in housing and credit counseling to improve their understanding of ownership requirements and responsibilities, and their likelihood of success.
The GROWTH initiative also supports workforce/job training in the construction trades. Using the homes purchased through the fund as resources for on-the-job training, program participants on the workforce development tract apprentice with home renovation crews for about six months. When the program is completed, each trainee apprentice works with a program job developer to find permanent employment in the local commercial construction industry.
Today, after two years, the initiative is showing positive results. The NCRC has acquired 130 properties, signed three lease-to-own agreements with LMI families, sold 20 homes to LMI families, and produced an annualized unleveraged return of 15.8 percent on the sold deals.
To qualify for the lease-to-own program, interested families must require time to improve their credit score, reduce their debt level, or save for a down payment. The program requires a minimum credit score of 550, a $50 application fee, a criminal background check, and gross monthly income that is at least three times greater than the monthly rent on the property. The lease-to-own program also requires a minimum two-year lease term, and the lease-to-own tenants must exercise their right to purchase by December 31, 2021, the program end date.
The NCRC's rehabilitation-to-sale program offers immediate homeownership opportunities for individuals interested in purchasing in an LMI neighborhood or for LMI families in any neighborhood. GROWTH buys and renovates properties and makes them available to interested buyers. Buyers are responsible for seeking out and obtaining a mortgage.
For further information, visit the GROWTH by NCRC website.
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Collection: Community Developments Investments
Before-and-after image of a home in New Orleans rehabilitated by Redmellon Restoration & Development, a mission-driven real estate development company.
Call (202) 649-6420 or email communityaffairs@occ.treas.gov. This and previous editions are available on the OCC's website at www.occ.gov/communityaffairs.
Articles by non-OCC authors represent the authors’ own views and not necessarily the views of the OCC.
