By Alison Gregor
Last spring, a revolutionary program to help stave off a wave of housing foreclosures was launched in Northern New Jersey. An alliance of nonprofit groups purchased the defaulted mortgages of 47 abandoned and crumbling homes in the Newark area with plans for refurbishing and reselling them to fight neighborhood blight.
As the first large-scale bulk purchase of foreclosure homes in the nation by nonprofits, the program is serving as a model for what housing organizations nationwide would like to institute in neighborhoods imperiled by the foreclosure crisis.
A group called the National Community Stabilization Trust (NCST), an alliance of six nationwide community development nonprofits, has taken an interest in the New Jersey program. With access to billions of dollars in federal funding, along with a $50 million Ford Foundation loan, NCST aims to help transfer foreclosure homes away from banks and into the hands of financially responsible homeowners.
All the homes purchased in New Jersey were sold by Washington Mutual Bank, now J.P. Morgan Chase. While the alliance of nonprofits led by Housing and Neighborhood Development Services, Inc., or HANDS, in a rare instance, successfully negotiated directly with the bank themselves, in the future, NCST will be available to assist them as a liaison with lenders.
“Part of the problem has always been that you have financial institutions with a growing inventory of foreclosed properties, and you also have communities about to receive, in many cases, a significant allocation of federal funding to help them buy those properties, but historically these two entities don’t communicate,” says Craig Nickerson, NCST’s president, who has a background as a mortgage financier. “We’ve created a bridge between two worlds that don’t speak the same language.”
The first action of NCST, which formed in 2008, was to develop a universal way of conveying properties to housing groups. “We want to provide better access to the foreclosed and abandoned properties for communities,” Nickerson says. “So the first thing we did, going back to the fall of 2008, is we established a predictable, seamless, transparent system by which we could convey property.”
Now, NCST is preparing to help communities after entering into agreements with the nation’s biggest mortgage lenders and servicers of mortgage-backed securities to provide opportunities for housing groups to purchase foreclosure homes. NCST announced in late August that it had also signed up more than 100 communities in 35 states for its services, among them Suffolk and Nassau counties, the communities of Islip and Babylon on Long Island, and Rochester, NY.
With about $6 billion in federal money for the foreclosure crisis just starting to flow to communities, NCST also hopes to assist nonprofits in strategically leveraging that money.
“The money that’s been appropriated by Congress for this sounds like a tremendous amount of money, but when you look at the fact that there’s millions of foreclosure properties nationwide, $6 billion doesn’t go that far,” Nickerson says. “We might be able to tackle about 100,000 units nationwide with that, so it’s really important that communities are strategic in how they use that money.”
NCST wants to assist communities in leveraging the federal money with the added attraction of the $50 million from the Ford Foundation to lure lenders to distressed neighborhoods. “The capital markets—the lending community—is not engaged in making loans, particularly in these distressed neighborhoods on properties that need significant levels of renovation,” Nickerson says. “This is not the time when lending institutions are willing to get out on a limb and take a risk, so we’re using the Ford money as insulation against their risk.
“So by creating revolving lines of credit, by creating reserve funds that limit the risk around renovating a property, we can bring more capital to these neighborhoods than would otherwise be the case,” he continued. In other words, nonprofit housing groups will be able to get loans to purchase homes and fix them up, thereby saving neighborhoods.
Nickerson says that he hopes to quadruple the $6 billion in federal funding. “We think, for every dollar of federal money, we should be able to grow it into four dollars by virtue of this Ford money,” he says.
In New Jersey, the group that raised the funding to purchase the 47 homes, called New Jersey Community Capital, is now working closely with NCST. Wayne Meyer, the president of the group, says he anticipates NCST to help both in facilitating the acquisition of properties, and leveraging financing.
“Nonprofits throughout New Jersey, and throughout the country, have always struggled with this concept of acquisition of scattered-site properties in neighborhoods,” Meyer says. “There’s lots of reasons for that, financing obviously being one of them. But also there’s the problem of being able to meaningfully acquire properties on a scale that makes sense.”
Buying one home in a neighborhood that’s being abandoned and plummeting in value doesn’t do much to stop the free fall. Growing crime and vandalism typically follow property neglect, leading to increased costs of as much as $19,000 per property to local and state governments, according to HANDS.
“When you have a higher concentration of foreclosed properties, it becomes almost a virus in that community that further decreases the incentive of people to fix up their own properties,” NCST’s Nickerson says. “It stops people from making their own mortgage payments, confidence wanes, property values decrease, property taxes aren’t paid. It’s a downward spiral that begins to pick up speed.”
However, a nonprofit purchasing and investing in several homes can turn a neighborhood around, he says. Thus, the federal government has allocated the $6 billion thus far in a new project called the Neighborhood Stabilization Program.
“The purpose of this program is to infuse enough capital strategically in a concentrated way so we can start to reclaim some of these neighborhoods that are really struggling to survive,”
Nickerson says.
Nickerson, who has been in the housing and mortgage industries for almost four decades, says some of these deteriorating neighborhoods are the same ones that were suffering two decades ago but had over the years been stabilized, often due to government and private investment.
“The shame of it is you see neighborhoods that, over a period of maybe 15, 20 years, have slowly and incrementally gotten stronger, more stable, and the quality of the housing has gotten better, and then all of a sudden in the last 12 to 18 months, they’ve been decimated,” he says. “We’ve reversed 20 years of progress.”
In New Jersey, for example, in one month alone, February 2009, 654 homes were repossessed by banks, and more than 600 were scheduled for foreclosure auction. Most of the 47 abandoned homes purchased by HANDS, which is located in Orange, are in Newark, East Orange, Irvington, and Orange, but there are a handful of outliers in places such as Roselle, Woodbridge, and Perth Amboy.
Restoration work has started on a few of the homes, including one suffering from fire damage in coastal New Jersey’s Keansburg. While working with its nonprofit partners to stabilize and rehabilitate the properties, HANDS will eventually convey groups of homes to the nonprofits that work in the properties’ neighborhoods. Those groups have agreed to complete the rehabilitation and make the homes available for resale at affordable prices, mostly for people with low or moderate incomes.
The total cost for the purchase and rehabilitation of the 47 homes is anticipated to be about $5.4 million, and HANDS will have such significant carrying costs—interest, property taxes, and insurance—during the rehabilitation process that it requires a collaborative effort, according to Patrick Morrissy, the executive director of the group.
“Time is our enemy and early intervention is the key to battling the destabilizing influence of abandoned and foreclosed properties on neighborhoods,” he says. “The reason we intervened with the 47 mortgages was to kind of get ahead of the foreclosure crisis and see if we could stabilize and clean up the properties while we cleared the title, and then we would redevelop the properties.”
Morrissy says he found the bank willing to do business with the nonprofits, because they were looking to buy quickly and in bulk. “A bank, if you’re going to come in and buy 20 or 30 properties, and you’ve got the financing to close on them quickly, they’re willing to get rid of those properties,” he says. “It saves them money. So this purchase has become something of a national model for the idea of not just buying one property at a time, but purchasing them in bulk.”
Morrissy says that HANDS, which has specialized in the redevelopment of troubled properties for about 23 years, is in discussions regarding a second bulk purchase. The statewide alliance of nonprofits plans to purchase 50 to 75 more foreclosure properties in the next year, and possibly as many as 600 homes over a three-to-five-year period throughout the state.
Some targeted locations will be Jersey City, Asbury Park, and Elizabeth, says Diane Sterner, the executive director of the Housing and Community Development Network, a statewide association of community-based development groups.
In the meantime, community development groups are watching Essex County as an example. With the aid of NCST, Meyer of New Jersey Community Capital says he is working on creating a national model for a “community asset preservation corporation,” or CAPC, that will continue beyond the current wave of foreclosures to help fund housing purchases in New Jersey’s troubled neighborhoods. The intention is for the program to be replicated throughout the country.
“The whole idea in our mind” concerning CAPC “is to create an infrastructure that survives this foreclosure crisis,” Meyer explains. “With the 47 homes we’ve purchased, we’re finding that the process is working, so we’re encouraged by it, but we know we’ve got some hurdles to go [over]. NCST is really an important tool in my mind for our acquisition program.”
A similar program to New Jersey’s, but not as advanced at this point, has grown out of a three-year initiative to purchase and resell homes foreclosed upon by the U.S. Department of Housing and Urban Development in New York City. A group called Restored Homes has purchased 56 HUD-foreclosed buildings since 2006 and has resold some and is in the process of repairing others.
But this new initiative, being done with the city government’s housing groups along with the assistance of NCST, is different. Restored Homes will be purchasing homes in the city’s most foreclosure-plagued neighborhoods. As of September, the group had purchased eight in deteriorating neighborhoods with plans to purchase a total of 95 homes by spring 2011.
“We’re going to be working in what the city has determined to be 13 areas of greatest need,” says Salvatore D’Avola, the executive director of Restored Homes. “These are areas with high lis pendens, high foreclosure filings, high subprime mortgage rates.”
For instance, three of the first eight homes were purchased in Jamaica, Queens, which has almost one-fifth of all the city’s foreclosures, with foreclosures on 1,152 homes from January 2007 to September 2008. Other troublesome areas are the North Shore of Staten Island, where Restored Homes purchased four homes, and the Williamsbridge/Baychester area of the Bronx, where the group acquired one home.
These areas, and others in all boroughs except Manhattan, are the target neighborhoods for Restored Homes full-blown program to purchase 95 homes, refurbish them and resell them at affordable prices to low-income families. While Restored Homes has raised its funding without NCST’s help, NCST has assisted by enabling the nonprofit to get a first look—before any private buyers—at properties about to enter foreclosure.
The properties have been sold at discounts off market rate of about 15 to 25 percent. “Three of the eight properties we bought were offered to us through the Trust, and we ended up purchasing them through a process with the Trust,” D’Avola says. “They were Wells Fargo properties.”
D’Avola says Restored Homes has raised $27 million in federal, state and city funds, which it is using to leverage a loan of $32 million from a consortium of lenders led by J.P. Morgan Chase. Home purchases will take place throughout 2009, 2010, and 2011. “We have the option of buying individual buildings, or if available, we could buy in a bulk purchase from a particular servicer,” he says.
Arden Sokolow, the director of distressed asset financing programs for the city’s Housing Preservation and Development office, says it was exciting to be able to create a program where homes could be selectively purchased for their maximum neighborhood impact. However, the age-old problem of banks and mortgage servicers being stingy with information on foreclosure homes continues to hamper the process, she says.
“Unfortunately, we’re trying to figure out where the banks’ supplies are, and they have not been overly transparent about that,” Sokolow says. “While we’d love to buy every house they own in Jamaica, we don’t really know for sure where the supply is exactly. We’re hoping the Trust will help us buy in bulk.”
