John C. Dugan, Comptroller of the Currency
Comptroller Dugan, Deputy Comptroller Wides, and Norman Henry, President of Builders of Hope, on a recent tour of the organization's work in Dallas neighborhoods hard-hit by foreclosures.
This edition of the OCC's Community
Developments Insights examines the primary bank risks, benefits, and regulatory considerations associated with the Federal Housing Administration (FHA) 203(k) Home Rehabilitation Mortgage Insurance Program. The report provides a comprehensive overview of the program for lenders that may be considering expansion of their product line with 203(k) loans. This product can be used by banks to develop new business, mitigate risk, enhance profitability, and meet certain regulatory requirements, as well as assist in the revitalization and stabilization of neighborhoods negatively affected by the current foreclosure crisis.
National banks have always worked hand in hand with local and state leaders to
build and revitalize the communities they serve. Now, as the nation's economy
struggles to regain its footing, these partnerships are proving critical to
distressed neighborhoods and to lenders contending with a glut of abandoned and
Thanks to new community partnerships, neighborhoods across the nation are being
rebuilt and renewed. In Minnesota's Twin Cities, low- and moderate-income
families buy foreclosed homes before they become eyesores and targets for
crime. In Charlotte, North Carolina, families unable to qualify for
conventional mortgages live in homes while saving to buy them. In Phoenix,
Arizona, prospective home buyers receive prepurchase counseling, home buyer
education, and help finding homes they can afford.
The partnerships behind these efforts are using strategies and tools—some
new, some old—to return to beneficial use a growing portfolio of
nonperforming real estate on bank balance sheets. In doing so, the partnerships
are fulfilling the shared goals and best interests of lenders and community
Lenders benefit when nonprofits and state and local government agencies buy, and
find buyers for, the foreclosed homes and the difficult-to-sell mortgages or
real estate owned (REO) properties on their books. State and local governments,
nonprofits, and low- and moderate-income home buyers benefit by gaining access
to affordable homes and help to renew communities struggling with high
These efforts come at a critical time for financial institutions. High
unemployment and falling home values have left financial institutions
nationwide holding portfolios of foreclosed real estate and nonperforming
loans. These portfolios are expected to grow, particularly if the economy
weakens further and unemployment rises. This could cause more homeowners to
default on mortgages and a crisis that began with subprime borrowers to expand
to borrowers with conventional mortgages.
At the end of second quarter 2009, the proportion of homeowners delinquent on
their mortgages or in foreclosure rose to the highest level in at least four
decades, according to a Mortgage Bankers Association study released in August
2009. As many as one million more foreclosed homes and other properties could
be added to the REO portfolios held by financial institutions over the next 12
months, according to the
National Community Stabilization Trust, which estimated that there were
350,000 to 500,000 REO properties across the country in July 2009.
Foreclosed and vacant homes are costly to communities and lenders. They can
bring blight to neighborhoods, become targets for criminals, and depress the
values of neighboring homes. They diminish profitability for lenders, which
face rising costs for holding and marketing properties for extended periods,
particularly in communities where there are many foreclosed properties and few
buyers. To stem losses and avoid further declines in property values, lenders
increasingly are looking at new ways to manage REO portfolios and to get
distressed properties off their books more quickly.
Now, a vanguard of banks, nonprofit organizations, community groups, and
government agencies are working to combat these problems. They provide the
critical leadership, creativity, and financing needed to help rebuild and
revitalize neighborhoods across the nation.
Minnesota's Twin Cities: Nonprofit housing
organizations are enabling low- and moderate-income persons and families to buy
foreclosed homes from major lenders and mortgage servicing companies.
Leading this effort is the
Stabilization Trust, which was created in 2008 by four leading national
nonprofit organizations with grants from the Ford Foundation and the John D.
and Catherine T. MacArthur Foundation. Targeted neighborhoods are those in
Minneapolis and St. Paul hurt by high rates of foreclosure and
abandonment, falling home values, and rising crime. By the end of 2009, more
than 130 communities across the nation may be helped as the Stabilization Trust
expands its effort to transfer foreclosed homes and other REO properties from
mortgage lenders to local housing organizations and home buyers.
Orange and East Orange, New Jersey: Neighborhoods
distressed by high foreclosure rates are being helped by
HANDS, a community development corporation that is speeding the
transfer of vacant properties before they can hurt the value of neighboring
homes. In March, a national bank sold HANDS nonperforming mortgages on 47
properties left vacant in the wake of a mortgage scam. This innovative sale
involved the bulk purchase of defaulted mortgage notes—mortgages in
default but not foreclosed—by a nonprofit from a bank. Other lenders and
nonprofits are expected to use the strategy to help rebuild distressed
neighborhoods across the nation.
Charlotte, North Carolina: Home buyers in the
Peachtree Hills neighborhood who cannot qualify to purchase a home with a
traditional mortgage have the chance to rent a home until they can qualify to
buy it through a lease-purchase program. This program is piloted by the
Center for Community Self-Help, a Durham, North Carolina-based
nonprofit that partners with local banks and nonprofits. Self-Help plans to
expand the program to other cities with the help of lenders willing to finance
REO sales to community groups that can identify potential lease-purchase
homeowners and manage those properties.
Maricopa County, Arizona:
Housing Our Communities provides first-time home buyers needing
affordable housing with prepurchase education and counseling. The nonprofit
repairs REO properties for resale to low- and moderate-income home buyers and
works to increase the availability of affordable housing. Results have been
good. The nonprofit says more than 99 percent of clients helped since 1988
remain in their homes—and only four borrowers have lost homes to
As these and other neighborhood stabilization partnerships evolve, it is
critical that lenders, nonprofits, and state and local community leaders stay
abreast of developments and, whenever possible, adopt new strategies and tools
to revitalize their own communities.
To support this important work, this issue of Community Developments highlights
the emerging work of these lenders and innovative community partnerships. We
hope that their leadership—and their early successes—will inspire
other banks and communities to launch partnerships and to help spread community
revitalization efforts to other neighborhoods in need across the nation.