Neighborhood Stabilization: Local Partnerships Are Rebuilding Communities

Partnerships Serve Common and Self-Interest of Banks, Communities

OCC 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 foreclosed homes.

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 partners.

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 foreclosure rates.

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 foreclosure.

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.