|Craig Nickerson, President of the National Community Stabilization Trust
The National Community Stabilization Trust is building bridges between financial institutions and local housing organizations in two ways—by improving access to foreclosed properties and increasing access to private capital. In the first instance, the Stabilization Trust is helping to speed the transfer of foreclosed properties held by financial institutions, commonly called real estate owned (REO), to local housing organizations working to rehabilitate and productively reuse these properties. A flexible financing "bridge" also has been created to link private capital with new federal subsidy funding.
The Stabilization Trust was created in 2008 through the collaboration of four leading nonprofit organizations that believed a national organization was needed to exclusively focus on this daunting task. In 2009, the founding organizations—Enterprise Community Partners, Housing Partnership Network, Local Initiatives Support Corporation (LISC), and NeighborWorks America—were joined by National Urban League and National Council of La Raza. Funding to capitalize the start up of the Stabilization Trust was provided by these six organizations and through grants and loans from the John D. and Catherine T. MacArthur Foundation, Ford Foundation, and other philanthropic organizations and financial institutions.
Last winter, the Stabilization Trust began its property acquisition program on a pilot basis in the Minneapolis-St. Paul metropolitan area with the goal of improving the predictability, scalability, and speed of REO transfers to local housing groups. Within eight months, over 150 properties were successfully transferred in the Twin Cities from participating financial institutions to local housing providers at attractive prices. At the end of September 2009, the Stabilization Trust was active in more than 100 local markets in 35 states; by the end of 2009, it hopes to be active in more than 130 communities across the nation.
Strategies for Success
In early 2008, with the OCC's support, the Stabilization Trust convened meetings with the nation's largest lenders and loan servicers. From these meetings, a clear role emerged for the Stabilization Trust—the organization would act as a facilitator between financial institutions selling REO properties and local nonprofit and for-profit housing groups interested in buying and renovating abandoned homes. The Stabilization Trust developed a streamlined process to increase the efficiency and predictability of REO property transfers.
The Neighborhood Stabilization Program (NSP), a program of the U.S. Housing and Urban Development, was created in fall 2008 to help communities struggling with high levels of foreclosed and abandoned properties. Congress has appropriated nearly $6 billion to date for the program. By solving two primary obstacles to neighborhood stabilization—access to foreclosed property on a predictable and scalable basis and access to flexible funding to leverage more capital for property acquisition and renovation—the Stabilization Trust is helping spur the productive use of NSP funds to promote community stabilization.
In March 2009, state and local government agencies began receiving NSP funding. These government agencies, and the nonprofit and for-profit entities that work with them, are often inexperienced with purchasing foreclosure properties from financial institutions. The Stabilization Trust ensures that these local providers can focus on what to do with the properties once they are under their control, rather than wasting time and resources navigating a complex REO transaction process with multiple financial institutions.
Key to the Stabilization Trust's success is the participation of leading national financial institutions. At the end of September 2009, the Stabilization Trust had relationships with Bank of America, Citigroup, Fannie Mae, Freddie Mac, JPMorgan Chase, GMAC, Nationstar, Saxon, Wells Fargo, and regional financial institutions. A property disposition approach with the Federal Housing Administration also is being piloted. Together, the participating institutions own or manage approximately two-thirds of the REO properties available in the nation.
Selecting Local Leaders
In each participating community, the Stabilization Trust typically seeks one locally designated organization authorized to act as the local buyer and to use NSP funds for property purchases. The lead organization is responsible for purchasing REO properties according to Stabilization Trust processes and subsequently conveying the properties to other local organizations for redevelopment or directly to new home buyers. By working with only one lead organization in a geographic area, the Stabilization Trust is able to increase efficiency, avoid buyer conflicts, and promote a unified local strategy. There are exceptions, notably in very large metropolitan areas, where the Stabilization Trust works with several lead agencies. The First Look diagram illustrates how the Stabilization Trust simplifies communication between multiple financial institutions with REO inventories and multiple community organizations seeking to acquire REO properties.
National Community Stabilization Trust
The National Community Stabilization Trust simplifies the transfer of REO properties to nonprofit organizations that are rebuilding distressed communities.
It is important to note that the Stabilization Trust serves as a facilitator for participating REO sellers and local buyers in property transactions and does not actually take title to any REO properties. The facilitator role is used by the Stabilization Trust for both newly foreclosed properties through the First Look Program and for existing REO properties through the Aged Inventory Program.
The First Look Process
First Look gives local buyers early access to REO properties, which can reduce carrying costs for REO sellers. When financial institutions receive newly foreclosed properties, local buyers begin working with the Stabilization Trust to determine whether they are interested in acquiring the properties. This occurs well before financial institutions would otherwise be ready to market properties. Local buyers get the opportunity to inspect properties and to decide if they want to purchase properties at the prices set by the financial institutions. This benefits financial institutions: as REO sales occur more quickly, financial institutions reduce carrying and marketing costs and avoid further declines in property value, vandalism, and other risks. In turn, financial institutions are expected to pass on these savings as pricing adjustments to local Stabilization Trust buyers.
On a daily basis, participating financial institutions provide the Stabilization Trust with updated lists of new REO properties available in each community's targeted zip codes. The Stabilization Trust then notifies local buyers of properties available in their target areas. Within 24 hours, local buyers indicate whether they are potentially interested in buying the properties. If there are no local buyers interested in the properties—perhaps due to the location, condition, or number of dwelling units—financial institutions are free to ready properties for marketing to the general public.
When local buyers are interested, they have five days to review and inspect properties, develop rehabilitation work specifications and cost estimates, and determine as-is values for the properties. During this period, financial institutions prepare properties for sale via their normal REO disposition process. As a result, First Look partners are not impeded from pursuing conventional marketing of REO properties; they are just given an additional opportunity to market properties, one that may result in quicker sales and, at the same time, demonstrate their support for community stabilization. The following graphic explains how the Stabilization Trust helps transfer REO properties to nonprofit organizations.
Financial institutions calculate the prices at which they are willing to sell properties to the Stabilization Trust local buyer using a net realizable value (NRV) process. The prices offered to local buyers reflect cost savings realized from expedited sales, including savings from the projected time on market for properties in that target market and the various carrying and marketing costs (see NRV definition). The net realizable value will typically result in price reductions that create a win-win—fast and efficient sales for REO sellers and purchases that satisfy the "discount from market value" required by the NSP.
Net Realizable Value Is ...*
Estimated market value assuming normal market conditions and procedures through a combination of full appraisal, broker price opinion, automated valuation model, or other proprietary calculations as appropriate
Minus Saved holding costs of insurance, real estate taxes, and maintenance
Minus Avoided transaction costs of brokerage and seller’s internal supervision and administration
Minus Savings in capital costs due to early receipt of proceeds
Minus Possible decline in value over the holding period
Minus Rehabilitation required for code compliance and marketing
Equals Net Realizable Value
*National Community Stabilization Trust
Financial institutions offer properties for sale to local buyers at the NRV price. This is understood among the parties to be a firm price, unless the local partner believes there are material issues with the financial institutions' valuations of properties, such as major structural issues or recent vandalism. The Stabilization Trust program discourages bargaining over price because the goal is to expedite the disposition process.
The Stabilization Trust has worked with its partners to establish a variety of required procedures for sellers and buyers to expedite sales. The Stabilization Trust remains involved in each step of the process by running a "transaction desk" that is responsible for monitoring the performance of the parties involved to ensure that all parties fulfill their obligations and that the process works efficiently.
The Aged Inventory Purchase Program assists buyers interested in acquiring properties in financial institutions' existing REO inventories, including bulk purchases in the target markets. To date, about 40 percent of the REO sales facilitated by the Stabilization Trust have been through the Aged Inventory Program; 60 percent have been part of the First Look Program.
Financing REO Sales
The Stabilization Trust also is improving access to leveraged financing for local buyers. By making available revolving lines of credit and loan loss reserves (guarantees), the Stabilization Trust is able to leverage more short-term financing for REO purchases and renovations by turnkey developers. The Stabilization Trust recently created its REO Capital Fund with an initial commitment from the Ford Foundation for up to $50 million in flexible, low-cost financing. Loans to local buyers are originated by participating sponsor community development financial institutions.
The Stabilization Trust's intention is to use the REO Capital Fund and funding to leverage private capital that may otherwise remain on the sidelines. The philanthropic and public funds can significantly insulate participating financial institutions from risk in such short- and intermediate-term lending, giving them incentive to provide larger investments into neighborhood stabilization.
The new REO Capital Fund has recently closed on its first $12 million of flexible financing and this fall will be making available revolving lines of credit and loan loss reserves to select local programs across the nation. Financial institutions interested in supporting this program should contact the Stabilization Trust.
The Stabilization Trust and its six key nonprofit sponsors are committed to building a sustainable campaign to help localities restore neighborhoods devastated by foreclosures and abandonment. Last spring, the REO Property Acquisition Program was operating on a pilot basis in a handful of communities. By September 2009, local buyers in over 100 communities were accessing REO properties through the First Look and Aged Inventory programs. To continue this progress, the Stabilization Trust seeks additional bank partners interested in participating in the REO Property Acquisition Program and in investing in the REO Capital Fund, as well as locally designated organizations authorized to use NSP funds to acquire REO properties.
For more information, e-mail Craig Nickerson or visit the Stabilization Trust Web site.