Kristopher Rengert, Community Development Expert, OCC
The sale by JPMorgan Chase (JPMC) of 47 nonperforming mortgage notes is being closely watched by lenders as a way to avoid having to foreclose on defaulted loans and to expedite the transition of multiple properties to community groups rebuilding neighborhoods.
The buyer was Housing and Neighborhood Development Service (HANDS), a leading nonprofit community development corporation that works with lenders to acquire, redevelop, and return real estate owned by financial institutions to low- and moderate-income homeowners and renters in Essex County, New Jersey. Thanks to its work in renewing blighted and abandoned homes, HANDS has earned the respect of community leaders and lenders in the New Jersey community and beyond.
In March 2009, JPMC sold the nonperforming notes--mortgage notes on which borrowers had failed to make even a single payment--to HANDS for a reported $2.3 million. The homes, abandoned in the wake of the collapse of a fraudulent mortgage scheme, were in the heart of the distressed neighborhoods in and near Newark that HANDS is working to revitalize.
Because vacant homes can become eyesores and targets for criminals, HANDS was anxious to buy and rehabilitate the homes for new homeowners and renters. “Time is our enemy,” Patrick Morrissy, Executive Director of HANDS, said at the time of the sale.
The transaction, finalized after more than a year of negotiations, was praised as the first bulk sale of nonperforming mortgage notes by a single lender during the recent financial crisis. The deal benefited the bank, the community, and HANDS. As a result, it provides a model for future bulk sales and for community revitalization efforts across the country.
JPMC benefited in these ways:
- The bank sold 47 nonperforming notes on properties left vacant in the wake of a mortgage scam that victimized borrowers in urban communities in Essex County. At the time, the lender was Washington Mutual (WaMu), the nation’s largest thrift. When WaMu failed in 2008, JPMC acquired the thrift and its holdings, including the 47 mortgage notes.
- By selling the notes before foreclosure, JPMC saved the time and expense typically associated with foreclosing, holding, marketing, and selling distressed properties.
- JPMC also may have avoided the negative publicity that can accompany foreclosure, as well as a further decline in property value that can occur when values are falling.
HANDS benefited in these ways:
- The purchase was the first by HANDS and was the initial step in a comprehensive plan to acquire and rehabilitate REO properties in Essex County.
- HANDS saved time and money by buying distressed loans in bulk from a single lender, rather than by buying multiple properties from multiple lenders and investors.
- The deal helped HANDS accomplish a broader revitalization in Essex County. The effort was led by the Community Asset Preservation Corporation of New Jersey, a new organization that HANDS helped found. HANDS and this new organization work with financial institutions to improve targeted communities by gaining title to vacant properties, rehabilitating and then selling or renting them to low- and moderate-income home buyers (see CAPC).
“This is a neighborhood stabilization program,” Morrissy said. “These communities have plenty of affordable housing. CAPC’s goal is to ensure that the neighborhoods continue to be desirable as places to live.”
A History of Helping
Founded in 1986, HANDS works to stabilize urban communities in Essex County with vacant, abandoned, and foreclosed homes and businesses. HANDS buys vacant and foreclosed homes and turns them over to nonprofit organizations that find homeowners and renters for them. The goal is keep vacant homes from becoming targets for criminals and hurting community property values. When necessary, HANDS gains titles in other ways, for example, by deed in lieu of foreclosure, and then clears the titles and sells or rents the properties.
HANDS relies on an array of financial partners, as is typical with large real estate transactions involving nonprofit organizations. For this project, New Jersey Community Capital was HANDS’ lead partner in bringing together the various financial institutions participating in the transaction. HANDS needed $3.6 million to buy the JPMC notes and to proceed with its plan. After HANDS gains title to the properties, nonprofit partners rehabilitate the homes and transfer them to new owners. From start to finish, the total project is expected to cost about $5 million.
Prudential Social Investments, the primary lender involved, required a 20 percent equity investment in the initial purchase. This was provided by New Jersey Community Capital, HANDS, and Local Initiatives Support Corporation. Financing was also provided by New Jersey Community Capital, NeighborWorks America, and Enterprise Community Partners. Additional investments are likely to be needed when the homes are sold as affordable housing to low- and moderate-income families. And nonprofit organizations and home buyers buying the homes will require mortgage loans from lenders.
Helping with the redevelopment and sale of these properties are six prominent, nonprofit developers working in Essex County: La Casa de Don Pedro, Unified Vailsburg Services Organization, Episcopal Community Development, Newark Housing Partnership, Brand New Day, and HOMECorp. Also providing financial assistance are the municipalities of Newark, Irvington, East Orange, and Orange, as well as Essex County.
Lessons for Lenders
Wayne Meyer, HANDS’ Housing Director, says HANDS’ experience, first with WaMu, and then with JPMC offers valuable lessons for lenders and nonprofits interested in buying mortgage notes and loans to help the communities they serve.
Lesson 1: Place realistic values on properties in a declining market.
Financial institutions must realistically value their nonperforming mortgage notes and REO properties, particularly in distressed communities and declining markets. In these cases, real estate owned may be worth just a fraction of its original value or, in the case of mortgage notes, a fraction of the outstanding balance. Realistically valuing this property may force lenders to recognize a loss, but they may avoid further declines in value by taking the loss sooner rather than later. In addition, lenders help community stabilization efforts by transferring vacant and deteriorating properties to nonprofits capable of finding buyers or renters for them. In turn, this can improve the value of neighboring homes and businesses in a community where the lender has other investments.
Lesson 2: Maintain institutional memory during times of change.
Bulk purchases, like any complicated transaction, benefit from the attention and continuity of the lender’s staff, and when that isn’t possible, well-documented records. Meyer said the JPMC deal was delayed and took more than a year to close because of staff turnover after WaMu failed and JPMC acquired the thrift. JPMC employees, lacking sufficient records, needed time to understand and then conclude the deal. If the recession continues, other financial institutions are likely to fail and be merged, resulting in staff turnover. But Meyer hopes that its experience with JPMC will make similar bulk buys of mortgage notes easier for others.
Lesson 3: Recognize the value of nontraditional roles and partnerships.
While banks have always worked with nonprofits to develop communities, the economic downturn is giving lenders the opportunity to work with new and nontraditional nonprofit partners. With the right set of skills, these partners can take on new roles and handle foreclosed and distressed properties in a way that can help save money and expand their presence and reputation in communities they serve. By expediting the disposition of nonperforming loans on vacant residential properties, banks may find opportunities to lower their holding costs and, in return, offer lower prices to affordable housing providers, such as HANDS. Such actions can benefit lenders, affordable housing providers, and the communities they serve.
For more information on HANDS, e-mail Patrick Morrissy or visit the Web site.
Frequently Asked Questions About How Nonprofit Organizations Can Acquire Nonperforming Loans
Q: What difference does it make if a nonprofit organization purchases an REO property or acquires a nonperforming loan?
A: When a nonprofit organization purchases an REO property, the foreclosure has been completed, so the nonprofit organization acquires full title to the property and is the owner. If the nonprofit organization purchases a nonperforming loan, the loan is in default but foreclosure proceedings have not been completed. The nonprofit organization owns the note on the mortgage, but not the property itself.
Q: How is a nonprofit organization able to get control of properties through the deed-in-lieu-of-foreclosure process? What rights does the nonprofit organization acquire?
A: In some instances, when a borrower is in default, the mortgage note holder will agree to accept a transfer of the title to the property from the borrower instead of proceeding with foreclosure. This process is called deed-in-lieu-of-foreclosure and transfers all ownership rights to the mortgage note holder. The primary advantage of this approach is that a deed-in-lieu-of-foreclosure avoids the expense and time involved in a foreclosure.
Q: What are the risks when a buyer purchases a nonperforming loan or gains control of a property through the deed-in-lieu-of-foreclosure process?
A: With the purchase of a nonperforming loan, the buyer takes on all of the legal obligations of the former mortgage note holder. To acquire full title to, and ownership of, the property, the note holder would have to complete foreclosure. Even after the foreclosure is completed, the property in many states is subject to a right of redemption that allows the former borrower to reacquire ownership by paying the unpaid loan balance plus costs. In some states, the right of redemption is quite short. For instance, this period is 10 days in New Jersey. In some states, if the property is vacant, the right of redemption is waived. A deed-in-lieu-of-foreclosure expedites the transfer of property. There is no need to file for foreclosure and no right of redemption is available to the former homeowner.
Q: What right does a nonprofit organization have to perform property inspections and do other due diligence when it evaluates whether to buy a nonperforming loan or accept a deed-in-lieu-of-foreclosure?
A: Until the legal title of a property has transferred to a new owner, there is generally no right to inspect a property. A lender or servicer would be reluctant to allow a property inspection without the express permission of the property owner. If a lender or servicer knows that the property is vacant, there is an obligation to secure the property. But this does not provide the lender the right to inspect the property or allow others to do so. If a borrower has agreed to a deed-in-lieu-of-foreclosure, the lender or servicer may have more bargaining power to negotiate with a borrower to permit a property inspection.
Q: What responsibilities does a nonprofit organization have to maintain a vacant and blighted property while it has the nonperforming loan but not full title to the property?
A: Although the nonprofit organization, in this case, is not the property owner and is not obligated to perform property upkeep as the holder of a nonperforming loan, once the nonprofit organization acquires full title it will be subject to any liens placed on the property. Many jurisdictions will file liens against vacant properties to recover the cost of property maintenance services, such as mowing lawns and removing trash.