Community Developments Investments (February 2018)
National Community Stabilization Trust—A Bridge for National Bank and Community-Based Partnerships
Florida Minority Community Reinvestment CoalitionBefore and after: This deteriorated home in Northwood Hills, a historic area of Palm Beach County, Fla., was purchased and renovated through the NCST’s First Look program. Many of its original 1926 features were restored, and the home was then purchased by a first-time LMI home buyer.
Julia Gordon, Executive Vice President, National Community Stabilization Trust
A decade after the start of the financial crisis, today’s U.S. housing market remains uneven. Many areas have rebounded significantly from the recession and have a robust housing market. Others—especially communities of color, lower-income areas, and cities where economic activity remains depressed—continue to grapple with high rates of vacant, abandoned, and distressed properties.1
Established in 2008, the National Community Stabilization Trust (NCST) is a nonprofit organization that works in partnership with banks, mortgage servicers, secondary market institutions, and other partners to support healthy neighborhoods and fight blight. Our real estate owned (REO) and distressed asset programs move distressed and vacant residential properties into the hands of those who will rehabilitate the houses either (1) for sale to an owner-occupant or (2) for rental as safe and affordable housing. Additionally, the NCST engages in housing policy research and advocacy, and provides a source of capital to organizations engaged in housing acquisition and rehabilitation work.
One problem that has destabilized many communities is the persistence of vacant and abandoned homes, which are exposed to vandalism and continued decay. In some instances, mortgage servicers and investors make an economic decision not to complete the foreclosure process, particularly for low-value properties. The result, which is often described as “zombie foreclosures,” is that properties continue to deteriorate and exert a viral influence on the community. This virus can weaken nearby home values, create health and safety risks, reduce local tax revenues, and contribute to further neighborhood decay.
In many of these distressed markets, moving vacant properties into the hands of new owner- occupants or responsible landlords faces significant barriers. Home values in these markets often suffer from a valuation gap, because the costs to acquire and rehabilitate one of these properties for safe and healthy occupancy exceed the fair market value of the home.2 If these properties are not acquired and rehabilitated, they may remain vacant, falling further into disrepair to the point where demolition is the only option.
The housing recovery in distressed communities depends on efforts to responsibly acquire and rehabilitate properties. Investors, at times from outside the community, have shown an appetite to purchase distressed properties, but often do not make repairs to bring the properties up to code, and simply opt to rent to low-income tenants or leave the property vacant with plans to flip it once values increase. In the worst-case scenario, investors have abandoned properties entirely when values remained low.
There are a number of efforts to stabilize these communities by affordable housing developers and nonprofit organizations. These buyers want to acquire and rehabilitate these properties for sale to low- and moderate-income homeowners or to expand the stock of affordable rental housing. (For more information, see the “National Community Reinvestment Coalition GROWTH Fund.”) The NCST’s community partners report, however, that stiff competition from investors with deep pockets remains one of their biggest obstacles in stabilizing neighborhoods and fighting neighborhood blight.
First Look, powered by the NCST’s online REOMatch platform, is the NCST’s longest-running and largest program. For financial institutions with REO portfolios, First Look provides a mechanism to sell those properties to community partner organizations such as local nonprofit groups, community development corporations, and other neighborhood stabilization-focused buyers that are pre-qualified by the NCST. Current First Look sellers include Fannie Mae, Freddie Mac, and other private financial institutions.
First Look gives local NCST partner organizations working to stabilize communities an opportunity to purchase REO properties before they are listed on the Multiple Listing Service (MLS) or auction sites. Selling properties through the REOMatch platform saves repair, maintenance, and marketing costs and reduces the risk of further property value declines from vandalism or other damage.
The First Look program solves two of the most daunting problems facing distressed communities. First, because the sellers often pass on their savings to local buyers, the property pricing can help fill the valuation gap between low market value and higher rehabilitation and purchase costs. Second, giving NCST partners the opportunity to acquire properties before they are offered on the MLS or auction sites reduces investor competition and solves the problem of sourcing suitable properties in communities that are being targeted for revitalization.
NCST buyers, our community partner organizations, appreciate the cost savings and look for additional savings wherever possible. One NCST community partner has formed partnerships with local banks, which provide a resource for “flexible capital” that helps further hold down costs. Read more about this program in the sidebar “Florida Minority Community Reinvestment Coalition.”
When First Look sellers take possession of newly foreclosed properties, they immediately place those properties on REOMatch. The REOMatch platform gives local buyer-partners an opportunity to customize their property searches. Updated daily, REOMatch provides NCST buyers with immediate notice of any properties that become available in their target neighborhoods.
Buyers have 48 hours to indicate initial interest in the properties, and then have eight days to inspect the property and determine whether they would like to receive a purchase price from the seller. After receiving that price, they have 48 hours to accept the seller’s offer price. If no NCST buyers are interested in obtaining pricing, or if the buyer rejects the pricing after inspection, the financial institution is free to prepare the property for marketing to the general public, having lost very little time.
Although the volume of REO properties available through the platform has declined as foreclosures have decreased, the program received a boost in recent years with the participation of Fannie Mae and Freddie Mac. These entities now use the NCST’s REOMatch system for their Neighborhood Stabilization Initiative, which offers Fannie- and Freddie-owned REO properties to local affordable housing and community development organizations in 28 strategic markets around the country, mostly east of the Mississippi River.
The ReClaim Project Initiative
In collaboration with the Housing Partnership Network, a business collaborative of the nation’s leading affordable housing and community development nonprofit groups, the NCST owns and manages a small portfolio of long-delinquent mortgages donated by financial institutions, including national banks. This program, known as the ReClaim Project, contributes to overall neighborhood revitalization efforts in markets still recovering from the housing crisis. By offering a community-positive resolution for pre-foreclosure loans on low-value properties, the ReClaim Project addresses situations that otherwise might result in a zombie foreclosure.
The ReClaim Project has accepted donations from national banks of low-value nonperforming mortgage loans along with a financial contribution, sized to pay the costs associated with resolution of the properties. This contribution can cover costs for servicing and loan remediation or property resolution expenses, such as homeowner counseling, property security and maintenance, title and property tax deficiencies, property repairs, and, when necessary, demolition. After transferring the loan, a specialized servicing firm that has experience with this asset class handles all servicing functions and initial loss mitigation efforts.
The ReClaim Project team and the special servicer then work with local government and community housing partners to create the best property-specific resolution. This partnership leverages the on-the-ground expertise of the NCST’s network of community-based providers and the Housing Partnership Network’s local members, along with community, city, and state officials, to identify a disposition strategy for each property. The team considers several factors, including the borrower’s financial condition, the property’s condition, alignment of a disposition strategy with community goals, and any local ordinances related to tax foreclosure, property preservation, and other relevant issues.
After weighing all factors, the team either modifies the loan so the borrowers can afford the monthly payments or arranges for a foreclosure alternative, such as a short sale or a deed in lieu of foreclosure. When the team is unable to contact the owner or work out a foreclosure alternative, the foreclosure process is completed and the property is moved into the NCST’s First Look program to end up in the responsible hands of a local NCST partner.
Participating financial institutions can benefit in several ways. Most important, conveying a mortgage note or a pool of mortgage notes to the ReClaim Project avoids the cost and economic uncertainties associated with foreclosure and property disposition. By prioritizing homeowner retention and community-focused solutions, this initiative reduces a bank’s potential reputation risk. Additionally, partnering with a single national intermediary is more cost effective than negotiating individual conveyances to hundreds of local organizations with varying levels of note resolution experience.
The REO Capital Fund
The NCST also operates the REO Capital Fund, which aggregates capital from philanthropic and social investment sources to provide financing for local organizations to acquire and rehabilitate single-family homes. Effectively deploying this fund has been challenging, however, due to the cost of these monies and limitations on their use that screen out too many applicants. While the fund has provided capital for a number of important efforts, the NCST’s experience in administering the fund has underscored how great the need is for better, more flexible capital sources. The NCST is looking for financial institutions to partner with in this effort.
For more information, please visit the NCST website.