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Responding to the Affordable Housing Crisis
February 6, 2009
New York

The fallout from the mortgage meltdown has been most acutely felt in the nation's low- and middle-income communities, where families are losing their homes at higher rates and foreclosures are driving neighborhood deterioration. An increasing number of loans are in distress, and lenders continue to hold on to properties they can't sell. The prospects for a scalable approach to affordable housing are dim at exactly the time when it is most needed.

The Milken Institute held a Financial Innovations Lab to explore mechanisms and strategies for addressing the issue. Is there a way to finance the acquisition and disposition of foreclosures while simultaneously easing the affordable housing crisis? During the daylong session, various proposals were debated by experts from banks, foundations, community development organizations, research institutions, and federal, state and local governments.

Mary Tingerthal of the Housing Partnership Network (HPN) introduced the National Community Stabilization Trust (NCST), a partnership that brings together four leading community development nonprofits: HPN, Enterprise Community Partners, the Local Initiatives Support Corporation (LISC) and NeighborWorks America. The NCST coalition aims to stem the decline of communities awash in abandoned and foreclosed properties by providing a clearinghouse for distressed REO (real estate-owned, or foreclosed) homes. The group helps local communities obtain REOs from servicers and investors, converting them to properties that support affordable housing and stable communities. Working with major loan servicers, NCST is currently testing its model in the Twin Cities, New York City, Rochester and Memphis. Under NCST, the purchase price is an agreed-upon "net realizable value" - that is, the market value under normal conditions, less the costs the seller would avoid by participating in the program (e.g., holding costs such as maintenance, taxes and insurance; transaction costs; decline in value over the holding period; capital costs saved by early receipt of proceeds; etc.).

Capital allocations are needed immediately to build a comprehensive affordable housing strategy at the local and state levels, according to Harold Simon of the Community Asset Preservation Corporation (CAPC) of New Jersey. CAPC uses a portfolio acquisition approach, works with multiple mortgage servicers and cross-subsidizes its properties. The organization prices assets from the ground up - identifying the actual cost to rehab and dispose of the property. Once those costs are identified, assets are targeted for demolition, land banking, sale at market rate, or rehab and development as affordable housing. The program began last year with the purchase of a portfolio of 47 loans. There is great opportunity for expansion right outside CAPC's front door, as vacant properties are rampant in Newark. While several years ago there were 350 REOs (of which 275 properties sold), Newark now has 950 REOs and posted only 100 sales last year. Simon urged immediate leverage of Neighborhood Stabilization Program funds (administered by the U.S. Department of Housing and Urban Development) at the state level.

Tom Streitz, director of housing policy and development for the City of Minneapolis, presented details of a pilot program he is implementing. The city purchases only the most distressed properties in identified strategic areas, with some targeted for demolition and some for land banking. Funds are provided from the city budget as well as from HUD's Neighborhood Stabilization Program (NSP), which currently has $5.9 billion in funding to tackle the problem nationwide. Streitz commented that one of the biggest challenges is that municipalities aren't set up to act quickly enough to compete against private investors in the acquisition of foreclosed properties priced at distressed levels.

The afternoon session focused on the disposition of assets. Bill Goldsmith of Mercy Portfolio Services described the Chicago Neighborhood Stabilization Program and mentioned real estate developers - both for-profit and nonprofit - as the main obstacle to building viable affordable housing solutions. Mercy Portfolio Services, together with the City of Chicago and the Chicago Neighborhood Stabilization Corporation, plans to acquire 1,400 vacant homes starting in March 2009 with the help of NSP funds. By the end of December 2013, most homes will be transferred to future homeowners using various strategies such as lease-to-purchase, interim rental and equity-sharing ownership. Two hundred of the 1,400 homes will be demolished and either rebuilt or used for the purpose of land banking.

Bruce Marks, representing the Neighborhood Assistance Corporation of America (NACA), advocated a return to what he called "basic lending" and underwriting of mortgages, stressing the need for income verification and proper documentation. His organization developed and successfully uses an online software solution that features a user-friendly application process and stores a borrower's documents. This greatly facilitates the underwriting of mortgages, and enables NACA to offer a 30-year fixed-rate product with an interest rate of 4.25%, with no down payment and no closing costs. Only 0.0023% of homeowners who bought this product defaulted on their mortgages.

The role and importance of the private market in reducing foreclosure rates and helping residents stay in their homes through restructuring individual mortgage loans was repeatedly discussed during the course of the day. One strategy brought forward was aggregating risk capital from accredited investors and matching these funds with those seeking equity investments, such as affordable housing agencies or individual prospective buyers.

Further limiting the number of vacancies and foreclosure evictions was cited by many as the key to stabilizing low- and middle income communities. While the overriding sentiment among attendees was grave concern about the current housing crisis and its negative consequences for disadvantaged communities, some participants expressed great hope that this moment could be seized to build long-term affordable housing solutions. But they also highlighted the importance of being aware of unintended consequences in crafting new policy.

A full report on the Lab's findings is available here. For more information, contact Caitlin MacLean, manager of Financial Innovations Labs, at cmaclean@milkeninstitute.org.