Capital Markets & Neighborhood Stabilization
The articles in this issue depart from our usual stomping grounds a bit to look at capital markets and how they are partnering or might partner with community developers. Here’s how we came to be consorting with private equity firms and their kin.
Jim Erchul of Dayton’s Bluff Neighborhood Housing Services in St. Paul, Minn., is worried. His organization is using NSP funds to fix up and reoccupy vacant homes in their service area. While Erchul, like so many others in the field, continues to fight the good fight and is making a valuable difference, he also makes no bones about feeling overwhelmed. He frets about the occupied but underwater homes that make up the rest of the neighborhood he works in. How are they going to afford to replace a roof or make other repairs with no equity? Do they all have to cycle through foreclosure eventually?
“Are we making it better for a few families on a few blocks?” he says. “Sure. Can we affect the real estate market? It’s ridiculous to even talk like that. What’s happened is of such a magnitude that I see it taking more than a decade to work its way through.”
A Question of Scale
In response to the foreclosure crisis, the nonprofit community has rallied its resources and focused its attention on the spreading virus that is decimating fragile neighborhoods. We’ve covered many of these efforts in the pages of Shelterforce, from groups stepping up to make use of NSP funds, to the National Community Stabilization Trust, to efforts like New Jersey’s Operation Neighborhood Recovery (ONR).
While much successful work has been done and many well-meaning and important policies have been enacted, the response from the nonprofit and public sectors has not been able to match the scale of the crisis.
We are still, in 2012, facing escalating foreclosures: 3.5 to 5 million loans, depending on who you ask, are seriously delinquent or in foreclosure as of January 2012, and the New York Federal Reserve expects the number of houses going into REO status to be higher in 2012 and 2013 (1.8 million per year) than it was in 2010 and 2011. The New York Fed also estimates that 11 million homeowners are underwater, to the tune of $700 billion in negative equity. Since 2006, $7.3 trillion in home equity has evaporated.
And, of course, with so many foreclosures already completed—2.7 million as of February 2011 just on loans taken between 2004 and 2008, according to the Center for Reponsible Lending—there is a vacancy crisis along with a foreclosure crisis.
Even innovative programs like ONR and Boston Community Capital’s Stabilizing Urban Neighborhoods program (see p. 18) that have gotten much-deserved accolades within the field and even general media, count their victories in the dozens, maybe low hundreds. Programs that address one property at a time, or even a dozen or so, are operating orders of magnitude smaller than the problem. And many in the field are struggling with that knowledge.
Though every saved home matters to its owners and neighbors, actually stabilizing neighborhoods will require operating close enough to the scale of the problem itself to shift market dynamics. Ridiculous? Maybe, maybe not.
Where the Money Is
To bring neighborhood stabilization to scale, perhaps we need to go, in the (apocryphal) words of bank robber Willie Sutton, “where the money is.” That is, the capital markets.
While the community development field struggles to scale up, the for-profit sector is actively purchasing notes and REO, many in distressed communities. Many of them are operating, or planning to, at significant scale. As George Ostendorf describes on page 10, pools of thousands of delinquent mortgages already change hands regularly. The mission of those trading them, however, does not include neighborhood stabilization, and they are rarely aware of the nonprofit community’s work and challenges. Even those who would want to do right by those neighborhoods are constrained by the expectations of their investors.
“We’re in a hurry,” says one. “We have to return money in two to three years after we get it. We had to turn down two families we thought we could modify. It took too long and we had to turn them down and foreclose. They both got their jobs back, but we couldn’t wait any more.”
Miriam Axel-Lute is editor of Shelterforce and associate director of the National Housing Institute.