The Hard Part
Reclaiming REO at a scale that protects neighborhoods will involve a delicate dance between ground game and national reach, and between nonprofit and for-profit capacities.
As important as dealing with delinquent mortgages preforeclosure is, neighborhood stabilization also requires dealing with the fact that the horse is already out of the barn. Neighborhoods are flooded with vacant properties, many of which are foreclosed, and some of which are REO (real estate owned, i.e. lender/investor owned).
From the beginning, of course, nonprofits and mission-oriented for-profits have been attempting to get control of these properties, rehab them, and get them reoccupied in order to stabilize the neighborhoods they pock-mark. Three rounds of NSP funding have been distributed through local governments and collaborative efforts with nonprofits to mission-oriented developers. Innovation has abounded despite frustration with restrictive regulations. Community developers have bit the bullet on targeting resources, challenged their own ideas about rehab levels and demolition, and brought their own strengths, combining neighborhood organizing, advocacy, and other quality of life programs to try to increase the ripple effects.
But even the most exciting of these projects fall short of the scale that’s needed. Oliver Chang, a Morgan Stanley analyst based in San Francisco, put out a report last October that predicted that about 7.5 million homes with a current market value of $1 trillion will be liquidated through foreclosures or other distressed sales by 2016, according to Bloomberg News. “It was an eye-opener to hear HUD and some economists say we’ll only touch 1 percent of one year’s worth of foreclosure over the years of the NSP programs,” says Kate Krietor of the city of Phoenix’s NSP programs. “It’s daunting to think of it that way.”
Carolyn Olson, president of Minneapolis’s Greater Metropolitan Housing Corporation, says they bought about 300 foreclosures through the First Look program of the National Community Stabilization Trust, (NCST), clustered in North Minneapolis where the greatest need was. They sold about 50 of them back to the city (which demolished 35) or to nonprofits/responsible for-profits working with NSP money. They demolished 50 and renovated the rest directly into for-sale single family homes, and implemented a contract-for-deed program to deal with the credit issues facing potential buyers. They sold 25 in the first half of 2011, 47 in 2010, 85 in 2009. “It’s kind of a drop in the bucket,” says Olson.
In Chicago, Mercy Portfolio Services, which administers the city’s NSP funds, has focused on using the funds for multifamily apartment buildings on key corners, because the bang for the buck is so much higher than with single-family homes. (See profile p 24.) Los Angeles’s NSP program has also gone after many key multifamily buildings.
On the private side, some smaller REO purchasers have been fixing up properties for rental or lease-purchase, something likely to pick up as the GSEs explore bulk REO sales. So far, however, many more REO investors have either gotten in over their heads with decrepit properties that don’t pencil out or are intentionally speculating from afar, leaving many neighborhoods even worse off, and housing and neighborhood advocates skeptical of the entire idea of private investment in REO, especially in bulk (see “Tackling Bank Walkaways and Vulture Investors,” SF Fall/Winter 2010).
The concept of addressing REO property at scale with private investment is a tricky one. It involves balancing efficiencies of scale with the ability to target investment and, as Eric Belsky of the Joint Center for Housing Studies puts it, “do no harm” despite the tenuous, fragile conditions of both properties and neighborhoods. It also involves questions of capacity—both financial capacity for swift acquisitions and development capacity to affordably turn around properties at a faster clip.
- Greater Metropolitan Housing Corporation
- National Community Stabilization Trust
- Phoenix Neighborhood Stabilization Program