Where banks fear to tread a nonprofit is an angel

Phillyrocket · Oct 24, 2011

Five years after the housing market peaked, the mortgage mess remains a significant drag on the economy. Banks, policymakers and investors have yet to figure out a way to stop the cycle of massive foreclosures and the fire sales that inevitably ensue. In September, foreclosures and short sales accounted for 30 percent of existing home sales.

The calls are rising, from all points of the political spectrum, for mortgage modification — i.e., figuring out a way to let people stay in their homes even if they can't afford the current mortgage payment. While banks, the Obama Administration and the taxpayer-owned mortgage giants Fannie Mae and Freddie Mac dither, one non-profit lender is taking matters into its own hands. Boston Community Capital, which has been active in the region for 30 years, last year set up the Stabilizing Urban Neighborhoods (SUN) initiative. The plan? Buy properties back from banks who aren't willing to modify. Then resell them to the owners who were in danger of defaulting or who had already defaulted —- at a much lower price and with a better mortgage. And all while delivering 4.25 percent annual returns to investors. The goal, aside from keeping people in their homes, is to stabilize neighborhoods.

Since 1985, BCC has invested more than $650 million in low-income communities, and financed more than 11,100 affordable homes. The organization's CEO, Elyse Cherry, was a partner at the blue-chip law firm Hale and Dorr who specialized in commercial real estate and who knows her way around structured finance.

Several years ago, she saw trouble developing in lower- and middle-income neighborhoods around Boston. In seven inner-city neighborhoods, the average mortgage was $323,000, while the average income could only support a $150,000 mortgage. "On balance, people had twice the mortgage they could afford," Cherry says. Then came the bust. In certain neighborhoods, home prices have fallen up to 50 percent. "It's a nightmare if you're paying the mortgage," says Cherry. "But it creates an opportunity."

Cherry decided to start a mortgage lender that would buy back properties from banks at steeply discounted prices, and then underwrite new 30-year fixed-rate mortgages for customers who could afford the payments.

To raise funds, BCC in May 2010 sold $20 million in five-year bonds that pay 4.25 percent annual interest. That's a pretty good return, considering how low interest rates have fallen. Amy Domini, a money manager in Boston with long-time expertise in socially responsible investing, took about $1.1 million of the offering for some of her clients. (Domini manages $950 million for high net worth individuals in private accounts.) While the bonds don't trade, Domini was willing to buy because she knew BCC's track record, and because of the protections BCC installed for investors. Of the $20 million raised in the bond, $4 million immediately went into loan loss reserves. "They've set aside 25 percent at the start in case there are losses," says Domini.

In other words, of the $20 million raised, BCC will lend out only $16 million, at 6.25 percent. BCC also takes other steps to ensure repayment. BCC takes a diametrically opposed approach. It approaches the bank and offers to buy it at the market price. "And if we have a buyer that can afford it at that price — plus significant reserves — we'll sell it," Cherry says.

In 2006, Lydia Smith and her husband, who were both full-time workers, bought a two-bedroom cape in Hyde Park, Massachusetts. Upon closing, they had two mortgages for a total of $329,000. "We didn't know we were getting two separate loans," Smith says. "When I asked about it at the closing, they gave us a runaround." One of them had a large balloon payment. The couple was able to make the $2,550 monthly payments for a couple of years, but when Lydia's husband, a custodian, got injured and was unable to work, they began to fall behind. America's Servicing Company, the Wells Fargo unit that serviced the loan, wasn't particularly responsive to efforts to modify.

BCC bought the house from the bank in February 2010 for $165,932. Then it turned around and wrote a new mortgage to the Smiths for $214,000 —- the price of the home plus a 25 percent loss reserve, plus a several thousand dollar reserve for repairs. The upshot: The Smiths now pay $1,685 per month for the mortgages, taxes and insurance, a 44 percent reduction.

The house is still underwater, but the homeowner —- and hence the neighborhood -- is more stable. And while it gives borrowers a break, BCC also asks plenty of them. It requires people to make 26 bi-weekly mortgage payments instead of 12 monthly ones. "If they get paid on Monday by automatic deposit, they have to pay us on Tuesday," says Cherry. "We've tried to create a circumstance where the mortgage is the first bill paid." The 26 weekly payments force borrowers to make an extra month's payment each year, which they can use either to write down the principal or place in a reserve for a rainy day.

There's a final piece that helps protect BCC from some of the charges that it is simply encouraging and abetting moral hazard. If the homes appreciate over time, the mortgage agreement provides that BCC received 50 of the gains. BCC has committed to use any such gains to spruce up neighborhood parks, or fund college scholarships."When you explain that to the neighbors, they get it," says Cherry.

Of course, to a degree, such efforts can be seen as rewarding irresponsible behavior. But proponents insist we take a broader view, and think less about the individual and more about the impact of foreclosure on neighborhoods. As investor Amy Domini puts it: "What good does it to do a neighborhood to have ten foreclosed mortgages and ten properties out for sale, and ten people living in cars on the street?" And while one solution may be for investors to purchase homes and rent them out to residents, Cherry notes that homeowners tend to maintain their properties better than renters.

Mortgage modification is a messy, complicated business. Groups like BCC are trying to solve a problem that was created on a wholesale level —- mortgages shoveled out by machines —- on a retail level. And there are serious obstacles. The first is scale. So far, BCC has returned 125 homes to owners through its SUN program, with only one default. It would like to expand in Boston, and in other cities, but there's a funding issue. BCC is borrowing for five years and lending for 30. Cherry reasons that, if the bonds perform well, she'll be able to securitize income streams, and plow the proceeds into new loans.

The second problem is more daunting. It will come as no surprise that one of the institutions with the most to gain from mortgage stabilization simply isn't interested in BCC's effort. "Freddie Mac won't work with us," Cherry says. "They've taken the position that any property that ends up in the hands of the original owner is a non-starter." To work with Fannie Mae, BCC must hold onto a property for six months after buying it before writing a new mortgage. "We've managed to do a grand total of thirteen with Fannie."
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http://finance.yahoo.com/blogs/dani...e-non-profit-lender-doing-help-150316843.html

I was hopeful banks would do this voluntarily or the HAMP program would do this on a larger scale.

I like it and wish this would be expanded. The government could utilize a new tax credit or perhaps a type of build america bond for state bond banks and local governments to get this going on a broader scale.

Thoughts?

Johndoe804 · Oct 24, 2011

How can they a home at a high price and re-sell it to the former owner at a lower price with better mortgage terms and still provide investors a 4.25% annual return? I suppose they'd have to take a hit on some of their other profitable operations.

geeimsobored · Oct 24, 2011

Johndoe804 said: ↑

How can they a home at a high price and re-sell it to the former owner at a lower price with better mortgage terms and still provide investors a 4.25% annual return? I suppose they'd have to take a hit on some of their other profitable operations.
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They're not buying at the 2007 value of these houses, they're buying that at present market price. They're buying the foreclosed property. Banks have to charge based on the current market value of those homes. (which is obviously lower than the mortgage they gave out before the bubble) On top of that you can get even bigger discounts.

Essentially all this company is doing is paying current market value for the foreclosed houses and then they turn around and give a mortgage that reflects the actual current value. And they collect interest on that so that's where their returns come from.

Phillyrocket · Oct 25, 2011

So if Obama jumped on this tomorrow and authorized bonds similar to the BABs should it be supported or is this more goverment intervention and rewarding people who bought more house than they could afford?

GladiatoRowdy · Oct 26, 2011

Phillyrocket said: ↑

So if Obama jumped on this tomorrow and authorized bonds similar to the BABs should it be supported or is this more goverment intervention and rewarding people who bought more house than they could afford?
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If Obama jumped on this and authorized bonds, it SHOULD be supported. Unfortunately, the usual suspects would crow about "more government intervention" and scapegoat people who they say "bought more house than they could afford."

DaDakota · Oct 26, 2011

Jon Stewert said it best, they should have offered the bailouts to the people but only in a form in which they could pay down their mortgages, this way the banks would have gotten the capital they needed and the people would have kept their houses.

And the banks would have been forced to keep lending to make more $$$$...

Meh, makes too much sense to ever happen.

DD

StupidMoniker · Oct 26, 2011

Obama should not be able to replicate this, because it is not something the government has the power to do (constitutionally speaking). Any number of banks (or private individuals) should be willing and able to do this though. There would also be no need to limit the buyer to the original owners.

pgabriel · Oct 26, 2011

StupidMoniker said: ↑

There would also be no need to limit the buyer to the original owners.
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there aren't a bunch of new buyers out there.

Forums

Where banks fear to tread a nonprofit is an angel

Phillyrocket Member

Johndoe804 Member

geeimsobored Contributing Member

Phillyrocket Member

GladiatoRowdy Contributing Member

DaDakota If you want to know, just ask!

StupidMoniker I lost a bet

pgabriel Educated Negro

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