Federal Home Loan Bank: Seattle

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Federal Home Loan Bank: Seattle

Rapid house price appreciation over the not-so-distant past has created barriers for individuals and families seeking affordable housing. From young couples with small children to seniors of lesser means, the run-up in house prices has put homeownership out of reach for many.

Few lenders want to dwell further on what precipitated the fall of housing prices, but the problem we now face is clear: financial institutions in most markets are struggling to deal with an increasing volume of foreclosures.

Affordable housing providers who attempt to acquire foreclosed properties often express frustration with the process. From their perspective, the process is cumbersome and confusing. In many cases, the acquisition process takes months.

Many lenders are the first to admit they aren’t the most adept at selling foreclosed properties. REO departments are overwhelmed, successful disposition practices need to be re-learned, and loss mitigation specialists need to be recruited and trained on the job. Despite their best efforts, lenders are often missing the silver lining that exists in the current storm.

The Inconspicuous Solution: Financial Institution and Nonprofit Partnerships
Herein lies the not-so-obvious solution that can benefit both lenders and affordable housing providers. The following simply highlights an existing model that can be adapted in various ways.

The Utah Center for Affordable Housing (UCAH), a newly formed nonprofit, links lenders holding foreclosed inventories with affordable housing providers (municipalities, nonprofits, etc.). UCAH identifies the lender of record, contacts the lender, negotiates a sales price, and offers the property to housing providers, who then acquire, rehab, and sell or lease the foreclosed properties to low- and moderate-income families or individuals with special needs. Purchased properties include single- or multi-family homes, building lots, blighted properties, partially constructed homes, or even properties that simply need a fresh coat of paint and new carpet.

The process facilitates the rapid and efficient transfer of discounted, foreclosed properties to affordable housing, an option that otherwise might not exist. The lender’s troubled asset is more rapidly removed from the books, and the affordable housing provider is given the opportunity to purchase discounted properties in support of their mission. Some lenders have chosen to make loans to the nonprofits to purchase properties at terms favorable to both lender and nonprofit. The asset is remedied, and the affordable housing provider is able to leverage remaining funds to purchase additional properties.

In Utah, affordable housing is generally priced under $250,000. Coincidentally, this housing price range has experienced the least amount of stress. The hold time for these properties is estimated in weeks or months, compared to the extended hold times of more expensive homes. Consequently, one might ask why a lender would offer a discount on the property that falls within the sales price range that is easiest to sell.

Lenders who are most successful in this method of REO disposition recognize the true cost of holding REO. Any seasoned REO officer recognizes that costs associated with keeping the lawn mowed, taxes paid, winterization, and marketing are just the tip of the iceberg. Most lenders underestimate the true cost of holding REO, particularly as it relates to the administrative and marketing expenses. A net present value calculation accounting for true holding costs, holding period, appropriate discount rate, and estimated future sales price returns a value that tells a lender what the price of the property should be if sold today.

Table 1: Basic NPV Pricing Model

As can be seen from the model, the discounted price offered to the affordable housing provider is the same price a lender would receive if the property sold within the given holding period based on future sales price assumptions.

Suggestions for Successful Implementation
The federal government issued Neighborhood Stabilization Program (NSP) funds to all states in early 2009. These funds must be used to purchase foreclosed properties. Lenders should identify entities that were awarded these funds in their area and learn what properties they are targeting for purchase–and avoid costly marketing and rehabilitation costs by giving affordable housing purchasers a first look at the properties. Purchasers should be told that the discounted price is an “as is” price that factors in the current condition and assumes rapid contract execution.

If NSP funds aren’t being used to buy foreclosures in your institution’s footprint, consider making loans to seasoned nonprofits that have a proven track record of purchasing and rehabilitating single- or multi-family properties. Of course, many of these activities provide community reinvestment benefit.

As you may have already realized, this model can be adapted to fit the needs of lenders in small or large communities. City and county funds may be available in your area that specifically target blighted properties by providing renovation grants or low cost loans. Developers and other for-profit entities not previously involved in affordable housing initiatives may become key partners in property renovation and neighborhood stabilization. Lenders can combine resources to lend pooled funds to affordable housing providers with proven track records.

With a little bit of foresight and planning, this model can provide a practical and efficient means to handle foreclosed inventories and a common benefit to lenders and the communities they serve. At the end of the day, the burden felt from the difficult business of REO disposition can be lightened when our efforts improve housing conditions, house hard-working families, and stabilize neighborhoods.

Dan Peterson serves as Executive Director of the Utah Center for Affordable Housing. Dan is a loaned executive who has worked for Zions Bank in Salt Lake City, Utah, since 2002.

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