Campaign News

Nearly a decade after the housing bubble burst, one grim legacy endures.

Far too many homeowners are still struggling to make mortgage payments, or have quit paying altogether. But one of the most robust attempts to address the overhang of delinquent loans is bumping up against an uncomfortable reality.

Since 2010, government entities like the Department for Housing and Urban Development, Fannie Mae and Freddie Mac have auctioned off thousands of delinquent mortgages. The auctions should be a win-win: they take those problem loans off the government’s books so taxpayer dollars aren’t strained. They also offer homeowners the possibility of a fresh start: investors who pay far less than the loan is worth are able to cut the borrowers a better deal than the government can.

But there’s been some pushback. Groups like the Center for Popular Democracy and progressives like Massachusetts Senator Elizabeth Warren criticized the government for enabling what they called a “land grab” by the same Wall Street investors whom many saw as responsible for faulty lending in the first place.

The government responded by encouraging nonprofit organizations to compete alongside financial institutions. Groups focused on helping homeowners, rather than realizing a bottom line, would do good and do well, the agencies reasoned.

But there’s a catch.

The scale of the auctions is so big — some are measured in the billions of dollars — and the scope of what’s being asked so vast that only two nonprofits have successfully purchased mortgages. What’s more, that doesn’t seem likely to change soon.

There are plenty of nonprofits with ample experience in community development and helping homeowners, said Julia Gordon, executive vice president of the National Community Stabilization Trust, a nonprofit focused on the blight left behind by vacant properties.

What nonprofits lack is access to capital, particularly equity funding, Gordon told MarketWatch. While there are plenty of investors interested in the distressed mortgage space, the yields such investors want may not be compatible with the mission focus of a nonprofit.

“Some nonprofits are realizing that the returns private investors are demanding can’t be achieved if you also want to achieve good neighborhood outcomes,” Gordon said.

Of the two nonprofits that have successfully bid in the government auctions, one, New Jersey Community Capital, dominates. They’ve won about $290 million of loans so far. The sole other nonprofit, Hogar Hispano, has won $16 million. Hogar did not respond to a request for comment.

NJCC is a community development organization whose mission is helping New Jersey cities and towns. But as one of the best-established nonprofits in the country in this space, they’ve been asked to work more broadly than that since the early days of the government auctions.

From the beginning, NJCC understood the tension between returns for investors and results for communities, said Peter Grof, deputy to the president of the organization. But NJCC believed that it was not only possible to strike that balance, but also that it could chart a course that other nonprofits could follow.

NJCC funds its purchases with a ratio of about 50% to 60% debt to equity, Grof said. The equity investors are often private-equity firms, while the debt piece comes from what Grof calls “socially-motivated investors” or major financial institutions like Prudential Financial PRU, +3.94%   and MetLife MET, +3.81%  .

Grof says NJCC is uncomfortable with the “Wall Street vs. Main Street” concept that surrounds discussions about how to handle the delinquency overhang. “We understand and appreciate housing advocates. We couldn’t do a lot of our work if not for them,” he said. “They make it simple, beat up on the banks and Wall Street. That’s fine, there has been some bad behavior. But we don’t see it as us vs. them, ‘property investors are evil.’”

Instead, Grof said, NJCC focuses on achieving appropriate outcomes for troubled homeowners and for their neighborhoods. Sometimes that means fighting the natural urge to want to keep borrowers in their homes, and realizing it’s best to let them walk away.

“We’re about trying to bring back normal real estate market dynamics to these communities,” he said. “We understand communities have a normal ebb and flow. It’s not just about creating opportunities for people to stay, it’s about creating opportunities for people to leave, if that’s appropriate.”

To some extent, some of those advocates would agree. “What’s most important is outcomes not ownership,” Julia Gordon said. “The government agencies have a responsibility to have an idea of what they want to have happen with these notes once they sell them. It’s their responsibility to communities and the housing market. Bad outcomes weaken housing markets.”

Amy Schur, a campaign coordinator for the Center for Popular Democracy, agrees. “We believe that both HUD and FHFA should set much higher standards for all notes sales around the commitment to and quality of modifications, and around affordable housing and meeting community needs,” she said.

Schur and her group believe that if the government set more stringent requirements, it would prompt for-profit investors to partner with local community organizations. She believes such partnerships would produce the yields institutional investors are seeking while enabling the mission-driven groups to do their work. Schur also believes that while many smaller nonprofits would prefer to buy smaller tranches of mortgages, many of the investors who provide equity to more established organizations would like bigger pools.

NJCC is “on course” to achieve more than the government’s “neighborhood stabilization outcome” goals, Grof said. He stresses that it’s still too early to total up the final outcomes for all loans. In New Jersey, where NJCC focuses on principal reduction mortgage modifications and developing affordable rentals out of homes where modifications aren’t possible, the NSO rate should be about 85%. In Florida, he estimates it will be about 65% to 70%.

Government agency spokesmen speak carefully about the note sales. “We believe the program is doing what it was designed to do,” said a spokesman for HUD. He answered a question about how the nonprofit portion of the sales were going by ticking off a list of ways the government has tried to improve the program to benefit nonprofits: lengthening the amount of time between a sale announcement and when it takes place, making smaller pools of loans, and concentrating them by geography.

A spokesman for Freddie Mac said it’s “certainly an objective” to encourage more nonprofit participation. Asked about whether the type of investor is as important as making sure good outcomes are achieved, he said only that “the winning bidder is determined on the basis of economics.”

Fannie Mae did not respond to a request for comment.

As of January, in all of HUD’s sales, foreclosure had been avoided in 27.9% of the homes, 34.3% had been foreclosed on, and 35.5% had no resolution. Fannie and Freddie have not yet reported on the outcomes of their sales, although such a report was expected by the end of the first quarter, as previously reported.

Despite the government’s efforts, “the appetite isn’t there,” Grof said. “The risks and the challenges turn off our competitors.”

By Andrea Riquier

Source