Non-profits, while perhaps most suited to work with borrowers of seriously delinquent mortgages, face many challenges to independently purchase and resolve distressed mortgages. However, with strategic and financial partnerships, non-profits can overcome hurdles to participation in note sales.
A popular and effective means of resolving large numbers of defaulted single family home loans has been through bulk sales. The note sale approach has been popular with FHFA (Freddie and Fannie) and with FHA. Each of these entities have slightly different methods for conducting bulk sales, but overall, the programs resemble each other more than they differ.
Since the inception of these programs, the housing advocacy community has expressed concerns that the methods employed by FHFA and FHA were damaging to families and neighborhoods in large part because the purchasers of defaulted loans were for-profit entities. The reasoning has been that the interests of for-profit purchasers was fundamentally adverse to the best interest of families and neighborhoods. The remedy that the housing advocacy community proposed was to sell or give non-performing loans to local non-profit organizations, who they posited were better able to address community needs than the typical for-profit purchasers.
Both FHFA and FHA responded to the demand for increased involvement of non-profit organizations by altering parts of their note sale programs and fostering the involvement of non-profit organizations by designating specific loan pools for non-profit bidders only, providing rolling applications for bidder qualifications as well as extending due diligence time frames for non-profit organizations. However, some of the factors that continue to inhibit participation of non-profit organizations in bulk note sales include:
- Limited capital to use for purchasing loans;
- Unable to meet timeline requirements of a typical bulk sale;
- Limited portfolio management/disposition experience and limited experience working with loan servicers;
- Diseconomies of scale, i.e., too few notes in the geographic area that is the focus of the local non-profit organization.
Through strategic and financial partnerships, non-profit organizations can be better positioned to purchase and resolve distressed mortgages. In 2016, the Urban Institute wrote in an evaluation of the HUD DASP program that they “question whether nonprofits have or can quickly build the capacity to service a significantly larger portion of the HUD portfolio—especially if they are not working in partnership with for-profit investors who have the capacity to service loans on a large scale.” Additionally, non-profits may be more suited to participate in a direct sale, rather than a typical bulk sale to ensure geographic concentration and to ease competition.
An example of a successful non-profit partnership that works to resolve REO properties is the Neighborhood Community Stabilization Trust (NCST) Neighborhood Stabilization Initiative (NSI). The NSI was jointly developed by the Federal Housing Finance Agency (FHFA) and Fannie Mae and Freddie Mac to stabilize neighborhoods hardest hit by the housing downturn and reduce the inventory of real estate owned (REO) properties held by Fannie Mae and Freddie Mac.
NCST was selected as the national nonprofit partner due to its unique blend of policy expertise and on-the-ground experience working with local affordable housing and community development organizations (community buyers) and local government to eliminate the blight caused by vacant and foreclosed properties and severely delinquent mortgages in distressed communities. NCST collaborates with local financial institutions and real estate professionals to focus on identifying and implementing solutions that promote neighborhood stabilization. Acting as an intermediary between financial institutions, community organizations, real estate professionals, homeowners and prospective home purchasers, NCST has developed a significant record of success. NSI began as a pilot program in Detroit, Michigan and was expanded to Cook County, Illinois. Now the program is in 18 strategic markets that continue to have large concentrations of distressed and low-value REO inventory. NCST/NSI has gained significant traction in resolving REO properties and preventing neighborhood destabilization that results from vacancy and blight.
Another successful example is the unique alliance between the City of New York and several non-profit organizations who came together last year under the Community Restoration Program to purchase two dozen distressed mortgages in a direct sale from HUD. The funds for this program were provided through Goldman Sachs and its $5 billion toxic mortgage settlement, which included $1.8 billion marked for consumer relief and a payout of $190 million to the state of New York. MHANY, a HUD approved counseling agency is part of this alliance, and provides housing counselors to work with delinquent borrowers.
Such alliances of public-private partnership offer a promising model that other non-profit organizations could replicate to gain traction and make significant impacts in preventing foreclosures.