Bill Ireland Freelance Writer


The Roots of Community Growth

Published in DS News magazine


Blighted neighborhoods have been part of America's story from the beginning. We generally tolerate them—and presume that someone is doing something to address the problem and its root causes. But with the recent foreclosure crisis, the blight has metastasized to neighborhoods previously untouched. Now none of us can ignore it.

Foreclosure was once a private tragedy that affected a few unfortunate homeowners and their lenders. When the problem reaches the stratospheric levels of recent years, it's no longer private. Whole communities have a stake in reversing the trend. The housing bust hit many neighborhoods with a one-two punch: First, prices were depressed by the lack of demand; then the proliferation of REO's pushed them down even further. Vacant homes, with their attendant problems, became a symbol of the economic malaise gripping the nation. There were few viable buyers, and the free market, which solves so many problems on its own, simply wasn't working in the worst cases.

Fortunately, there was a quiet army of nonprofit organizations already attacking these issues, and public programs that could facilitate their efforts. Innovative strategies have also brought in mortgage servicers and field workers as partners. And in the best examples, the results are positive for investors, communities, and new homeowners.

Working the Grassroots: NeighborWorks America

Ascala Sisk is Senior Manager of Neighborhood Stabilization at NeighborWorks America, an organization devoted to affordable housing and community development. She recently initiated a Neighborhood Marketing Program with some of NeighborWorks' 240 partners. "We identified competitively 16 organizations within our network that were already making significant investment around community stabilization," she says. "And we provided them with additional technical support to develop a neighborhood marketing and branding campaign. We provided them with grant funding to implement those campaigns and also engaged a design firm to work to create templates and collateral tools that would help get the message out."

The grantees represented a cross-section of American communities, as Sisk notes: "What we've learned from working on responding to the market downturn is that it looks very different across the communities that our network works in. And so we were actually intentional in trying to pick a diversity of places."

One of those places was East Camden, New Jersey, where a NeighborWorks affiliate has purchased and rehabbed almost 900 properties using a combination of state and private funds. The Saint Joseph's Carpenter Society often targets high-profile corner properties, and turns them into neighborhood showcases. To avoid the mistakes of earlier years, buyers are educated and counseled extensively before taking on their new commitment. The efforts are paying off: By March 2012, the default rate for SJCS's buyers was under three percent. Meanwhile, neighborhood values are rising, largely as a result of the upgraded properties SJCS has put on the market.

Building the Future: Enterprise Community Partners

Another nonprofit on the frontlines of renewal is Enterprise Community Partners, founded as Enterprise Foundation in 1982 by developer Jim Rouse and his wife Patty. The group’s focus on affordable housing has expanded nationwide to include partnerships with local developers and community groups, a policy arm, and a national green initiative. It also has a for-profit subsidiary that provides mortgage financing, tax credit syndication, and consulting services. Robert Grossinger, VP for Community Revitalization, describes the new housing capacity that Enterprise has facilitated: "We've done about $11 billion in low income housing tax credit syndication since our inception. Using that funding we've created about 300,000 units of affordable housing."

Grossinger draws on his extensive background with private sector lending institutions to help local groups achieve realistic goals. "I do work with municipalities and community groups around property preservation issues," he says. That means, "What's going on in the community in terms of who owns what, who's taking care of what, and where there are synergies or the lack thereof between the owners of the REO properties, or the pre-REO properties, and the people that care about their conditions—the neighbors, the community groups and the municipalities."

Synergy is particularly important to Grossinger. "There are lots of federal and state and municipal programs to try and revitalize communities," he notes. "And the coordination level between them is very bad. Even the way the programs are drafted and worded in many cases makes them either incompatible, or they lack the kind of cohesiveness that can put those funding streams together to do something worthwhile."

Connecting the Dots: NCST

It was that lack of large-scale coordination that led to the founding of the National Community Stabilization Trust in 2008, sponsored by four venerable players in the neighborhood revitalization field: Enterprise and NeighborWorks, along with the Local Initiative Support Corporation (LISC) and the Housing Partnership Network. Later the National Urban League and National Council of La Raza also came onboard. In the chaos that followed the mortgage crash, NCST was born with the urgent mission of moving a mountain of distressed properties back into the hands of viable homeowners, using that army of nonprofits, and local governments.

At the time, Craig Nickerson was winding up a long public service career with Freddie Mac and HUD. He had watched with horror as the housing sector imploded. "I felt like, frankly, almost 40 years of work in the housing and community development arena was being wiped away," he recalls. He was invited to attend a conference on community stabilization by the Federal Reserve, where he heard about the nascent NCST. "It sounded like a great idea," he says. "And when I inquired about it I found out that they were looking for someone to head it up." Nickerson proved a good fit for the job, and has served as the organization's president since then.

Considering the massive scale of the housing crisis, Nickerson realized that the response must be comprehensive too: "We needed to figure out a way to connect the dots between local community developers—nonprofit, public, and for-profit—with the holders of real estate. And that communication link did not exist. REO historically has been sold from a servicer through a real estate broker to an individual buyer. But now we're talking about whole neighborhoods being impacted. And we needed to do something at scale and with enough coordination and choreography that we could ensure that the purchases were being done in a very systematic and thoughtful way."

One of the NCST's initial efforts was its First Look program, which offers municipal governments a chance to buy REO properties below market value before they hit the broader market. As Nickerson explains, "There were two primary benefits: One was that we gave these local community buyers a sort of right of first refusal—an opportunity to purchase a property without having to compete against a whole bunch of other possible buyers that weren't really necessarily focused on neighborhood stabilization. The other benefit, of course, was that if you can do that, and you can assure the servicer that you can derive for them a quick and certain sale for cash—that has real value."

The quick turnaround time has particular appeal for servicers. "All of this," Nickerson notes, "is typically done during a window of time when the servicer wasn't in a position to sell the property yet anyway—because they had to do the trash out, they had to get their estimate of value, they had to engage an asset manager, and all those things. So, we're using that window of time when the servicer is getting the property ready to be marketable to actually execute on a sale, so that they're not losing anything on this transaction."

Finding the Cash

In an age when governments as well as individuals are financially strapped, coming up with funding can be a challenge. The Neighborworks affiliate project in East Camden used a public-private collaboration that typifies many of these efforts: Half of the financing came through the CHOICE program, funded by the New Jersey Housing and Mortgage Finance Authority. That lessened the risk enough for a local private lender to come in with the rest.

The federal government has allocated some $7 billion through its Neighborhood Stabilization Program, which began with the Housing and Economic Recovery Act of 2008. Pairing those funds with corporate contributions has been a winning formula for many groups. NeighborWorks recently announced a partnership with Capital One, which has enabled it to fund more groups than before. The relationship is reciprocal, as Mariadele Priest, Capital One's Director of Community Development Banking, explains: "This partnership aligns with Capital One's overall community involvement and investment efforts, which focus on expanding economic opportunities for individuals and families in communities where we do business."

For new developments, low income housing tax credits (LIHTC) are often the currency that makes things happen. A vestige of the Tax Reform Act of 1986, these credits are made available to developers who produce affordable housing units. Since the credits usually exceed the financial needs of the developers, they typically sell them to large financial institutions that can use them—sometimes to satisfy their obligations under the Community Reinvestment Act. Those transactions then provide capital for building.

Robert Grossinger describes the process: "[The credits] flow from the Treasury Department down to the state on a per capita basis. [It's] very competitive; there are usually five times the number of requests (as) available tax credits. When they're awarded, the developer who is awarded those tax credits then sells them, usually in a syndication way. If it's CRA-driven, usually those low income housing tax credits will make up somewhere between 45 and 55 percent of the total deal."

The Last Puzzle Piece

The point of all these activities is to get properties into the hands of people who can live in them, maintain them—and pay for them. But the catastrophe that followed the overzealous push for homeownership a few years ago has led to a more sober and cautious approach across the board. As Grossinger observes, "The difference between pushing to raise homeownership from 64 percent to 68 percent ... resulted in a couple of million bad loans. So this country has to come to grips with what does it really want out of homeownership?"

One realistic alternative is to ease qualified candidates into ownership through a lease-option program. "We see that happening in a lot of places," Ascala Sisk observes. But, she cautions, "There's a lot of work to happen around the management of the properties, but also preparing the tenants to be ready for homeownership." Craig Nickerson describes another obstacle: "There's a fundamental opposition to that by local elected officials (and) urban planners, because these are historically owner-occupied neighborhoods that we're transforming into single-family rental neighborhoods."

There's a tipping point at which such efforts can become counterproductive, according to Cheryl Travis-Crawford. "You've got to have at least 80 percent of that neighborhood being owner-occupant to have some degree of stabilization," she maintains. Travis-Crawford is Executive VP for Vendor Resource Management. Like most others in the field, she supports the lease-option approach—with safeguards. "We would like to see investors go to a lease-purchase solution," she says. "Maybe a short-term rental period that's going to lead to that occupant being able to purchase that home at a certain point as they reestablish their credit and develop some savings component." By common agreement, buyer counseling and education are crucial. VRM also provides a range of services to ease that transition process for buyers and sellers—from rental management to property valuation.

Is it possible to make sound transactions that raise the quality of communities—and respect the interests of all parties? Like a marriage, it's all about good communication. Robert Grossinger observes, "It's the communication and dialogue between the entities that give us the best chance of having it done responsibly and consistent with the community and municipal wishes," he says, "while not completely making bankrupt the servicers that are responsible for this stuff."

Providing an efficient conduit for funds is also key, according to Grossinger: "Where there is coordination, where the city and the state and federal government have either put together funding sources that can work together well, or on the ground you've figured out how to use those funding sources correctly—that's where real stabilization happens."

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