From Servicing Management Magazine, November 2009:

Partnering With Nonprofits Gains Acceptance in REO

Nonprofit organizations becoming an increasingly important component in servicers' efforts to move REOs off their books.

Mortgage servicers can't seem to catch a break. As we exit the throes of the Great Recession, it is expected that 2 million people will lose their homes to foreclosure throughout the remainder of this year.

With the Treasury openly adminishing servicers' efforts at loan modifications and issuing report cards on the number of loan modifications completed, servicers are feeling the pressure to perform. Though the Making Home Affordable program promised help to 9 million struggling homeowners when it debuted in March, fewer than 600,000 had received help as of September. Mostly, the Home Affordable Modification Program has become servicers' greatest logistical challenge.

According to Fitch Ratings, $1.34 billion in option adjustable-rate mortgage loans are projected to reset by 2011. If these predictions are accurate, servicers are likely to be buried with work for the next few years. With more troubled loans coming in the door each day, servicers have to find a way to liquidate their portfolios in order to remain profitable.

Certain properties have lost so much value that they become almost impossible to sell. These properties are candidates for land banks or community development opportunities, where servicers donate or deed property to churches, nonprofit groups or inner-city organizations. This practice benefits both the servicers and the receiving organization, as the servicer no longer has that property in its portfolio, and the new recipient gains a property — a piece of land.

A Public-Private Bridge

When it comes to briding the gap between nonprofit groups looking to acquire distressed properties and asset managers looking to move said properties off their books, perhaps no organization has garnered the attention that the Washington, D.C.-based National Community Stablization Trust has.

Launched in October 2009 with the support of six national nonprofits and a slew of philanthropic organizations, the consortium provides a framework that seeks to simplify the sometimes complicated process of connected buyers with sellers of real estate owned properties (REOs). As of late September 2009, the Stabilization Trust had helped to close or had pricing accepted on 437 properties in locations ranging from Orange County, Calif., to the Twin Cities, to California's Inland Empire — no small feat considering many of the Trust's buyer partners use Neighborhood Stabilization Program funds, which didn't become available to most grantees until May, 2009.

"What we generally find is that financial institutions would prefer our execution because we are a funnel point to bring a whole audience of buyers to them at one pass," says Danny Gardner, chief operating officer.

About two-thirds of the Stabilization Trust's transactions, to date, have been executed through its first-look program, in which potential nonprofit buyers have a condensed span of time — usually less than a week — to express their interest in a property before it is listed. Once the buyer acknowledges interest in the property, the seller offers a price and the buyer has to respond with a firm commitment within 24 hours.

The other transactions have occurred through the Stabilization Trust's aged-inventory program, which transitions listed properties to nonprofits. The program was originally designed with bulk purchasers in mind, but the Stabilization Trust has found that the appetite for bulk buying isn't as strong as expected, and all sales performed thus far have been on single properties.

Seeking out the largest portfolio holders first, the STabilization Trust has worked with Chase, Wells Fargo, Bank of America and Citi, and is "very near to operationalizing" GMAC, Saxon and Nationstar as partners, Gardner says. Conversations with regional banks have started, as well, though Gardner notes that engaging with the Stabilization Trust requires dedicated resources from servicers. "They would need to look and determine if their portfolio size warrants enough liquidation on the other side to offset their start-up costs," he suggests.

Besides offloading REOs, an upside for servicers working with the trust is that they can limit negotiation redundancies and, in turn, cut time inefficiencies. Instead of a bank's asset manager having to repeat conversations with 10 different NSP grantees, the STabilization Trust offers a standardized process.

"We're helping everybody speak the language of REO transfer in a way that makes sense for the buyer, given they're municipal and funded through government funding, and from a seller, given they have profit motives and process objectives of which they're held to," Gardner explains.

— John Clapp

HUD to the rescue

The Neighborhood Stabilization Program (NSP) was developed by the U.S. Department of Housing and Urban Development (HUD) to restore stability to communities that have been impacted by foreclosure and abandonment. The program enables the purchase and redevelopment of foreclosed and abandoned residential properties.

NSP funds may be used for activities that include — but are not limited to — the following:

  • Establishing financing mechanisms for the purchase and redevelopment of foreclosed homes and residential properties;
  • Purchasing and rehabilitating abandoned or foreclosed residential properties;
  • Establishing land banks for foreclosed homes;
  • Demolishing blighted structures; and
  • Redeveloping demolished or vacant properties.

Under the terms of the Housing and Economic Recovery Act of 2008, Title III: Emergency Assistance for the Redevelopment of Abandoned and Foreclosed Homes provides almost $4 billion in assistance for state and local governments for redevelopment purposes. The American Recovery and Reinvestment Act of 2009, signed into law in February, allocated an additional $1.9 billion for a second round of NSP funding.

Servicers today should consider creative real estate owned (REO) property disposition strategies that preserve affordable housing opportunities and stabilize communities. A variety of options exist for servicers to dispose of REO properties and lighten their growing inventories of troubled assets. In addition to creating affordable housing and homeownership opportunities, servicers can have a direct impact in revitalizing failing communities. Servicers also reap the benefits of community redevelopment efforts in newly thriving neighborhoods with properties that are infinitely easier to market and sell as compared to those riddled with blighted properties.

Reclaiming for the community

"Reclaiming Foreclosed Properties for Community Benefit," a study by PolicyLink, a national research firm that works to advance economic and social equity, highlights the early successes of land banks in managing vacant and abandoned properties. Cities such as Atlanta, St. Louis, Cleveland and Louisville, Ky., are actively rehabilitating properties, which ultimately revitalizes neighborhoods and communities.

In Providence, R.I., land trust banks have purchased vacant properties and sold them to owners who will occupy the house on the property while the trust retains ownership of the land. This makes the loan, with the mortgage based on the home as the sole collateral, more affordable and within reach of an expanded pool of potential homeowners.

In another example, the city of Los Angeles is working with Restore Neighborhoods LA and Enterprise Community Partners, as well as with real estate brokers and lenders, to make foreclosed properties available to low- to moderate-income home buyers. The Genesee County Land Bank Authority in Flint, Mich., meanwhile, is able to transfer foreclosed properties to adjacent homeowners, develop short-term or long-term green spaces and assemble land for new housing and commercial development.

Land banks are a proactive way to reclaim foreclosed properties and improve blighted communities. Local government and mortgage servicers should look at the strategies behind these early successes and apply the land-bank model where applicable.

One recent example of a mortgage servicer deeding properties to state and local governments is Bank of America's "early review" program for municipalities that receive NSP funds.

Through Bank of America's program, local and state government departments receiving NSP funds will be able to review properties owned by Bank of America before they are listed on Multiple Listing Services or other public sites. NSP grant recipents will also have private access to a new website providing realtime listings of all REO properties owned by the bank, with the capability to search within a specific ZIP code. Municipalities receiving NSP grants will have the option to buy multiple properties in a single transaction.

Working in concert with nonprofit entities, one approach to REO disposition involves servicers transferring REO properties at a discounted cost or for free as a gift to improve their portfolio, while also facilitating property rehabilitation efforts. Beyond the obvious benefit to services of unloading REOs from their portfolios, servicers also can leverage the qualified borrower contacts that many nonprofits have. Relationships with nonprofits provide servicers with a pool of potential buyers and tax deductions on the donated property.

Nonprofit groups also receive government grants from HUD for the purpose of establishing affordable housing options under HUD's Section 8 Rental Assistance Program. Servicers can donate single-family properties to help nonprofits build on their rental-housing inventory, allowing both parties to save money in the long run.

Deciding which REO to donate can cause some debate. Servicers should look at tow criteria when determining which properties are best to give to nonprofits: location and price. Where is the REO located? Is it in an undesirable area to live, but ideal for nonprofit use? How much is the home worth? If there is little to no value left in the REO, then giving it away can only improve the servicer's portfolio.

Still not convinced?

Let's face it: Servicers continue to battle public perception that they itnentially ignore requests from troubled borrowers. While those in the industry realize that this notion is not true, servicers' reputations suffer. Leading the charge for vacant property re-use strategies positions servicers in a much better light with borrowers. As the servicing industry is repeatedly hammered by the Treasury, issuing positive press to counter all the negative information is not a bad idea.

Mortgage servicers have never been more burdened than they are today. Determining which REO properties in their portfolio qualify for donation, rather than sale, should be a top priority. Trimming down their troubled assets will make it easier for servicers to focus on loans that qualify for modifications. Facing the reality of increasing oversight, servicers have to look at options for cutting the fat away from their books.

CHERYL LANG is president and CEO of Houston-based Integrated Mortgage Solutions and founder of No Paws Left Behind. She can be reached at (281) 994-4538 or