The nation’s foreclosure crisis continues to roll on.
While late stage mortgage delinquencies have dropped in the third quarter of 2010, data suggests that foreclosure starts are increasing, and the industry’s foreclosure inventory is nearly 6 percent higher than a year ago. Industry analysts expect that Fannie Mae and Freddie Mac will continue to see their foreclosed inventories rise into 2011, driven by unemployment and continued depressed housing values.
But as the crisis persists, a concerted response is emerging in many American communities, born out of necessity and growing in intensity and effectiveness. This response was, in many instances, precipitated by HUD’s Neighborhood Stabilization Program (NSP). At the same time, however, many practitioners and pundits have strongly criticized NSP as ineffective and ill conceived.
So, where lies the truth? Are we ready to confront this unprecedented housing and community crisis with new tools and new collaborations, or are we destined to spend too much time and effort learning the arcane nuances of a new federal program while Rome burns?
A Slow Start
It’s been more than two full years since the first tranche of NSP1 was appropriated and 18 months since funding was allocated to the 300-plus state and local government grantees, but neighborhood revitalization has been slow to materialize. What has happened? Why has the progress been so slow? And what can policy makers and housing providers do to accelerate local stabilization efforts?
NSP has been particularly sloth-like in its first year, but slow starts have blemished the first years of the many other new housing campaigns — the HOME Program, Low Income Housing Tax Credits, and Title VI to name a few. Experience dictates that lessons learned in the first 24 months of a new housing initiative can pay dividends in ensuring that the future is more productive.
In the case of NSP, there were four primary culprits to the slow start:
Locality and Financial Institution Capacity. Acquiring, renovating, and subsequently disposing of large numbers of abandoned and deteriorated properties in a highly targeted geographic setting requires a level of planning, existing infrastructure, collaboration, and choreography that was rarely in place when NSP1 funds became available. Likewise, financial institutions saw their own distressed servicing shops overwhelmed by unprecedented REO inventories. They were inexperienced in working with publicly funded buyers unfamiliar with the REO purchase process, while simultaneously learning a complex and ever-changing set of HUD property disposition requirements.
Investor Competition. In a recent survey by the National Community Stabilization Trust, more than 70 percent of community REO buyers who responded indicated that competition for REO properties has been the biggest challenge in running their local stabilization efforts. Growing numbers of well-capitalized investor pools, motivated by the potential of a fast “flip” of the property, have been scooping up low-value REO properties in NSP target markets and undertaking minimal interim property renovations so the property can be rented until sale. These investors offer REO sellers a quick close for cash, and often have a first-name relationship with REO brokers.
Changing NSP Requirements. NSP requirements related to buying foreclosed and abandoned property underwent a steady stream of revisions from October 2008 through March 2010, causing hesitancy on the part of some state and local grantees to start utilizing funding early in the program.
Ebb and Flow of Available REO Inventory. Midway through 2010, large financial institutions such as Bank of America, Chase, and Wells Fargo were reporting REO inventories to be 30 to 40 percent lower than inventory levels in early 2009. This significant decline in REO inventory, even as mortgage defaults and foreclosure filings continued to increase month over month, caught many NSP grantees working within tight obligation timelines by surprise.