Last fall, New Jersey Community Capital (NJCC) received a NEXT Award at the Opportunity Finance Network conference. The 2014 NEXT Awards, sponsored by Wells Fargo, the MacArthur Foundation, and the Kresge Foundation, focused on rethinking housing finance, and they found NJCC’s ReStart program inspiring.
With ReStart, NJCC buys pools of delinquent mortgages competitively at auction, through programs like FHA’s Distressed Asset Stabilization Program (DASP), and offers homeowners non-foreclosure options like principal-reduction mortgage modifications and deeds-in-lieu of foreclosure. Vacant properties are redeveloped as affordable housing through NJCC’s real estate subsidiary, Community Asset Preservation Corporation (CAPC). (NHI was involved in the founding of both CAPC and HANDS, the 29-year-old CDC partner that took on the proof-of-concept project for this model in 2008.)
We tracked down NJCC’s tireless president, Wayne Meyer, in October to talk about how a New Jersey group ended up buying loans in Florida, what surprised them about the loan pools they bought, and what riles him up about how subsidy is used in the affordable housing world. Here’s some of what he had to say.
On the modification process for their ReStart program:
Everybody’s offered the opportunity to modify, everyone. We have no moral hazard issues here. So, that’s number one. Number two is that, if they don’t want to modify, do they want to stay in the house with a lease, or a lease purchase? And if they don’t want to stay in the house as a lease/lease-purchase, do they want to go through a transitional assistance program where we would get a deed in lieu [of foreclosure] and have a soft landing into another place and help preserve their credit? And if they don’t — in cases where we don’t make any contact with them or they don’t want to do anything, then we do have to go through foreclosure.
We’ve had instances where we’ve had tenants who want to stay in the property, and we’re going through one now where they’re looking to purchase it. We’ve had owners come back because they [only] left because they didn’t want to be there when the sheriff locked them out. And then, we also have had deed-in-lieus, and we’ve also gone through foreclosure. So, in essence, we have the whole gamut.
On Super Storm Sandy recovery:
After Super Storm Sandy hit [in October 2013], we were approached by HUD and FHA as part of the Sandy Task Force, to see [if we had] any ideas around housing that could help aid in Sandy recovery. We proposed to HUD that they enter into a direct sale with New Jersey Community Capital and sell to us their nonperforming mortgage loans in the most impacted Hurricane Sandy areas. We saw this not only [as] an opportunity to keep families in their home[s], but an opportunity for us to redevelop on a really significant scale both vacant and tenant-occupied housing.
It was the first time that HUD ever entered into a direct sale with a nonprofit. They generally don’t do that because the goal is to maximize taxpayer revenue, so they had to get highest approval of U.S. Treasury and Office of Management and Budget to do this, and we actually paid a premium. OMB imposed a premium because of the non-competitive nature of the bid there.
But again, they saw this as an opportunity to not only aid in Sandy recovery, but also as a model for future disaster recovery efforts.
Our program has two very distinct elements to it. The first piece is loan modifications, and our goal is to try to keep everybody in their home. Everybody’s offered that opportunity; we look to modify the mortgage down to the current [market] value of the house, and to make sure that the payment does not exceed 35 percent of borrower’s income. We do that through working with local HUD certified financial counseling organizations that work with the borrower in developing what we called loan resolution program plans. It’s a financially holistic plan.
So far we have modified hundreds of mortgages. We have already written down probably $20 million of principal, and we probably have another 200 or so mortgages that are in the pipeline, probably another $20 million or so in principal reduction. So, we’re pleased at what we’ve been able to do in trying to keep people in their homes.
The second piece of this program is that we’ve been able to develop a platform to redevelop houses [whose mortgages can’t be modified] at a significant scale, without the heavy use of government subsidy. We’re in the process of doing that now. CAPC has already identified 120 properties, has already made some downpayments to acquire the properties and is gearing up to have a massive renovation-rehabilitation plan over the next year.
On the surprise in the FHA pools of delinquent mortgages, and the opportunity:
When we did our due diligence, both in Newark and in Tampa, we saw that probably 20 percent of the properties were vacant, maybe a little more, maybe almost 25 percent in the one pool. After we started to make contact with the borrowers, we found that there were a lot more vacant properties than we originally thought, and a lot of the properties were tenant-occupied. The homeowners had already left. They rented the houses out to tenants, were collecting rent and not paying the mortgage.
If a house is vacant and a person wants to come back to the house, we offer them that opportunity to do that. And we’ve had cases where that has happened. If a person is gaming the system, where they have rented it out and are collecting rent and not paying the mortgage for years, we don’t look to modify that mortgage, we offer them a deed in lieu.
At the end of the day, for example, in our Newark pool, roughly 50 percent or so of the homes were either vacant or tenant-occupied. I don’t think FHA and HUD fully thought through how many of these would be vacant and tenant-occupied. For us, it was a tremendous opportunity to redevelop [these properties as] affordable housing without the heavy use of government subsidy.
Around the country, everybody’s focusing on mortgage modifications as the neighborhood stabilization outcome, and the initial FHA report I think showed a small percentage of the mortgages are being modified, although admittedly, the program is in early stages of implementation.
Our goal was to modify 50 percent of the owner occupants. But, keep in mind, at that point in time we thought we had, say in the Newark pool, 100 owner occupants. We ended up with 53, maybe 55. So, it’s still our goal to do 50 percent of those as modifications. In Florida we’re a little ahead of that target. In Newark, we’re a little behind, but we’re still way above the national average in modifications.
We are also achieving significant successes beyond modifications. In our first Newark pools, CAPC will be acquiring probably 65 to 70 properties and we’re going to redevelop them as affordable housing. So our neighborhood stabilization outcomes in Newark are going to be probably 80 to 85 percent.
On doing more with less:
When we [launched] ReStart, HUD delivered to us 651 mortgages, with about $180 million of unpaid principal balance. But the property values were roughly about $120 million, so they were underwater.
Based on our first experiences [with HUD distressed asset sales we would expect] that 40 to 50 percent of the homes were either vacant or tenant occupied. That would give us 250 homes that we could redevelop as either affordable housing or some other supportive need housing. Now, we’re not going to do all 250 of them, but it’s our plan to try to do as many as possible.
We’ve been having discussions with the state around accessing some CDBG Disaster Recovery money under the state’s Neighborhood Enhancement Program. We feel that with $10 million, we can repurpose probably 200 units or so. And because we were able to buy them at such a discount, we’re able to pass that discount on to low-income families.
Now, I always say it’s important to put that in context. If you look at the first NEP program that the state had under Sandy, I think they spent $28 million for 160 units? So the leverage wasn’t that great, right? We’re saying we could do 200 units for $10 million, and we can. We think we’re able to do it for a lot less because of the ability to acquire at the right price. We’re able to leverage government subsidy.
On the frustration of short-sighted rules about subsidy:
One of the first deals that we ended up losing out on was that we were looking to acquire a pool of roughly 50 properties. We tried to engage some of our public sector partners. We said why don’t you set aside a subsidy allocation for us. We asked for $500,000. Where they would normally do 7 to 10 units directly with $500,000 in subsidy, we could do potentially upwards of 50.
And at the end of the day, they couldn’t get there because all of the subsidy programs were designed so that you had to attach the subsidy to a particular unit. They couldn’t setup the subsidy on a pool basis like that, just saying, OK, here’s $500K, go buy a pool. So we couldn’t quite get there. We did end up receiving what they considered 2 units worth of subsidy, which enabled us to buy a total of 12 units. So, we proved that it’s possible to leverage subsidy and develop more units if you’re able to have a little flexibility in how the subsidy is used and allocated. But, I mean, we could have done the 50!
On expanding to Florida and others expanding to New Jersey:
The Florida Housing Finance Corporation was going to try to auction another neighborhood stabilization pool [of FHA mortgages]. They were having some difficulty getting their nonprofit partners to participate, [and] asked if we would be willing to participate. We said we would if we could get an endorsement from Florida, and if they would support us with [securing] Hardest Hit Funds. They did both.
In our initial pools, we were the winning bidder on 150 mortgages in Newark and 249 mortgages in Tampa. At the end of the day, FHA delivered to us 125 mortgages in Newark and 150 mortgages in Tampa.
The NJCC board was very supportive of our getting involved. It was mission-aligned as the mortgages we acquired were part of a very targeted neighborhood strategy. A lot of the mortgages in the first Tampa pool are very concentrated in low- and moderate-income communities.
[Moving into a new state,] we decided to set a few what we call, north star guiding principles of how we do this.
The key was really around operational and governance control of the entities. From that standpoint, we look to partner with the local nonprofits. [You have to make sure] that when you bring private capital into these funds, you can still be the manager and the investment manager and are able to achieve the outcomes that you want.
We needed to limit exposure to New Jersey Community Capital’s balance sheet, which was another guiding principle.
Last year in the June sale there were 12 national pools and one bidder won all 12 national pools. It was the first time in history of the program that one bidder won all 12 of the pools.
HUD had all the NSO [neighborhood stabilization outcome] pools right after the national pools. [Ed note: Neighborhood stabilization outcome, or NSO, pools are loans from specific metropolitan areas that have been hit hard by the foreclosure crisis, including Tampa and Newark, where bidders must document at least 50 percent achievement of a set of “stabilization,” non-foreclosure outcomes.] There was one in Cumberland County, New Jersey, where Senator Booker advocated strongly that HUD have an NSO pool there because they were hard-hit by Sandy, except they didn’t qualify for any of the Sandy recovery money. They just missed the federal cutoff. The senator really asked us to go hard at the pool, which we did, but we lost to an out-of-state bidder.
[The winning bidder] has to achieve the 50 percent neighborhood stabilization outcomes, but, at the end of the day, they’re not really connected to the community, right? And so, the person who’s already bought the Cumberland pool has reached out to us already to see if we would work with them.
And there was also another pool in New Jersey, in the southern part of the state that was part of a Philadelphia pool. Another out of state for-profit bidder won that pool. They’ve already reached out to us to work with them, too, because the performance rate on the mortgages for them are roughly 11 percent. They’re concerned about achieving their NSOs of 50 percent, especially because there’s more vacant properties.
So, we’ve actually had some discussions with some of the big players here in New Jersey and in Florida. We would be interested in acquiring their REOs, which would qualify them to be able to hit their NSO requirement.
On working for private equity firms
Besides the pools we have purchased, we’ve been able to expand our program by entering into loss mitigation management agreements in North Carolina and Florida. The state of Florida and North Carolina have set aside $50 million, and $15 million, respectively, in hardest-hit funds for us to use for mortgage modifications. And it’s for programs where people have participated in the FHA sales. We have entered into what we call loss mitigation management agreements with a couple of the private equity firms that have acquired FHA mortgages in Florida and in North Carolina.
They give us a pool of borrowers, and we get to then use our local counseling networks, contact the borrowers and go through the loan modification process with them. So, we actually modify mortgages on their behalf. We’re not putting any capital into these pools. We are service providers. We are in essence, vendors. But as loss mitigation managers we have exclusive authority to modify, so we don’t have to go back to [the equity firms] for approval.
On encouraging more nonprofits to participate in FHA asset sales:
One of the things we talked about with the FHA is looking for ways to get more nonprofits involved in [DASP sales]. Well, there are a couple of possible solutions to that.
Create smaller pools in targeted neighborhoods, have a nonprofit set-aside, or just tighten the NSO restrictions, because right now anybody can be an NSO-eligible bidder.
In Cumberland County, for example, New Jersey Community Capital has investments in education, in economic development, in affordable housing. We have a track record around community stabilization there.
The group that bought the mortgages has no real track record in Cumberland County. So, why would you have a neighborhood stabilization pool and the person who buys it has no neighborhood stabilization track record? And so, we are saying, maybe you need to tighten that up a little bit.
We said to them, what you should really think about doing is more direct sales. And also consider a ‘last look’ option: Take an eligible nonprofit bidder with a stabilization track record in that area, who has put in a bid on that pool, and give them an opportunity to match the winning bid. FHA could come back to us and say if you’re willing to buy for $1 more, you can have this pool. This way, taxpayers and communities can be protected.
On cross subsidizing with high-value properties in distressed asset pools:
We’ll probably have neighborhood stabilization outcomes in our Newark pool around 80 percent, but that means there’s 15-20 percent of properties which are not achieving one of the NSO outcomes, where we’re doing a market outcome.
These are properties that we feel are outliers for us, in a sense. There’s value in there, and we’re able to maybe sell them into the market and achieve a certain return on them that can help support the work in some of the other markets. In the first ReStart pool we went for very targeted zip codes. But, when HUD filled up the bucket, they ended up putting in properties in some of the suburban areas too. And although we’re trying to develop some of them as affordable housing, and we’re actually thinking of [doing] a [community] land trust for some of them, there are a handful for which we’re just saying, you know what? These are great properties to sell to maybe an owner-occupant, try to maximize value, and help cross-subsidize some of the other work that we’re doing.
On deal structure:
In our first pools, to give you an idea, social debt was 50 percent in one, 60 percent, in the other. [Ed note: Social debt and equity here means investments by socially motivated investors who interested in a double bottom line return, both financial and social justice. It’s also known as impact investing. For more, see our focus issue on the topic.] The New Jersey pool was majority social equity investments, like New Jersey Community Capital and Prudential. We controlled 51 percent of the equity. So, there was 40 percent equity in the fund, and we controlled 51 percent of that 40 percent. Private capital controlled the other 49 percent. So we were the managing member.
At the beginning I already had Prudential saying, listen, we’re in. We get it. We think it’s a great program. They said they would put in 50 percent of the equity right from the beginning. But they also said, “We want you guys to put in 20 percent, New Jersey Community Capital.” And they wanted us to go out and try to find someone to buy some of their equity participations, which we did.
We knew that we could easily put in the 20 percent, and we had Prudential. I think it’s really important to put skin in the game, and the fact that we were willing to do that, both on an equity and debt basis, that really helped bring Prudential, MetLife, and everyone along.
These are risky assets, right? But the risk in this is really the vacant and the tenant-occupied properties. To the extent you can modify mortgages right away and start getting the mortgages re-performing, that helps the financial structure of the transaction. When you have to go through deed-in-lieus over a long period of time, or even foreclosures, your restructuring costs, especially in judicial foreclosure states, are such that it puts an enormous amount of pressure on our development budgets.
So [the deal] was really underwritten at, like, a 12 percent equity return in New Jersey, and Florida. To the investors, it’s a good return on their investment, although we may not hit those investment hurdles in New Jersey, we anticipate providing the investors with a fair market return. In the second [ReStart, the Shore direct sale], we had to go out and raise mostly private equity because it was a larger pool. It was a $100 million budget and we had to get $65 million of capital to the closing table. HUD only gave us six weeks not only to do due diligence, but to close.
And we said to them, well, there’s no way we’re going to be able to put together a debt structure in that period of time, and they recognized that. And so, we said we’ve got to bring in equity. We told [the FHA] the equity partner that we were bringing in. They said that was great, because they were a good partner with FHA.
Now, we are hitting our performance targets, so it’s not an issue. But, that’s one of the things, when you raise capital to this extent, and if you are not successful in implementing your program, then there’s an ability for [the equity partners] to step in and exercise control. But, so far, we’ve been comfortably achieving our performance targets.
Fifty properties is good minimum pool size for this kind of work. That’s not to say you couldn’t do it with 10 or 12, because we’ve done it at that scale too. But sellers, even HUD, don’t want to make them that small because there’s too much wear and tear for them. I know a lot of the banks don’t want to do that, either. When we first did the pool with HUD and FHA in Newark, we set 150 as the pool size, and we thought that that was the right number for us. In retrospect, I think that was the right number, to be honest with you.
On where CDFIs and CDCs should be headed:
I would like them to think about opportunities to be a little more entrepreneurial. Connecting with private capital and doing it in a way that protects balance sheets, while we put our skin in the game. Being a little more entrepreneurial and a little more market-oriented around doing this work, I think is really necessary. There are opportunities out there to be able to do this stuff, but the old models of keying up subsidy, getting a debt silo, having a program, it’s just not going to cut it.