When the dust had settled and the Great Recession of 2007-2009 was finally receding in the rear-view mirror, it became clear what had happened.
In response to a tidal wave of foreclosures, buyers began snapping up cheap single-family homes and turning them into rentals. By the early 2010s, institutional investors had discovered real estate as an asset class and picked up momentum, buying homes around the country and often beating out competitors by paying for transactions in cash.
Millions of low- and middle-income families that had owned their homes became tenants instead; in 2016, 25 percent more households were renting their homes than in 2006. It amounted to a giant transfer of wealth from lower-income families to Wall Street and large corporations.
Today, with the coronavirus ravaging the U.S. economy and millions of families struggling to pay their rent or mortgage, many housing advocates fear that the country is teetering on the brink of a similar catastrophe.
“It’s a huge pending problem—we’re very worried,” says Jeff Crum, chief investment officer for New Jersey Community Capital, a community development financial institution (CDFI) that was highly active in preserving affordable single-family homes during the recession. The fear is not only that homeowners may lose their houses. It’s also that landlords whose tenants can’t pay their rent may have to foreclose on the small and mid-sized multifamily buildings that form the bedrock of low-income housing stock in most cities. All of those homes, single-family houses and apartment buildings alike, are fair game for institutional investors.
After all, buyers who can pay with cash have remained engaged around the U.S. In May, the Center for NYC Neighborhoods reported that throughout the city, all-cash investors—who are particularly active in New York—make up 40 percent of the home purchase market. They tend to be concentrated at the bottom of the market, the study said.
That trend could be exacerbated as the pandemic continues, with potentially disastrous outcomes. “Because COVID-19 has an outsized impact on lower-income Black and Latino families, it will intensify the disadvantage these families have in the face of cash purchasers who use their resources to pick up single-family homes, co-ops, and condos,” reads the report. It could also result in rising prices and fewer affordable homes available for sale overall, a potential increase in the number of distressed neighborhoods anchored by fewer local landlords or homeowners, and a growing concentration of housing in a small number of for-profit hands.
But the upside of this pandemic, at least as compared to the financial meltdown, is that policymakers and others have a little time to prepare for a coming crisis. And they’re using it. Around the country, housing advocates are thinking about programs that worked last time, policies that need some tweaking, and underutilized models that could potentially have a real impact.
Purchasing Distressed Mortgage Notes to Preserve Homes’ Affordability
The National Community Stabilization Trust (NCST) was created in 2008 specifically to address the large number of foreclosed homes that were suddenly crowding the market then. Essentially designed as a platform connecting buyers and sellers—imagine a Zillow for less-desirable homes—NCST worked with Fannie Mae, Freddie Mac, HUD, and banks to list some of their real estate-owned properties on the site.
There, community development corporations and other nonprofits could source inventory easily and get a jump on the market—and a leg up on institutional investors, which had employees targeting potential properties full time. With funding from the Ford and MacArthur foundations and revenue through transactions, NCST has conveyed about 27,000 properties since its founding.
But its activity declined when real estate-owned (REO) inventories finally did. Today, it’s revving up again. “I’m having conversations with banks now,” says Julia Gordon, president of NCST. “I’m trying to persuade them to rejoin our program because we do expect REOs to tick up, best case, or significantly increase, worst case.” She’s also been working to gain the cooperation of nonbank lenders; these days, those kind of companies—think Quicken or Loan Depot—dominate the mortgage market.
Fannie Mae and HUD are no longer listing properties with NCST, but Gordon is hoping to begin working with municipalities to list their tax-foreclosed properties. After all, like banks, cities aren’t in the business of selling homes, and largely want to unload them. But municipalities do have a mission to improve the lives of their residents and would benefit from targeted sales to nonprofits that have pledged to keep homes affordable.
New Jersey Community Capital is exhibit A for NCST’s usefulness when it’s flush with property listings. During the height of the foreclosure crisis, NJCC was one of NCST’s largest buyers, with a multipronged strategy designed to optimize a home’s affordability and stability—efforts the CDFI plans to redouble if the economy deteriorates further.
The centerpiece of NJCC’s program is purchasing distressed mortgage notes in bulk, from NCST as well as directly from HUD and the government-sponsored enterprises Fannie Mae and Freddie Mac. Access, of course, is dependent on money. “You’re competing against for-profit cash buyers that care less about any social outcome,” says Crum, whose organization utilizes funding from a variety of public funders, socially motivated debt providers, and mission-aligned private equity capital.
NJCC’s first priority is keeping troubled homeowners in their houses. In partnership with a housing counseling group, the organization offers every single homeowner the opportunity to adjust their mortgage payment and wipe out all outstanding escrows, taxes, and penalties so that they’re paying no more than 35 percent of their income for housing. For homes that are underwater or where a borrower’s income has decreased, NJCC will also right-size the principal balance to reflect the home’s current value.
“We successfully modify about 40 percent of owner-occupied properties that we acquire,” says Crum. “That’s well above the industry standard.”
Families that no longer want to remain in their homes can get help extricating themselves without a stain on their credit. Working with a local nonprofit developer, NJCC then rehabilitates those and other vacant properties and sells them to new owner-occupants, or offers them as affordable rentals.
It’s a win for everyone. And it’s considerably cheaper than building low-income housing from scratch using tax credits. NJCC requires only about 25 percent in public funding to renovate a house, compared to the roughly 80 percent subsidy needed to build LIHTC units. “You can pick up an abandoned property for $30,000 or $40,000, then put $100,000 in rehab—the cost base is so much less,” says Crum.
But the process could be even cheaper and easier if HUD and the government-sponsored enterprises were required to sell a portion of their housing inventory to nonprofits. Crum’s organization has been working with HUD on a pilot program to do just that: starting in late September or early October, the department is committing to selling about 500 vacant, nonperforming mortgage notes in New Jersey and New York directly to NJCC.
It could be a path to eventually expanding NJCC’s powerful program to housing organizations around the country. “That’s how we start at a meaningful scale to have a real answer to the institutional for-profit investor,” says Crum.
Expanding Inventories When Properties Are Cheap
For some affordable housing groups, this potential crisis could also be a very real opportunity. If real estate values drop precipitously like they did during the last recession, organizations whose buying power is otherwise fairly limited could get a chance to substantially grow their inventory of land and houses.
That includes community land trusts—and advocates are aware of it. “It’s in the forefront of everyone’s mind in the community land trust world,” says Olivia Williams, an independent scholar and organizer focused on cooperative housing models. With access to funding and credit, community land trusts (CLTs) could significantly scale up, acquire property, and stabilize more low-income families for years to come.
Aaron Miripol, president and CEO of the Urban Land Conservancy (ULC) in Denver, can talk about that. His organization is essentially a nonprofit developer utilizing low-interest loan funds; it got its start in the early 2000s with an initial allocation from a local businessman. But a few things set it apart.
First are its land holdings. During the recession, when the real estate market was down, ULC had the foresight to invest in land. “There were a lot of challenges, but it was a time when we could buy properties we couldn’t have in a normal market. We were able to purchase some of our most strategic transit sites then,” explains Miripol.
Since then, Denver has boomed, and property values have soared. “Land we bought five, six, seven years ago is now worth a lot,” he says. Parcels that originally cost $25 a square foot are now worth $125, sometimes even $200 a square foot.
And that price appreciation has made possible another thing that distinguishes ULC. The organization actually utilizes a land trust model wherever possible for its projects. “We try to do everything within a land trust,” says Miripol, who is a huge proponent of the concept. The land holdings allow that: paying less originally means ULC can take its time to find the right deal, rather than rush to complete a project in order to pay off debt. It also means the organization can sell off small pieces of property to stay afloat. And because the land has appreciated so much, ULC has equity it can draw from when pulling deals together.
From doing small projects on small parcels of land, ULC has grown and now frequently works as the lead developer on complicated deals. And that’s the third thing that’s unusual about it. Many land trust groups work slowly, tackling one-off projects that include a single-family house or two. In contrast, ULC’s developments are usually multifamily projects with 60, 100, or even 150 units—all of which will remain affordable practically forever. While the buildings get sold, the land remains in ULC’s hands on a 99-year ground lease with an automatic 99-year renewal: 198 years in total.
Many of ULC’s projects include more than just housing. The organization is planning to soon break ground on a 6-acre development that will also hold a clinic; other projects include schools or libraries. Those structures will also remain permanently in place as community services.
“We’re pushing to use land in a way that it’s not traditionally been used,” says Miripol. The land trust model, he adds “can be used for so much more than single family homeownership—and should be.”
A City’s Superpower
Land trusts aren’t the only organizations that can take advantage of dropping real estate prices. Land banking is a tool that’s been around for a while but has recently begun to draw new attention. Quasi-governmental entities that purchase, hold, and eventually resell property, they have a few unique abilities. First, a land bank organization can clean up a property’s deed and remove any debt or liability associated with it. That means tax-foreclosed homes, for example, could be made ready to sell without any lingering complications.
Second, a land bank is allowed to establish criteria for potential buyers; it may prioritize community development groups that plan to create affordable housing, for example, or community land trust organizations. That ability gives the community considerably more control over the future of its land.
Both of those functions—the buying and the selling—could be extremely important in the coming months.
“[Land banks] are a rare tool in community development,” says Akilah Watkins-Butler, president and CEO of the Center for Community Progress, which partners with municipal governments to find productive uses for vacant and abandoned properties. “For cities that are going to face a deluge of foreclosures and don’t want outside investors, we think land banks are a logical and equitable option for communities.”
Watkins-Butler adds that her organization is just starting to explore whether commercial real estate, which tends to rebound more slowly than residential real estate, can be rezoned and added to a land bank’s collection.
There are almost 200 land banks around the country. Unfortunately, they can’t be created in a hurry; their establishment usually requires the passage of enabling legislation at the state level. Currently, 15 states have official land bank policies.
One of the oldest groups in the U.S., the Fulton County/City of Atlanta Land Bank Authority, has been seriously considering the prospect of a coming recession. “It’s top of mind for us,” says executive director Christopher Norman.
In 2018, Atlanta Mayor Keisha Lance Bottoms had pledged to add or preserve 20,000 units of affordable housing to the city’s stock. The coronavirus pandemic halted the issuing of a bond that would’ve paid for acquisitions, however. In response, Norman’s group is examining its powers, from purchases and donations to criminal seizure and tax foreclosure, to gather single-family residences, small apartment buildings, and maybe even commercial real estate.
“We’re in the lab right now, trying to figure it out,” says Norman. “If we can acquire property at a low point in the market, we can then partner with mission-minded entities” to create more affordable housing. The goal is to push every possible means of acquisition within the land bank’s power.
Where the Money Might Come From
Land banks might not be in the picture for most municipalities right now. But there are other tactics governments can employ to keep affordable housing out of the hands of all-cash buyers in a potential coronavirus-related downturn.
Some are largely free. They might include policies like San Francisco’s Community Option to Purchase Act (COPA), which was passed last year; it allows community organizations the first opportunity to buy a multifamily building that has been put up for sale. The law resembles Washington, D.C.’s Tenant Opportunity to Purchase Act (TOPA), which was passed over 30 years ago; both were designed explicitly to prevent displacement and preserve affordable housing. Or cities might make it easier for nonprofit housing groups to learn about and buy tax foreclosed properties, by utilizing the National Community Stabilization Trust or some other vehicle.
But housing organizations, whether developers or land trusts, need access to substantial funding in order to seriously tackle the problem. In April, Rep. Ilhan Omar (D-MN) introduced a bill that includes a fund to “fully finance the purchase of private rental properties by nonprofits, public housing authorities, cooperatives, community land trusts, and states or local governments—in order to increase the availability of affordable housing during this downturn.” The bill hasn’t moved in the House.
Many advocates believe that in the face of a major crisis, the federal government will have to offer some assistance to housing organizations. David Abromowitz, a Boston-based affordable housing attorney and the former chair of the National Housing and Rehabilitation Association, was involved in the creation of the Neighborhood Stabilization Program after the financial crisis. The program provided community organizations with funding to purchase, fix up, and sell foreclosed homes. Abromowitz thinks that with a large enough allocation, a similar program could work well now—if it ramped up quickly, was nimble enough to genuinely address the problem, and was tied largely to the purchase of small and mid-sized multifamily buildings
“I truly believe that if community-based organizations had had access to essentially a line of credit, and were trusted to make intelligent decisions, they would’ve been able to buy up many more foreclosed properties and preserve them,” says Abromowitz.
Perhaps so. Let’s hope that history doesn’t repeat itself—and if it does, that we’ve learned something.