Foreclosure is more than just a private tragedy for individual homeowners. Foreclosed homes that sit vacant and neglected bring down housing prices nearby and become magnets for crime and vandalism, threatening the stability of entire neighborhoods.
To try to stem the damage in Boston’s poorest areas, Boston Community Capital, a nonprofit finance institution, now purchases foreclosed properties and provides the former owners or renters with fixed-rate mortgages to buy back their homes. Because the size of the new loans is lower and the terms are fairer, the monthly payments are affordable.
In the last 18 months, Boston Community Capital has helped people repurchase more than 70 houses and condominiums, allowing more than 125 people to stay in their homes.
While the organization’s Stabilizing Urban Neighborhoods program is small, it is already attracting some high-powered attention. In a speech this past spring, Ben Bernanke, the Federal Reserve chairman, citedthe program as an innovative approach to minimizing the strain that foreclosure puts on communities. Open Society Foundations has awarded Boston Community Capital a $300,000 grant to help the program expand nationally.
“Every time you’re able to keep somebody in their home, you’re one step closer to stabilizing a neighborhood,” says Elyse D. Cherry, chief executive of Boston Community Capital.
'Not a Giveaway’
The financial organization relies on a combination of loans and grant money to run the program.
The steep drop in housing values in low-income neighborhoods in Boston and nearby cities like Lynn and Revere is the key to the organization’s purchasing plan.
A house that someone bought several years ago for $300,000 may be worth only $150,000 today, says Ms. Cherry. If Boston Community Capital can purchase the home at the lower price, the group can offer a mortgage that a low- or moderate-income worker could afford.
So far, homeowners who have repurchased their homes have seen their monthly mortgage payments drop from an average of $3,300 to $1,700.
When Boston Community Capital reviews an application from a homeowner, it carefully evaluates whether the candidate will be able to repay the new loan. The organization works only with homeowners who have a stable source of income, whether from a job or a government program such as Social Security or disability assistance.
“This is not a giveaway,” says Ms. Cherry. “We have to pay back our lenders.”
Grateful for Relief
Homeowners who have sought help from the program fell behind on their mortgage payments for many reasons. For Cesar Santana, a father of three in Lynn, Mass., it was an adjustable-rate mortgage, falling home values, a divorce, and eight months of unemployment.
Mr. Santana’s condominium was foreclosed on in January. Now working two jobs, he repurchased it through the Stabilizing Urban Neighborhoods program, and his monthly mortgage payment is $631. With his old loan, it had risen as high as $1,610.
Mr. Santana is grateful to Boston Community Capital for helping him stay in his home, and he appreciates the time his loan officer took to make sure that he understood the terms of his new mortgage. Now a volunteer with Lynn United for Change, the community-organizing group that first told him about the program, he participates in antiforeclosure rallies and talks to other homeowners who are behind on their house payments.
“I go to the meetings, I go to the marches, because in the same way I got help, I want other people to get help too,” he says.
Negotiating with Lenders
Advocacy groups, like Lynn United for Change and City Life/Vida Urbana, and legal organizations that help homeowners fight eviction, such as Harvard Legal Aid Bureau and Greater Boston Legal Services, are key sources of referrals to Boston Community Capital. What’s more, the pressure such groups bring to bear gives lenders a greater incentive to negotiate a deal with Boston Community Capital.
Working with large financial institutions is the biggest challenge the program faces, says Ms. Cherry. Lenders, she says, don’t want to sell properties for less than is owed on the mortgages because they are terrified that other homeowners who owe more than their houses are worth—often referred to as being “underwater”—will stop paying their mortgages.
But Ms. Cherry says Boston Community Capital can make a persuasive argument that it is in the best interest of not just the homeowners but also the banks to sell at the lower price. The foreclosure and eviction processes are drawn-out and expensive, and cities are becoming more aggressive in their demands that banks maintain the foreclosed properties according to local building codes.
“We come in and say, 'Look, you’re only ever going to get market value for this property anyway,’” says Ms. Cherry. “'We’ll pay you market value. It’s distressed market value, but that’s what you’ve got. So isn’t it better to deal with us early in the process, so that you don’t have this long period of time in which you aren’t getting any funds, and you’re getting all these other costs?’”
When it started the effort, Boston Community Capital realized it couldn’t rely on philanthropic dollars alone if it wanted to create a program that would reach a large number of homeowners.
The organization initially sought commercial loans, but the best interest rate it could find was higher than 12 percent. However, with a $3.5-million equity investment from wealthy donors set aside to cover losses if any mortgages the group makes go into default, Boston Community Capital was able to secure $40-million in loans from foundations and wealthy individuals, at an interest rate of 4.25 percent.
The charity uses that money to buy foreclosed properties, and provide the former homeowners with mortgages at an interest rate of 6.25 percent. The homes typically are sold back to the owners at a price 25 percent higher than the organization paid. The markup in the price of the home and the higher interest are used to bolster the program’s reserves to cover bad loans and pay for operating expenses.
The organization eventually plans to sell the mortgages it holds, repay its lenders, and then use the proceeds to make more loans. By recycling the loan capital it’s raised so far, the charity thinks it will be able to purchase and resell 1,500 to 2,000 properties over five years.
The 'Boston Model’
Economic-development groups across the country are excited about trying to create similar programs in their own cities, says Solomon J. Greene, who oversees grants that the Open Society Foundations gives to help keep neighborhoods stable. He says the approach has been a topic of conversation at almost every conference he’s attended since last summer.
“When there is something that’s working, it is very quickly taken up and held up as a model by other groups,” says Mr. Greene. “One of the things we realized is that folks are talking about replicating what they call the 'Boston model,’ but there isn’t a lot of information about how to do it.”
To fill that gap, the foundation awarded a grant to Boston Community Capital to create a tool kit, with details such as the group’s underwriting standards, that other organizations can use to start their own programs. The money will also pay for the group to plan how it can expand the Stabilizing Urban Neighborhoods program.
Boston Community Capital, says Mr. Greene, “is a great partner because they recognize they’ve got a good thing, but that they can’t be the only version of this solution.”