Making NSP Work
As originally published in ShelterForce:The journal of affordable housing and community building, Fall 2010
Despite critiques, NSP is a powerful program that, with a few years under its belt and the help of “first look” programs, can move beyond its slow start and make a major difference.
By Craig Nickerson and Annie Carvalho
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.
When leading national nonprofit organizations created the National Community Stabilization Trust (NCST) in the summer of 2008, the premise was that this new organization would connect two disparate worlds—the financial institutions holding unprecedented levels of foreclosed and abandoned property and local housing providers seeking to purchase and reuse these properties to foster neighborhood stabilization.
In late 2008, NCST launched its national REO Property Acquisition Program to facilitate the transfer of foreclosed and abandoned property from financial institutions to local housing providers systematically, predictably, and transparently. It has established working relationships with over 130 NSP grantees and enlisted the participation of the nation’s leading financial institutions.
NCST’s standardized acquisition process enables quick sales of REO to publicly supported buyers, a
money-saving proposition for financial institutions managing REO as it allows them to avoid transaction uncertainty, lower carrying costs and marketing costs, and reduce risk of property deterioration and vandalism. Quick acquisition decisions and fast closings on properties save REO sellers real money that can be passed on to NSP buyers. Financial institutions calculate the price at which they are willing to sell the properties through NCST using a “net realizable value” process that reflects cost savings from the expedited REO sales. NSP grantees have achieved an average property discount of over 17 percent from fair market value on transactions (a savings of over $13,000 per property).
In addition, NCST pioneered the “first look” model, which gives NSP-funded buyers a window of exclusivity to see and determine interest in new REO listings before these properties are marketed to the broader buying public. Although developed initially to ensure a substantial discount consistent with early HUD NSP requirements, the “first look” program is also a way to ensure that NSP buyers can see and selectively buy REO property without competition from investors.
To date, financial institutions working with NCST have transferred nearly 3,000 REO properties directly to NSP grantees representing more than 250 communities in 41 states.
On September 1st, HUD Secretary Shaun Donovan announced a national HUD First Look program. NCST’s established system will serve as the “engine” behind this new program. Large financial institutions participating in First Look include Bank of America, Citigroup, Fannie Mae, Freddie Mac, FHA, GMAC, JPMorgan Chase, Nationstar, and Wells Fargo and specialty servicers such as Ocwen and Saxon. Under the new national program, HUD is encouraging all servicers and investors to commit to establishing a “first look” process for REO listings to ensure that NSP grant recipients can more strategically and effectively acquire properties to advance their local stabilization efforts.
Getting to true scale with REO acquisition and disposition efforts will also require better technology. NSP grantees now have access to a collection of technology tools that can assist them to more accurately assess their local real estate landscape and use data to drive strategic planning efforts:
REOMatch, a web-based mapping and property transaction tool created by NCST, enables property buyers to define target areas and view all REO listings within those set boundaries in real time and helps them identify acquisitions, smoothly navigate the transaction process, and manage NSP acquisition pipelines.
Community Central, developed by Mercy Housing, a national nonprofit that develops, finances, and operates affordable housing, provides comprehensive project management capabilities for local NSP programs. The web-accessible platform offers asset and project management tracking and reporting over a full lifecycle of NSP-funded evaluation, acquisition, rehabilitation, and disposition.
The Reinvestment Fund’s PolicyMap is an indispensable tool that aggregates and displays a wide array of demographic and economic data at a glance, helping local housing providers with planning and execution strategies.
Looking Forward
So, can we look for more productivity and impact with NSP2 and NSP3? Unquestionably. While the track record will remain uneven among participating localities, NSP2 funding recipients are likely to experience more efficient and strategic property acquisitions, an increase in the scale of property development, and improved access to conventional mortgage financing as market conditions improve.
NSP2 fund recipients were required to craft coherent and collaborative plans in order to get funding. As a result, NSP2 collaborations are able to start using funds much quicker and execute much more specific geographic targeting strategies. NSP3 awardees reflect capacity in addition to a more current analysis of need. Most NSP3 grantees have also developed considerable infrastructure during the NSP1 operational period.
NSP brings unparalleled resources to help struggling communities, but realistically, NSP funding pales in comparison to the unprecedented size and scope of America’s housing crisis. The challenge going forward, therefore, should not be to focus on a new and improved NSP, but rather to figure out how we use the limited federal funding being made available through NSP, CDBG, HOME, and other sources to restart the engines of the private sector.
Real, sustainable neighborhood reclamation will require a greater involvement of the private sector; not as a competitor to local public and nonprofit activities, but rather as a partner.
More institutions that hold defaulted assets, including specialized distressed asset servicers, private investor note purchasers, short sale experts, and holders of low-value assets, must increase the inventory of available properties. Localities need access to all of the strategically important property assets to be successful.
Firms that specialize in property renovation and new construction at scale must be engaged in turnkey development activities. Property acquisitions should never be slowed down waiting on local development teams to free up for additional renovations.
And limited federal dollars must leverage private capital. Too often, localities have chosen to obligate their NSP funding by investing large, unleveraged sums directly in acquisition and renovation of REO properties. While this approach commits the federal funding quickly, it “locks up” that flexible capital for extended periods of time until the property is subsequently sold to a new buyer. Increasingly, NSP dollars must instead be used to reduce the risk for private investment to ensure funds can be moved faster and for more properties.
So, has the Neighborhood Stabilization Program been a failure or a success? Claiming either failure or success at this juncture would be like writing a book review based on the first few chapters of a long saga. We have years of restoration ahead of us. Inevitably, the NSP story will have many future twists and turns, but neighborhood stabilization efforts will be stronger in the years to come.
