Community Development

Evidence suggests that hundreds of first-time home­owners who received credit and homeownership counseling from community development corporations (CDCs) have floated above the tide of problems flooding the state's troubled real estate markets.

Ramon Rodriguez, community affairs relationship manager at Washington Mutual (WaMu), has worked for years in partnership with community-based organizations providing homeownership and credit counseling to first-time homeowners. Rodriguez says that referrals to lenders from these organizations are more solid, credit-worthy prospects and are usually not investors.

According to Rodriguez, the role of these organizations in preparing buyers is invaluable to financial institutions. "CDCs can work 12 to 18 months to get a buyer ready," he says, explaining that loan officers at a bank usually do not have the same time to devote to mentoring loan applicants through the process.

Although hard data aren't available, Rodriguez, who is now heavily involved in the bank's foreclosure prevention activities, hears from WaMu loan consultants and CDCs that people who went through first-time homeownership counseling are not the ones facing foreclosure.

"The CDCs did two principal things for their clients," says Rodriguez. "They educated the homebuyer on the mortgage process and how to protect their interests, and they also kept them from getting into a problem loan—one that did not best fit their financing need."

Arden Shank, executive director of Neighborhood Housing Services, which services Miami-Dade and Broward counties, agrees with Rodriguez that "the people calling us because they are in trouble are not people who went through homeownership training." Though his office doesn't track this type of data, he notes he hasn't heard of any case in which a client who went through homeownership counseling with an approved agency is now facing foreclosure.

Nonprofits act as bridge to mitigate foreclosures
Nonprofit community-based organizations are also proving to be a valuable ally in dealing with foreclosures. After riding a huge real estate wave with five years of double digit annual home value appreciation, South Florida's market crested and quickly changed directions, catching many by surprise.

The South Florida market began to slow in 2006, but many in the real estate industry predicted recovery to begin in late 2007. However, the slump has actually deepened. According to RealtyTrac, Florida logged a total of 279,325 foreclosure filings in 2007, more than twice the number of filings reported in 2006. Reduced median home values are now working against borrowers trying to refinance high cost loans and over-leveraged property.

Rodriguez says borrowers often find it easier or less threatening to work through a community agency rather than contacting the bank to address problem loans and evaluate foreclosure mitigation options. CDCs' existing contacts with financial institutions and their ability to communicate effectively with consumers have propelled many of these organizations to the forefront of mitigation efforts. Rodriguez points out that "as a neutral organization, a CDC helps the bank meet its goal of working with the borrower to find a suitable solution."

The HOPE Hotline launched by NeighborWorks Amer­ica in 2007 has received hundreds of thousands of calls since its inception—over 55,000 during February 2008 alone. The HOPE call center refers consumers to local counseling services provided by NeighborWorks partners throughout participating states.

In South Florida's Miami-Dade and Broward counties, Neighborhood Housing Services (NHS) started fielding calls referred to them by the hotline in late 2007. "Almost everyone that calls has some element of their own mismanagement in the problem," says NHS Executive Director Shank. "For some that explains the whole problem, but for many others it is in combination with getting into the wrong loan or falling victim to predatory practices or misinformation from a loan broker."

Foreclosure assistance needs strain nonprofit capacity
Although community agencies are more than willing to help, foreclosure-related needs are straining the capacities of many nonprofits that weren't prepared to take on the volume of new clients. In many cases, organizations have had to increase staff and develop a knowledge base in a new area.

NHS is considering bringing in extra staff to deal with the increasing number of callers seeking assistance. The organization is also conducting foreclosure clinics throughout the community, where lenders and counselors devote several hours to meeting borrowers with problem loans and beginning the mitigation process.

The additional mission of providing foreclosure assis­tance is driving scarce nonprofit resources into unplanned activity and thus putting a strain on staff and budgets. Although grants have now been made available through NeighborWorks America to help fund foreclosure counseling, the number of calls continues to grow and the funding gap widens for assistance through the nonprofit industry.

Agencies find it difficult to turn anyone away. Working with community task forces and establishing new partnerships with lenders is helping them streamline the mitigation process and quickly build efficiencies, but funding will most likely continue to be a principal challenge along with training of mitigation experts.

Keeping communities sound in a climate of foreclosure
For community nonprofits, addressing foreclosures not only expands their client base but also protects the stability of the neighborhoods they serve. Annetta Jenkins, senior program director for South Florida Local Initiatives Support Corporation (LISC), says that although the communities targeted by South Florida LISC for redevelopment and revitalization are not experiencing high foreclosure activity, she still anticipates a "trickle-down" effect on more stable neighborhoods. As home prices in surrounding neighborhoods depreciate, the whole community experiences the destabilizing symptoms that typically accompany vacant and neglected property—such as increased crime, trash and debris, and transient population.

In addition, economic pressures are growing from loss of employment, especially with regard to second jobs that were helping families with the increased cost of living. Financial stress may make families more vulnerable to subprime and predatory lending promotions that are still bombarding South Florida residents through TV and radio ads, and through direct mail from a myriad of financing companies—even the consumer's own lender. Jenkins says that nonprofit organizations will need more funding to take on the added counseling activity, which reaches far beyond their historical client base of low- and moderate-income homeowners.

Finding financial partners and capital for ongoing development projects has also grown more difficult, says Jenkins, and this will affect the continued progress of community building strategies. She notes that land value and construction costs remain high in this market, while the waiting lists for subsidies are growing. Jenkins also points out that credit is becoming harder for many prospective homebuyers to obtain.

U.S. FORECLOSURE ACTIVITY INCREASES IN 2007

*Actual increase may not be as high due to expanded data coverage in this state. Source: RealtyTrac 2007 Year-End U.S. Foreclosure Market Report.

Shank believes stiffer penalties are needed to enforce consumer protection laws along with more publicity focusing on the fraudulent activities surrounding unethical mortgage lending practices. Mandatory homeownership education for first time homebuyers is an idea that is gaining traction. Shank says that the message is getting through "loud and clear" now, and prospective homebuyers are beginning to understand the value of counseling.

After years of incorporating homeownership counseling into first-time homebuyers programs for lower income borrowers, proof is emerging that the education and mentoring pay off in promoting financial stability for the homeowner and the community. Building on these principles to stabilize the mortgage industry going forward may be a positive outcome from the subprime collapse. Establishing additional funding and training resources will allow nonprofits to support an increased education and counseling effort that reaches beyond income levels traditionally served by these agencies to benefit the entire mortgage industry.

This article was written by Ana Cruz-Taura, senior regional community development manager in the Atlanta Fed's Miami Branch.