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Massachusetts Not-for-profit Has Right Idea to Fix Mortgage Mess – One Home at a Time

Daniel Gross recently reported on Yahoo Finance that there is one ray of light in the mortgage modification mess – Boston Community Capital. Here are some excerpts from his report…

Five years after the housing market peaked, the mortgage mess remains a significant drag on the economy. Banks, policymakers and investors have yet to figure out a way to stop the cycle of massive foreclosures and the fire sales that inevitably ensue. In September, foreclosures and short sales accounted for 30 percent of existing home sales.

The calls are rising, from all points of the political spectrum, for mortgage modification — i.e., figuring out a way to let people stay in their homes even if they can’t afford the current mortgage payment. While banks, the Obama Administration and the taxpayer-owned mortgage giants Fannie Mae and Freddie Mac dither, one non-profit lender is taking matters into its own hands.

Boston Community Capital, which has been active in the region for 35 years, last year set up the Stabilizing Urban Neighborhoods (SUN) initiative. The plan? Buy properties back from banks who aren’t willing to modify, then resell them to the owners who were in danger of defaulting or who had already defaulted —- at a much lower price and with a better mortgage. And all while delivering 4.25 percent annual returns to investors. The goal, aside from keeping people in their homes, is to stabilize neighborhoods.
Since 1985, BCC has invested more than $650 million in low-income communities, and financed more than 11,100 affordable homes. To raise funds, BCC in May 2010 sold $20 million in five-year bonds that pay 4.25 percent annual interest. Of the $20 million raised in the bond, $4 million immediately went into loan loss reserves.

In other words, of the $20 million raised, BCC will lend out only $16 million, at 6.25 percent. BCC also takes other steps to ensure repayment. BCC takes a diametrically opposed approach. It approaches the bank and offers to buy it at the market price. Here is an example:

In 2006, Lydia Smith and her husband, who were both full-time workers, bought a two-bedroom cape in Hyde Park, Massachusetts. Upon closing, they had two mortgages for a total of $329,000. “We didn’t know we were getting two separate loans,” Smith says. “When I asked about it at the closing, they gave us a runaround.” One of them had a large balloon payment. The couple was able to make the $2,550 monthly payments for a couple of years, but when Lydia’s husband, a custodian, got injured and was unable to work, they began to fall behind. America’s Servicing Company, the Wells Fargo unit that serviced the loan, wasn’t particularly responsive to efforts to modify.

BCC bought the house from the bank in February 2010 for $165,932. Then it turned around and wrote a new mortgage to the Smiths for $214,000 —- the price of the home plus a 25 percent loss reserve, plus a several thousand dollar reserve for repairs. The upshot: The Smiths now pay $1,685 per month for the mortgages, taxes and insurance, a 44 percent reduction.

The house is still underwater, but the homeowner —- and hence the neighborhood — is more stable. And while it gives borrowers a break, BCC also asks plenty of them. It requires people to make 26 bi-weekly mortgage payments instead of 12 monthly ones. The 26 weekly payments force borrowers to make an extra month’s payment each year, which they can use either to write down the principal or place in a reserve for a rainy day.
There’s a final piece that helps protect BCC from some of the charges that it is simply encouraging and abetting moral hazard. If the homes appreciate over time, the mortgage agreement provides that BCC received 50 of the gains. BCC has committed to use any such gains to spruce up neighborhood parks, or fund college scholarships.

Of course, to a degree, such efforts can be seen as rewarding irresponsible behavior. But proponents insist we take a broader view, and think less about the individual and more about the impact of foreclosure on neighborhoods.

Mortgage modification is a messy, complicated business. Groups like BCC are trying to solve a problem that was created on a wholesale level – mortgages shoveled out by machines – on a retail level. Serious obstacles remain. The first is scale. So far, BCC has returned 125 homes to owners through its SUN program, with only one default. It would like to expand in Boston, and in other cities, but there’s a funding issue. BCC is only borrowing for five years and lending for 30, so there will be a need for match funding/recapitalization down the line. The second problem is more daunting. It will come as no surprise that one of the institutions with the most to gain from mortgage stabilization simply isn’t interested in BCC’s effort. Freddie Mac will not modify any of its guidelines to accommodate the SUN program at this time. As a result, only 13 of the 125 homes have been funded through Freddie Mac programs..

Kudos to Boston Community Capital and simply another bad for Freddie Mac….