The foreclosure crisis, which has caused around 4 million people to lose their homes, has wreaked havoc on many neighborhoods. Foreclosed homes drag down property values when they swell the housing supply and sell at below-market rates. These bank-owned homes also can erode the character of communities by attracting all manner of blight as they sit unoccupied.

The foreclosure scourge is especially acute in minority neighborhoods, according to a recent report by the National Fair Housing Alliance, which found that banks take much better care of their foreclosed properties in predominantly white neighborhoods than those in minority communities.

Some nonprofits are taking robust measures to combat the epidemic of foreclosures, also known as REO (for "real estate owned") homes. Three of them, Rebuilding Together, NeighborWorks America and the National Community Stabilization Trust, recently announced a new partnership designed to ramp up efforts to revitalize clusters of bank-owned foreclosures, highlighting what appears to be a growing focus on maintenance as a means to mend the housing market.

NeighborWorks America, which coordinates with affiliates that were awarded more than a total of $500 million from the $7 billion Neighborhood Stabilization Program fund in 2010, is teaming up with local affiliates of the nonprofit Rebuilding Together to train the groups to rehabilitate vacant foreclosed homes and sell them to low-income Americans.

The National Community Stabilization Trust, which was created in 2008 to facilitate the transfer of bank-owned homes to nonprofits, will work with the two groups to identify homes that will receive repairs under the program.

"This is a unique effort in that it's focused on transforming vacant and dilapidated properties into safe and affordable homes in the communities they serve," Rebuilding Together spokesperson Janice Walker told AOL Real Estate.

The announcement of the collective nonprofit initiative marks one of the latest attempts to reduce the strain of neglected foreclosed homes on neighborhoods and the housing market. Nonprofits, banks and the government use rehabilitation to combat REO blight, and sometimes provide affordable housing to low-income Americans after the homes' restoration. They've appeared to bolster their efforts in recent months in order "to figure out how to move upstream," says Ascala Sisk, senior manager of Stabilization Strategies at NeighborWorks. And there are "many different structures" to use to accomplish this.

For nonprofits, the Neighborhood Stabilization Program plays a key role in rehabilitation efforts, furnishing them with the necessary funds to invest in mass-scale neighborhood revitalization, which often takes the form of REO rehabilitation.

The Department of Housing and Urban Development administers the fund, which has received $7 billion in appropriations so far, Sisk says. And the National Community Stabilization Trust, one of the three partners of the new nonprofit initiative, helps put these funds into action by "providing the only nationwide platform that gives local housing providers a clear, consistent, and straight path to acquire foreclosed and abandoned properties from financial institutions," the National Community Stabilization Trust's website says.

NeighborWorks America affiliates across the country helped homeowners rehabilitate more than 8,700 homes and 43,000 rental homes in 2011, group spokesperson Douglas Robinson says.

With NeighborWorks guidance, Rebuilding Together, which purportedly completes 10,000 projects that assist low-income homeowners per year, is now beginning its first foray into REO rehabilitation. Rebuilding Together's plan is to rehabilitate REOs and sell them to community members who make between 80 and 120 percent of the local median income, and also provide them with homeownership education, Walker says.

Since the partnership has just formed, Rebuilding Together says that it can't provide an estimate of how many homes the program will impact.

Coinciding with the two nonprofits' newly formed partnership is another program launched in February that takes an alternative approach to combating REO blight. Under the REO Rental Initiative, the Federal Housing Finance Agency will sell Fannie Mae and Freddie Mac-owned REO properties in bulk to private investors, if they agree to rent the properties.

By mandating that the properties be converted into rentals, the program aims to lower rents where foreclosures have hiked up rates and provide the homes with caretakers who are motivated to maintain them, namely, the investors themselves. After a few years of renting (and maintaining) the once-dilapidated properties, investors are expected to push the homes onto the market and sell them.

The program has its critics, including the National Association of Realtors. Detractors say that selling in bulk to investors could chip away at home prices (private investors often buy homes at discounts because they pay banks in cash, not borrowed money) and encourage prospective buyers to rent, instead of buy.

"Over time, servicers have adjusted their models to accommodate selling properties quickly rather than holding onto potentially wasting assets," the 2010 Federal Reserve report on neighborhood stabilization says. "At times this may mean selling to a cash investor immediately, at a slightly lower price, instead of waiting for a prospective owner occupant to receive financing for the purchase."

Bank of America has launched a similar pilot program, called the "Mortgage to Lease Program," that forgives the outstanding debt of some homeowners headed toward foreclosure and offers them the opportunity to rent their homes from Bank of America in exchange for handing over the titles to the bank. If homeowners opt for the program, they may rent for up to three years.

"If this evolves from a pilot into a more broadly based program, we also see potential benefits from helping to stabilize housing prices in the surrounding community and curtailing neighborhood blight by keeping a portion of distressed properties off the market," Ron Sturzenegger, a servicing executive of Bank of America, said in a statement.

For all the two programs' possible shortcomings, they reflect a growing interest across the real estate industry in finding innovative ways of ameliorating the housing crisis by attending to the REO threat, Sisk says.

"And that's great to see," she says.

CORRECTION:

An earlier version of this story misidentified a Rebuilding Together spokesperson. The spokesperson's name is Janice Walker. The story also incorrectly stated that Rebuilding Together's rehabilitation plan is to restore REOs and sell them to community members who make between 80 and 20 percent of the local median income. The income range is actually 80 to 120 percent of the local median income.

See also:
Foreclosure-Review Offer Getting Few Takers, Report Says
How to Avoid Foreclosure: Steps You Can Take to Keep Your Home
Home Prices May Withstand Foreclosure Wave

View the original article here

The Federal Housing Finance Agency (FHFA) issued a statement late Monday refuting a story from ProPublic and NPR that a complicated investment strategy utilized by Freddie Mac had influenced it to discourage refinancing of some of its mortgages.  FHFA confirmed that the investments using Collateralized Mortgage Obligations (CMOs) exist but said they did not impact refinancing decisions and that their use has ended. (the NPR Story)

Freddie Mac's charter calls for it to make home loans more accessible, both to purchase and refinance their homes but the ProPublica story, written by Jesse Eisinger (ProPublica) and Chris Arnold (NPR) charged that the CMO trades "give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance."

Here, in a nutshell, is what the story (we are quoting from an "updated" version) says Freddie has been doing.  

Freddie creates a security (MBS) backed by mortgages it guarantees which was divided into two parts.  The larger portion, backed by principal, was fairly low risk, paid a low return and was sold to investors.  The smaller portion, backed by interest payments on the mortgages, was riskier, and paid a higher return determined by the interest rates on the underlying loans.  This portion, called an inverse floater, was retained by Freddie Mac.

In 2010 and 2011 Freddie Mac's purchase (retention) of these inverse floaters rose dramatically, from a total of 12 purchased in 2008 and 2009 to 29.  Most of the mortgages backing these floaters had interest rates of 6.5 to 7 percent.

In structuring these transactions, Freddie Mac sells off most of the value of the MBS but does not reduce its risk because it still guarantees the underlying mortgages and must pay the entire value in the case of default.  The floaters, stripped of the real value of the underlying principal, are also now harder and possibly more expensive to sell, and as Freddie gets paid the difference between the interest rates on the loans and the current interest rate, if rates rise, the value of the floaters falls. 

While Freddie, under its agreement with the Treasury Department, has reduced the size of its portfolio by 6 percent between 2010 and 2011, "that $43 billion drop in the portfolio overstates the risk reduction because the company retained risk through the inverse floaters."

Since the real value of the floater is the high rate of interest being paid by the mortgagee, if large numbers pay off their loans the floater loses value.  Thus, the article charges, Freddie has tried to deter prospective refinancers by tightening its underwriting guidelines and raising prices.  It cites, as its sole example of tightened standards that in October 2010 the company changed a rule that had prohibited financing for persons who had engaged in some short sales to prohibiting financing for persons who had engaged in any short sale, but it also quotes critics who charge that the Home Affordable Refinance Program (HARP) could be reaching "millions more people if Fannie (Mae) and Freddie implemented the program more effectively."

It has discouraged refinancing by raising fees.  During Thanksgiving week in 2010, the article contends, Freddie quietly announced it was raising post-settlement delivery fees.  In November 2011, FHFA announced that the GSEs were eliminating or reducing some fees but the Federal Reserve said that "more might be done."

If Freddie Mac has limited refinancing, the article says, it also affected the whole economy which might benefit from billions of dollars of discretionary income generated through lower mortgage payments.  Refinancing might also reduce foreclosures and limit the losses the GSEs suffer through defaults of their guaranteed loans.

The authors say there is no evidence that decisions about trades and decisions about refinancing were coordinated.  "The company is a key gatekeeper for home loans but says its traders are "walled off" from the officials who have restricted homeowners from taking advantage of historically low interest rates by imposing higher fees and new rules."

ProPublica/NPR says that the floater trades "raise questions about the FHFA's oversight of Fannie and Freddie" as a regulator but, as conservator it also acts as the board of directors and shareholders and has emphasized that its main goal is to limit taxpayer losses.  This has frustrated the administration because FHFA has made preserving the companies' assets a priority over helping homeowners.  The President tried to replace acting director Edward J. DeMarco, but Congress refused to confirm his nominee. 

The authors conclude by saying that FHFA knew about the inverse floater trades before they were approached about the story but officials declined to comment on whether the FHFA knew about them as Freddie was conducting them or whether the FHFA had explicitly approved them."

The FHFA statement said that Freddie Mac has historically used CMOs as a tool to manage its retained portfolio and to address issues associated with security performance.  The inverse floaters were used to finance mortgages sold to Freddie through its cash window and to sell mortgages out of its portfolio "in response to market demand and to shrink its own portfolio."  The inverse floater essentially leaves Freddie with a portion of the risk exposure it would have had if it had kept the entire mortgage on its balance sheet and also results in a more complex financing structure that requires specialized risk management processes.  (Full FHFA Statement)

The agency said that for several reasons Freddie's retention of inverse floaters ended in 2011 and only $5 billion is held in the company's $650 billion retained portfolio.  Later that year FHFA staff identified concerns about the floaters and the company agreed that these transactions would not resume pending completing of the agency examination.

These investments FHFA said did not have any impact on the recent changes to HARP.  In evaluating changes, FHFA specifically directed both Freddie and Fannie not to consider changes in their own investment income in the HARP evaluation process and now that the HARP changes are in place the refinance process is between borrowers and loan originators and servicers, not Freddie Mac.

View the original article here