This is an excerpt of Chapter 5 of Tackling Vacancy and Abandonment: Strategies and Impacts After the Great Recession, jointly produced by the Center for Community Progress, the Federal Reserve Bank of Atlanta, and the Federal Reserve Bank of Cleveland. It has been lightly edited and condensed for the web. In this chapter, Andrew Jakabovics and David Sanchez discuss how a nonprofit “first look” program impacted outcomes for real estate owned (REO) properties. Click here to download the full chapter and read more insights on tackling vacancy and abandonment from the nation’s leading experts.
In the ten years during and after the financial crisis, nearly 8 million households lost their homes to foreclosure. As the number of foreclosures surged, so did the number of single-family real-estate-owned (REO) properties in the portfolios of the financial institutions that held these mortgages. Given the weak sales market, many REO properties initially sat vacant, causing blight and undermining neighborhood stability.
Over time, a significant number of these REO properties were purchased by investors or homeowners. Some investors turned those formerly owner-occupied homes into income-producing single-family rentals. One estimate suggests that more than 5 million homes that were originally owner-occupied transitioned to rental homes between 2006 and 2017. Other distressed homes were rehabilitated and sold to owner-occupants. Especially in weaker markets, many investors have left the properties vacant, where they continue to hold back local housing markets.
The National Community Stabilization Trust (NCST) was created in 2008 to facilitate sales of single-family REO properties to nonprofit and mission-aligned developers (aka community partners), to prevent these vacant homes from harming neighborhoods. NCST facilitates these sales through its proprietary platform, REOMatch. Community partners rehabilitate these REO properties for resale to owner-occupants, affordable rental properties, or transfer to a local land bank. Over its history, NCST has facilitated REO sales on behalf of the Federal Housing Administration, Fannie Mae, Freddie Mac, and a number of large banks and mortgage servicers.
Through REOMatch, community partners have an exclusive right to purchase REO properties before they are listed on the open market, a “first look.” When a listed REO property falls within the geographic area where a community partner is interested in acquiring properties, it is offered for sale to that community partner at a discounted price set by the seller, backing out the saved maintenance and marketing costs. Properties not sold are disposed of by the seller through its retail REO disposition process.
REOMatch aims to achieve neighborhood-positive outcomes by facilitating transactions through a network of vetted, community-based, nonprofit, and mission-focused for-profit organizations and land banks and by requiring that these organizations report the outcomes of their work. The platform prioritizes both homeownership outcomes, based on a view that an owner-occupant disposition best stabilizes a neighborhood, and sale to local nonprofit community partners. The platform also excludes higher-priced properties from eligibility for purchase. Over its twelve-year history, NCST has facilitated the transfer of 27,000 properties, more than 17,000 of which were first-look sales. Of the first-look sales for which community partners have reported data, 83 percent of properties were rehabbed and sold to an owner-occupant.
NCST community partners are playing an important role in stabilizing and improving housing markets in low-income, minority communities. Among properties made available for purchase to NCST community partners in low-income, minority census tracts (those with a minority population of 30 percent or greater and a median income below the area median), 13.3 percent were purchased by NCST community partners. For properties located in all other census tracts, 7.1 percent of available properties were purchased by NCST community partners. Accordingly, among REOMatch properties, 54.6 percent were located in low-income, minority census tracts, while 37 percent of retail properties were located in these areas. This suggests that NCST community partners disproportionately purchase REO properties in these minority communities, creating homeownership opportunities for low-income or minority households.
One particularly noteworthy finding from our study is that NCST community partners disproportionately
purchase properties in low-income, minority census tracts and are more likely to achieve owner-occupancy outcomes in those tracts. This conclusion is bolstered by the fact that we see higher owner-occupancy rates and lower investor ownership rates among REOMatch properties in these low-income, minority communities than among retail properties. Within these census tracts, 71.3 percent of the REOMatch properties were owner-occupied as of 2018, including 88 percent of the 2014 properties and 77 percent of the 2015 properties. By comparison, properties in these tracts that were sold through the retail channel ranged between 57 percent and 63 percent owner occupancy in 2018 for each year of sale, averaging 61.5 percent overall. By these measures, the first look program has made strides toward generating or restoring homeownership in communities affected by foreclosures.
Insofar as first look programs are especially effective in facilitating homeownership in minority neighborhoods, this finding is relevant because minority neighborhoods are likely to be those most affected by an increase in foreclosures. During the COVID-19 crisis, Black and Hispanic households have had the most difficulty making mortgage payments and rent. This finding is also relevant given the longstanding and significant racial wealth gap and increased national attention focusing on strategies that may promote wealth accumulation among minorities.
Accordingly, as our nation and our financial institutions determine how to mitigate the negative effects of post-COVID-19 foreclosures on communities, we suggest that first look programs remain an important strategy to promote homeownership and neighborhood stabilization.