Los Angeles: Helping New Homeowners Move into Foreclosed Properties
PROGRAM SNAP-SHOTSStrategy: Stabilize neighborhoods by maximizing the use of viable real estate in the city; provide incentives for home buyers to purchase foreclosed properties; create a nonprofit holding company to acquire and rehabilitate foreclosed properties for occupancy by lower and moderate-income households; target both programs to areas most impacted by foreclosures
Market: Strong Market City
Funding: Neighborhood Stabilization Program, Affordable Housing Trust Fund, HUD Lead Abatement Grants, State funding
Partners: City of Los Angeles, Restore Neighborhoods LA, Enterprise Community Partners, real estate brokers, lenders
Like many U.S. cities, Los Angeles has a fast-growing inventory of thousands of foreclosed properties. Unlike many cities, Los Angeles has a viable real estate market: approximately one hundred foreclosed homes are sold on the private market in Los Angeles every day. The mortgage crisis has reduced property values in one of the most expensive cities in the country and increased affordability for low- and moderate-income homebuyers. However, the corresponding tightening of the credit markets has made it more difficult for these potential homebuyers to obtain mortgage financing.
To capitalize on this healthy market for foreclosed properties and overcome the barriers to homeownership, Los Angeles Housing Department (LAHD) is implementing a number of programs to aid in foreclosure recovery. The City is using its Neighborhood Stabilization Program allocation to fund two initiatives. The Walk-In Program will provide low and moderate-income buyers with incentives to purchase a foreclosed home in targeted neighborhoods. And a newly established nonprofit property holding company, Restore Neighborhoods LA, will acquire, rehabilitate and sell properties to homebuyers with low and moderate incomes, or to mission-driven organizations.
First Steps: Defining the Foreclosure Problem
The City launched an intense effort to define the foreclosure problem through data collection and mapping in 2007. In a city that encompasses 468 square miles and contains 1.36 million housing units, a total of 24,611 units have been foreclosed between January 2007 and March 2009. One of the first goals of this effort was to determine the extent of the crisis and to identify geographic concentrations of foreclosures. To achieve the best results, the LAHD created a data committee to help identify and map relevant foreclosure-related data in the City of Los Angeles. This committee consisted of industry and academic experts, including: Enterprise Community Partners, the Federal Reserve Bank, the Lusk Center at the University of Southern California, and LAHD consultants.
The City, in consultation with the data committee, began its analysis of the impact of foreclosures in the City. The City supplemented foreclosure data (purchased and analyzed from DataQuick) with HUD data on foreclosure and abandonment risk estimates of areas that contained more than 50 percent of persons at or below 120 percent of area median income. Locally-collected gang activity and crime data was also used to identify target areas.
The City identified three major areas of foreclosure concentration: South Los Angeles, Central/East Los Angeles and the San Fernando Valley. The LAHD also individually mapped each of the fifteen City Council districts. Each map depicts foreclosures to determine concentrations in the each of the Council districts, but does not provide sufficient detail for speculators to identify the addresses of the properties. With this information in hand months before NSP funding was available, the LAHD approached City Council offices and asked them to identify 10-square-block areas within their districts with high foreclosure concentrations to target the City’s limited foreclosure recovery resources and leverage other investments to stabilize the neighborhoods.
The Walk-In Program: Providing Homeownership Opportunities
The City created its Walk-In Program to assist low- and moderate-income homebuyers purchase foreclosed homes that need little to no rehabilitation in the priority NSP areas. Under the Walk-In Program, the City will partner with lenders, realtors and homebuyer educators to assist households at or below 120 percent of area median income (AMI). The City will provide eligible homebuyers in the priority areas a soft second mortgage of up to $75,000 underwritten by the LAHD to make the home affordable. (A soft second mortgage does not replace the primary mortgage financed by the bank. Instead, it fills the gap between the amount that a borrower can afford for a first mortgage and the purchase price of a home.) The City will also provide an additional loan up to $50,000 to assist homebuyers with rehabilitation of the home. The rehabilitation loan is limited to $50,000 in order to encourage homebuyers to “cherry-pick” the foreclosed homes in the best condition in the targeted areas. The LAHD learned from past experience that more extensive repairs were problematic for new buyers. As part of the Walk-In Program, buyers will use FHA and other standard fixed-rate mortgage loan products to purchase homes. These home purchases will have an immediate stabilizing impact on the neighborhoods.
Home Price Decline in Two NSP Target Areas
Source: LAHD Policy & Planning Unit analysis. *DataQuick; +Assumes 30yr fixed 5.5% rate, 20% down payment w/ Taxes & Insurance; ^38% of income
Restore Neighborhoods: Lining up the Opportunities
The City established a nonprofit holding company to swiftly acquire and rehabilitate properties. The holding company, Restore Neighborhoods LA (RNLA), was incorporated as a Community Based Development Organization (CBDO) under federal regulations. The reason for creating a new nonprofit was simple: it would be more flexible in this market and have fewer bureaucratic requirements to satisfy before it could purchase and transfer properties. Enterprise Community Partners provided the technical assistance required to create the nonprofit organization. RNLA will work to acquire REO properties with more extensive rehabilitation needs. RNLA will use a Request for Qualifications (RFQ) process to hire contractors to rehabilitate foreclosed properties. LAHD will verify that the work is completed satisfactorily. Once properties are sold, the City will provide a soft second mortgage to the buyers of these homes to get the rehabilitated homes quickly re-occupied by homeowners. RNLA will also use some of its resources to “right-size” some homes to meet the needs of the impacted neighborhoods. For instance, a bedroom and bath may be added to a two-bedroom, one-bathroom house in order to meet/accommodate the needs of today’s families.
RNLA will also address multi-family buildings. One particular goal of RNLA is to buy and rehabilitate 2 to 4 unit multi-family rental properties in South Los Angeles. RNLA will acquire and transfer these buildings through an RFQ process to other mission-driven affordable housing providers with the capacity to rehabilitate, own and manage the properties as affordable rental housing.
The LAHD has acquired key information on the City’s multi-family housing stock through its program that inspects every rental property every four years. The City will use this information to help identify foreclosed buildings with code deficiencies or nuisance properties where a neighborhood would strongly benefit from the rehabilitation of these types of property by RNLA.
LAHD is also working with Enterprise Community Partners to integrate cost effective “green” specifications into the rehabilitation of NSP properties.
LA NSP Eligible Property Website
In an effort to assist real estate professionals, servicers, and prospective homebuyers to participate in the NSP program, the LAHD launched a searchable map-based property search website in March 2009. The new website contains NSP related information as well as maps of all the NSP priority areas in the City. The website enables users to input an address or the parcel number of a property and immediately determine if the property is located within an NSP priority area. The LAHD NSP website utilizes Microsoft LiveEarth so that users can view the property and surrounding area from a variety of vantage points.
Because of the high cost of housing in Los Angeles, the city estimates that the NSP funding will affect just over 300 housing units. To have greater impact, the City and RNLA are working to establish a revolving line of credit facility to leverage the NSP funds for the acquisition and rehabilitation of foreclosed properties. The line of credit will be similar to the City’s New Generation Fund, which is a new program that offers acquisition and predevelopment loans to developers committed to the creation and preservation of affordable housing in the City of Los Angeles.
To further assist families and neighborhoods hurt by the foreclosure crisis, the LAHD will be applying for the State of California’s NSP 25 percent set aside to assist households up to 50 percent of AMI as well as the NSP2 funding available through ARRA.
Other City Measures
In November 2008, the Los Angeles City Council approved the Foreclosure Protection Moratorium Ordinance (effective December 19, 2008), prohibiting lenders who foreclose on single-family homes or non-RSO multi-family properties from evicting a tenant merely because the property has been foreclosed. This ordinance provides renter protections that were previously only available to residents of units covered by the Rent Stabilization Ordinance. This moratorium will sunset on December 17, 2009; however, the City Council can amend and extend this ordinance. In May 2009, the City has also addressed fraudulent foreclosure counseling activity by regulating mortgage modification consultants.
Mercedes Marquez, General Manager, City of Los Angeles Housing Department, says these programs will only address a small part of the problem because of limited funding. Even at $32.8 million, the NSP funds will not go far in dealing with 24,611 units in 19,652 properties. Ms. Marquez estimates that the City will be able to acquire and rehabilitate at most 200 or 300 hundred foreclosed properties with the funding.
Los Angeles shaped its foreclosure recovery plan to take advantage of its viable real estate market. With a data-based approach to foreclosure recovery, the city will offer incentives for buyers to purchase foreclosed properties in targeted areas through the Walk-In Program, and has established a nonprofit holding company to quickly purchase foreclosed properties, rehabilitate them, and get them back on the market. Additionally, the City is working to create a line of credit to help finance these efforts. And as City officials like Mercedes Marquez will tell you, this is only the beginning of L.A.’s substantial efforts to manage the foreclosure crisis and, where possible, turn it to the City’s opportunity to create new affordable housing.