Twin Cities: Implementing a Coordinated Strategy

Background

From 2005 through April 2009, there have been 70,111 foreclosures in Minnesota.  The majority (68 percent) have been concentrated in the seven-county Twin Cities metro area. In some Saint Paul neighborhoods where real estate markets were hot just three years ago, the median sales price of homes has dropped close to $80,000 per home, or 43 percent of homes’ value, since 2005.

Lower-income households and households of color have been hit the hardest.  In the Twin Cities, households of color were much more likely to receive adjustable rate subprime mortgages, a mortgage type created for homeowners with a less- than-perfect credit score that often required higher interest rates or balloon payments which many homebuyers ultimately were unable to pay.  This has resulted in clusters of foreclosures that threaten neighborhood deterioration in minority neighborhoods such as North Minneapolis, South Minneapolis, and the north central and northeast quadrants of Saint Paul. 

A statewide Minnesota partnership is working to understand the foreclosure crisis in the state, reach out to and counsel distressed renters and homeowners, reclaim foreclosed properties, and create innovative financing products. A focus of the Minnesota Foreclosure Partners Council’s efforts is the acquisition, rehabilitation and disposition of foreclosed properties and the creation of innovative financing products that will enhance the Council’s ability to transfer foreclosed properties to responsible owners. Members of the Partners Council are working throughout Minnesota communities to rehabilitate foreclosed properties into affordable and market rate housing and restore a healthy housing market.

The Minnesota Foreclosure Partners Council

The Family Housing Fund, a nonprofit dedicated to providing affordable housing in the Twin Cities, along with the state’s housing finance agency, established the Minnesota Foreclosure Partners Council in 2007 to create a coordinated effort that addressed the rising number of foreclosures across the state. Partners in the Council originally were limited to funder organizations but soon cities, counties, nonprofit organizations and others joined the Council. Today Council members include Saint Paul Housing Finance Agency, Fannie Mae, LISC, the University of Minnesota, several funders, nonprofits, and community developers.

The efforts of member of the Minnesota Foreclosure Partners Council have been funded with state, county, city and federal, philanthropic lenders’ support. For example, the Family Housing Fund, launched the Home Prosperity Fund in 2008 with initial investment loans of $16 million from Wells Fargo, US Bank, TCF Bank, Thrivent Financial, and Minnesota Housing for strategic acquisition and rehabilitation and programs to assist affordable, sustainable homeownership throughout the Twin Cities. New 2009 commitments from the McKnight Foundation and Wells Fargo put the total pool at $24 million. Minnesota Housing released $9.2 million in federal HOME funds to provide down payment and entry cost assistance with the acquisition of foreclosed homes by new homeowners as a primary target and provided $1.5 million between the cities of Minneapolis and Saint Paul and local partners for affordability gap funds to support foreclosure remediation efforts. In addition, the City of Saint Paul approved $17 million for use in Saint Paul to finance the foreclosure recovery program that they named the Invest Saint Paul Initiative. Saint Paul raised this money through a bond issue that was supported by a portion of a half cent sales tax.

Targeting Efforts: Invest Saint Paul and Clusters in Minneapolis

The Invest Saint Paul Initiative targets foreclosure recovery resources to four key neighborhoods. In Saint Paul, 1,706 vacant buildings were identified as of April 8, 2008. Of these, at least 50 percent were estimated to be homes that were foreclosed upon during the past 2 years. By the end of 2008, projections predict over 2,300 foreclosed buildings. The greatest concentrations of vacant properties and foreclosures are in neighborhoods with the greatest numbers of rental properties. Invest Saint Paul’s mission is to address vacancies, home foreclosures, and commercial neighborhood decline and create healthy neighborhoods. Their challenges include declining property values, inability to locate the lenders and servicers for the foreclosed properties, and the presence of few buyers for the foreclosed properties. Invest Saint Paul is targeting their limited resources to four neighborhoods. Jim Erchul of Dayton’s Bluff Neighborhood Housing Services works on the East Side of Saint Paul in one of these targeted neighborhoods. In the hardest hit neighborhoods, Erchul says there may be six to eight vacant buildings on a block. Many of the foreclosures are in neighborhoods where a hot market caused a great deal of recent sales activity. Erchul says that his organization is focusing on recently stable areas with one or two foreclosures that are negatively impacting the area. His organization chooses not to put limited resources into areas with large numbers of foreclosures and vacancies at the block level because they do not possess the resources required to have a significant impact.

The City of Minneapolis similarly adopted a targeted approach and is partnering with nonprofits to acquire and rehabilitate foreclosed properties. Minneapolis is targeting six neighborhoods. This focus on six relatively small geographic areas, or “clusters,” is intended to make a visible impact on the housing stock and to stabilize and strengthen the homeownership market in those neighborhoods. The city selected the clusters by issuing a request for proposals and asking neighborhood groups in North Minneapolis to identify two-block areas that contained three or more condemned vacant properties. Twenty neighborhoods responded with approximately 20 areas and six were chosen.

Each of the six Minneapolis clusters is located in North Minneapolis, a neighborhood with very high foreclosure rates. Northside was a stable neighborhood, but was hit hard by predatory lending and as early as 2004, vacant properties were starting to appear. Northside Home Fund (NHF), a partnership begun in 2005 among Northside neighborhood organizations, nonprofits, governmental and enforcement agencies, private housing developers, and financial institutions, is taking the lead on remediating vacant foreclosed homes. The core focus of the NHF effort aims to make big changes in small neighborhood areas through the redevelopment of vacant and boarded homes for re-sale to stable owner-occupants, home repair assistance for existing homeowners, and foreclosure prevention programs. The City committed $1 million in un-programmed funds to “seed” the NHF. Since 2005, the NHF partners have removed the blighting influence of more than 87 boarded and vacant properties through property acquisition, demolition, and working with property owners to bring their buildings up to code. Poor housing market conditions, coupled with the increased foreclosures and vacant and boarded properties in North Minneapolis, have posed a challenge to cluster development plans. “Cluster development partners have been forced to slow production of new housing units and have increased efforts to improve the market on the north side,” explains Jill Kiener of the Northside Home Fund. In addition to acquisition and rehabilitation, in each cluster, NHF performs community outreach and organizing, a health impact assessment survey, a housing inspections component, foreclosure prevention, and the establishment of a development partnership to identify and implement residential development opportunities within the cluster.

Developing the First Look Program to Acquire Properties

Minneapolis and Saint Paul were selected for a pilot program by the National Community Trust – the First Look Program – that has significantly sped up their property acquisitions. Before First Look, the Minneapolis nonprofit Greater Metropolitan Housing Corporation (GMHC), a nonprofit that has a mission to preserve, improve and increase affordable housing in the Minneapolis metropolitan area, had a tough time locating officials at mortgage companies who have the authority to sell the properties, said Carolyn E. Olson, president of GMHC. First Look makes it much easier to locate and inspect the properties. The First Look Program is a national program developed by the National Community Stabilization Trust, a consortium of nonprofit housing and community development organizations (Enterprise Community Partners, the Housing Partnership Network, the Local Initiatives Support Corporation, the National Urban League and NeighborWorks America) that will coordinate the transfer of real estate-owned properties from financial institutions nationwide to local housing organizations, in collaboration with state and local governments. The Stabilization Trust is working with a number of the leading national financial institutions, including Bank of America, Chase, Citigroup, Fannie Mae, FHA/HUD, Freddie Mac, GMAC, Wells Fargo – who will make the properties available pre-market at adjusted pricing. A key component of recovery efforts is to gain control of properties and then manage the disposition and redevelopment of those properties at a scale large enough to build confidence and stimulate investment. Minneapolis and Saint Paul were chosen for the pilot program because of their innovative work before many communities had even diagnosed the extent of the problem. Two organizations have been identified for the test period to serve as the buyer of these properties on behalf of the effort: Greater Metropolitan Housing Corporation (GMHC) will work with Minneapolis, and Dayton's Bluff Neighborhood Housing Services, Inc. ( DBNHS) will work with Saint Paul.

First Look, soon to be available nationally in additional locations throughout Minnesota and the nation, will identify REO properties and provide cities with the opportunity to purchase the properties once the redemption period has passed and before they are listed for sale through traditional mechanisms. This will allow homes to be acquired quickly, saving on expenses associated with prolonged holding periods by both the cities and the lenders. The financial institutions will provide access to the property for inspection and will provide an offer price for the property. Prices will be adjusted to reflect a number of factors, including current local market conditions, changes in home values, long holding periods and increased vacancies. In addition to working with the cities of Minneapolis and Saint Paul on property acquisition, the lenders have also agreed to provide funding for the rehabilitation of some of the foreclosed properties, and provide end-loan programs and other assistance to homeowners.

Keys to Success

Property Inspections. Each foreclosed property must be inspected to determine whether it should be saved or demolished. The majority of REO properties in Minneapolis need some rehabilitation work, according to Stephanie Gruver at Greater Minneapolis Housing Corporation (GMHC). “The rare home that we find in move-in condition is referred to real estate brokers who can sell it. We focus on the homes that need work,” said Ms. Gruver. The goal is to find homes that can be rehabilitated with a relatively small subsidy, some of which may be able to be recovered at resale. GMHC’s average acquisition price on 45 foreclosed single family properties that needed rehabilitation was $63,000. Average development costs for these properties were $167,000. The average resale price for the rehabilitated foreclosed property was $135,000, leaving an average subsidy gap of $32,000. Repairs include everything from installing a new roof to removing a chimney to allow direct access to a bathroom and make the property more appealing. Many properties, however, are demolished because they are not structurally viable, are no longer attractive to modern buyers, or would require too much funding to make them marketable.

Creative Financing. Innovative financing using contracts for deed helps rehabilitated foreclosed properties sell to first-time buyers. After rehabilitating a foreclosed house, Dayton’s Bluff in Saint Paul and GMHC in Minneapolis must sell it. This is not always easy given the tight credit market. As a result, Daytons’s Bluff and GMHC created the Sustainable Home Ownership Program and the Bridge to Success Contract for Deed Program. A contract for deed is a seller-financing tool under which a buyer receives the deed to a property only after making all payments. Under the contract for deed program, Dayton’s Bluff or GMHC will buy a property and retain title to it, but give possession to a buyer who will pay monthly installment payments. The nonprofit therefore replaces the traditional lender, with another significant difference: the buyer does not build up equity. They must make every payment before they obtain title to the property. This also means that if they miss one installment payment even after paying regularly for years, Dayton’s Bluff or GMHC could legally take full possession of the property. The nonprofits do not plan to take such draconian measures because they want the homeowner to succeed in gaining title. "It's open for a lot of abuse," said Gary Beatty, who will run the new program for GMHC, a nonprofit agency. "But if it's done properly, it's a very good tool that opens the door for a lot of home ownership opportunities."

The program is aimed at people who do not qualify for mortgage loans under current tighter mortgage underwriting standards, but who can show financial counselors that their family budget can cover house payments. While paying off the contract for deed, the buyer can repair their credit so that they can refinance with a traditional mortgage. The program offers up to $200,000 in financing at a fixed 7.5 percent interest rate for owners who plan to occupy the property. It is available for one- to four-unit housing, including townhouses and condos.

To establish this program, the Family Housing Fund made an initial loan of $500,000 to Dayton's Bluff Neighborhood Housing Services (DBNHS) and Greater Metropolitan Housing Corporation (GMHC). These two organizations used the loan to obtain a lender commitment—similar to a line of credit—for up to $1 million from a private lender. The funds from the Family Housing Fund will make up 20 percent of the purchase price, with a balance of 80 percent funded by the lender. GMHC rehabilitated 11 foreclosed homes in 2008. GMHC sold 5 of those homes in 2008, two of which were sold via contract for deed. As of January 23, 2009, Dayton’s Bluff has sold one house using a contract for deed. The program is so new that evaluations on buyer performance are not available. See this article by the Minneapolis Federal Reserve Bank for more information on contracts for deed.

Additional Programs

A Minneapolis program, Minneapolis Advantage, provides a $10,000 forgivable loan to cover down payment and closing costs for homes in the twenty neighborhoods with the highest foreclosure rates. In addition, many municipalities in the state have put “Point of Sale” ordinances in place that require sellers to bring their property up to code prior to selling it or establishing escrow accounts for the buyer to do so. The goal is to hold the owner responsible for the property’s condition and discourage buyers from allowing the properties to deteriorate while they wait for an opportunity to flip them.

Recently both Minneapolis and Saint Paul launched the Take Credit!! First-time Home Buyer Mortgage Credit Certificate Program, where new home owners can take 20 percent of the interest paid on their mortgage annually and apply it toward the amount of Federal Income taxes they owe at the end of each year, for as long they live in their home. In conjunction with this program the Saint Paul Heroes First-time Home Buyers Loan Program offers up to $15,000 in interest-free loans for down payments or mortgage payments. The loan is forgivable after ten years. The Heroes Program is reserved for active military personnel, reservists and veterans, the National Guard, firefighters, emergency service workers, health care workers, law-enforcement, teachers and civil service employees. Both programs can be used with the $8,000 Federal First-Time Home Buyer program.

Going Forward

Minnesota’s work has gained the attention of Living Cities, a consortium of foundations and financial institutions. On behalf of the Minnesota Foreclosure Partners Council, Twin Cities LISC received $500,000 to develop disposition strategies and test new models for reclaiming vacant properties Minnesota also received $58 million in federal Neighborhood Stabilization Program grants which can be used to supplement existing financing of Partners Council activities and municipal and county programs.

Conclusion

Minnesota officials recognized the scale of the foreclosure problem before most of the nation’s experts and took quick action. The Minnesota Foreclosure Partners Council is an extraordinary example of organizations and government working together on a statewide basis to solve important issues. Their work is both visionary and grounded, focusing on innovative financing, buyer incentives and quick, strategic acquisition of REO properties as pilot communities for the National Community Stabilization Trust’s First Look program. Their efforts send a powerful message to funders and organizations looking for worthy projects to invest in.