NSP Chicago – When the Going Gets Tough, the Tough Get Going
Matt Field
Published: enero 20, 2010
The federally-funded Neighborhood Stabilization Program may have been dreamed up in Washington, but it is at the state and local level that reality is setting in.
Now, the plans drafted by local officials to win a share of $4 billion in federal grants must be turned into real programs with brick-and-mortar results.
The basic idea was to snap up foreclosed properties in key areas, fix them up, and get them back on the market, thus saving targeted neighborhoods from the domino effect of blight.
That hasn’t always been easy. There have been delays in getting foreclosed bank-owned properties (also known as REO properties) back into the rental or sales market. Officials working with the program say that was to be expected; starting new programs, particularly those that involve the acquisition, repair and re-sale or rental of hundreds of residential properties, takes time. Still, the groundbreaking work Chicago has done applying $55 million from the first round of NSP to acquire and fix up foreclosed properties was recently validated when the U.S. Department of Housing and Urban Development channeled an additional $98 million in NSP2 funds to Chicago – second only to Los Angeles among cities receiving round two grants.
Chicago gets moving
In Chicago, much of that time has been devoted to assembling and dispatching an army of more than 40 for-profit and nonprofit developers, 13 appraisal companies, eight asset management firms, 18 law firms, 10 real estate companies, six specification writers, and six title companies to handle the details of acquiring, repairing and selling or renting a large number of single-family houses and apartment buildings.
“None of this happens in a vacuum, and we’ve learned that none of it happens quickly” said William
Mercy Portfolio Services' William Towns
Eric Young Smith
Towns, vice president of community action plans for Mercy Portfolio Services (MPS), which is managing NSP in Chicago.
To date, MPS has acquired 95 units and has contracts to close on 107 more. Meanwhile, laying the groundwork to purchase NSP-eligible vacant houses and apartment buildings has resulted in the employment of numerous people, ranging from property managers to appraisers.
Acquiring properties has been more difficult than expected, said Towns. When the program began, the prevailing wisdom was that MPS would need to look at three units for each one it ended up buying. Now it’s a 4-to-1 ratio. Competition from investors is especially hot for properties costing less than $50,000.
National challenges
Other challenges also have emerged in Chicago and across the country. NSP officials are dealing with twists such as an unexpected drop in the number of listed and/or available REOs in their markets as well as competition with investors for bargain properties in struggling neighborhoods.
The diminished REO supply is temporary but surprising, says Craig Nickerson, the lead consultant and project director for the National Community Stabilization trust, a nonprofit that helps NSP recipients throughout the country acquire property.
"We would have expected the inventory to be higher than ever," he says. "In some cases, it's half of what it was six months ago.”
Sometimes, banks want to keep properties listed as assets on their books, even after an owner defaults on their mortgage. In other cases, Nickerson says, those who own foreclosed property, usually banks or investors, would rather have a property occupied by an owner who is not paying their mortgage rather than a vacant property that can easily be vandalized.
"Most of the strategies are temporary-holding-pattern strategies," he says. "It is simply delaying the inevitable."
And private investors can make it harder for NSP to buy REOs that do exist.
Competition from private investors
Brian Sullivan, a spokesman with the U.S. Department of Housing and Urban Development, says low housing prices in many parts of the country mean NSP recipients may lose out to private investors. Local programs using NSP funds cannot pay more than 99 percent of a property’s appraised value. Speculators are under no such restrictions.
"Investors are buying at a discount, but perhaps more than what a local community might have bid," Sullivan says.
Before the housing market took a nosedive, getting a mortgage was all too easy. In many cases, brokers didn't even require proof of income. But now that has changed. New investors need skin in the game. Whether this new breed will benefit the neighborhoods they are buying into remains to be seen.
The Chicago Lawn neighborhood on the city’s Southwest Side took a big hit during the foreclosure crisis. In 2008 alone, 744 properties had foreclosure filings against them, according to the nonprofit housing research organization the Woodstock Institute.
Mike Reardon is the Chicago Lawn neighborhood director for Neighborhood Housing Services. His housing organization’s services include foreclosure counseling, and he says he's somewhat hopeful the new investors in the neighborhood will be more responsible than people who got easy credit during the subprime mortgage boom.
He says one investor who recently bought several buildings with collateralized loans seems to be "operating in a businesslike way." That wasn’t always the case. Reardon says most of the vacant buildings in Chicago Lawn had been investor-owned. In the past, he says, some unscrupulous investors had sold buildings in straw-buyer scams that allowed the investors to run off with the money from the mortgage loans and leave the buildings to foreclosure.
"It's much better if people have their own money in it," Reardon says.
Nickerson is less trusting of new investors. He says they do little to improve their properties. Instead, he said, they are waiting to make a profit when housing values rise in the NSP neighborhoods.
"They sure as hell would like to buy the property right next door where you are putting $80,000 into a rehab," he said.
High Chicago NSP standards
But NSP in Chicago is setting a high standard in terms of the quality of the rehabs. “Our hope is that the emphasis on quality will put pressure on investors to do the right thing,” said Towns.
Difficulties aside, Nickerson and others are optimistic about NSP. Although Chicago's program is clearly getting up to speed, HUD’s Sullivan acknowledges many NSP recipients nationwide will need help. To that end, HUD will award another $50 million in grants to help programs use their initial NSP allotment. In some cases, HUD officials will be embedded in struggling programs.
"Three hundred nine places got [NSP funds]," Sullivan says. "Among the 309 there are those that are further along in obligating than others."
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