Laying a stable foundation
John McCarron
Published: February 6, 2010
Ophelia Cage knows all too well the damage – physical and psychic – that a foreclosed and vacant house can do to a neighborhood. She lives next door to an empty bungalow at 6324 S. Campbell Ave. and, after two years of calling the cops and shooing away kids, she’s delighted someone is rehabbing the still-sturdy brick home for a new family to buy.
“I’m hoping it’s a new day,” said Ms. Cage. She’s a meter-reader with the city’s Dept. of Water
Karry Young and workers in Chicago Lawn.
Photos by Alex Fledderjohn
Management and “reads” her own street better than most. “I was thinking of moving,” she said of the constant nuisance that is living alongside a magnet for metal thieves, vandals and squatters. “Now I think I’ll stay.”
What the city-savvy Ms. Cage may not know is the complex public-private partnership newly created to identify, buy, rehab and resell hundreds of foreclosed homes such as 6324 S. Campbell.
There’s no off-the-shelf model for Chicago’s Neighborhood Stabilization Program (NSP). Yet barely a year after the city got word it was getting $55.2 million in first-round federal funding, the City of Chicago and its non-profit program manager, Mercy Portfolio Services (MPS), have created a nimble system for buying and recycling hundreds of foreclosed homes and apartment buildings.
And it actually works, albeit with several tweaks and fine-tunings. By the end of January 2010, MPS had acquired more than 100 units of housing in its 25 targeted neighborhoods. And several – like 6324 S. Campbell – already have been conveyed to developers whose crews are busy rehabbing them according to carefully-drawn specifications. Another 217 units are “under contract,” meaning they’ve been professionally appraised by MPS, and that the owners – often a bank or a bank servicing agent – have agreed to sell for a bit less than appraised value. Why less? Because property values are still declining while their carrying costs are rising. It’s a buyers’ market.
Trailblazing initiative
“This had never been done before,” said Darlene Dugo, MPS’s vice president for acquisitions. So much of the program’s first year was spent building a multi-partner team of real estate developers, appraisers, structural engineers, lawyers, sales agents and so forth.
Young has acquired several Chicago Lawn buildings through the Neighborhood Stabilization Program.
Even with 17 years of experience in the Chicago office of Fannie Mae, Dugo describes the NSP process – with all its due diligence, federal and city requirements, plus the legal strings of foreclosure – as “pretty labor-intensive.”
“There were no models,” she said. “So our first job was putting in place a process. You could say it’s a trailblazing initiative.”
The gruesome economy, ironically, has worked in MPS’s favor. It’s also a buyers market for professional services, which has allowed Chicago’s NSP to get up and rolling with a full-time staff of just half-a-dozen professionals. For example, major lenders such as Bank of America, Citibank and Chase Bank generally have been more than willing to part with their REO (real estate owned) inventories in the 25 neighborhoods. Developers and contractors, moreover, up against the near-collapse of private sector activity, have bid aggressively … even though NSP only reimburses for pre-specified costs plus a fee of 10 to 15 percent. So far more than 40 competitively-selected developers and contractors, both private and non-profit, are in place. Other real estate professionals, from transaction lawyers and property appraisers to listing agents and security providers, have been similarly motivated … and price-competitive.
William Goldsmith, president of MPS, said Chicago’s quick mobilization likely influenced the U.S. Department of Housing and Urban Development’s (HUD) decision to award a second-round grant of $98 million.
“HUD focused on who can get the funds, and the product, out the door in an affirming way,” he said of the Jan. 14 announcement. He also pointed to Chicago’s strategy of focusing on specific neighborhoods, and on problem clusters within those neighborhoods, rather than a scatter-shot approach driven by which properties are easiest to acquire.
New but veteran team
Another factor behind Chicago’s quick response was the city’s extensive experience working with private developers and non-profit groups on affordable housing.
Typical is Karry Young, whose Karry L. Young Development, LLC., is overseeing work on 6324 S. Campbell. He is a veteran of the city’s New Homes for Chicago program and has won awards for affordable houses and two-flats his firm has built in nearby Englewood.
“We’re no strangers to this area,” said Young of the adjacent Chicago Lawn neighborhood, where he’s doing “gut” rehab on three buildings besides the one located next to Ophelia Cage. He says he wants 15 or 16 more. He’s also comfortable working with Neighborhood Housing Services of Chicago, the venerable citywide non-profit that has nominated problem REOs – like 6324 S. Campbell – for early attention.
With headquarters on East 75th Street, Young has been able to tap into local job training and placement programs. He said his company employs 75 men and women – nearly all minorities – covering virtually all the residential construction trades. This helps the city and MPS meet their minority set-aside and local hiring commitments. And because federal funds are used, his workers earn “prevailing” (or roughly union-scale) wages.
Finding buyers
In part because of prevailing wages, and because all rehabs must conform to city building codes plus NSP goals for energy efficiency, the cost of redevelopment may well exceed the going price for bungalows and two-flats in neighborhoods such as Chicago Lawn or Englewood. In other words, finding mortgage-ready buyers may prove more difficult than finding developers or contractors.
The derelict bungalow on South Campbell, for instance, was purchased for $19,000 from now-defunct IndyMac, one of the nation’s more active sub-prime lenders. But specifications and estimates prepared by MPS consultants show it will require $180,527 worth of labor and materials to restore the property to code-compliant, saleable condition.
When completed, the renovated homes and two-flats will be highly energy efficient.
“Look at these bedrooms,” said Young as he showed a visitor the scale of work required to bring a battered 1913 bungalow up to 2010 standards. “There’s no closet. And you couldn’t put a queen or king-sized bed in here if you tried. Look at the exterior walls. There was no insulation. None. There’s really nothing to save in these houses other than the framing and exterior brickwork. Everything of value has been stripped out.”
So the work will be extensive and the question quickly becomes: Who’s going to pay more than $200,000 for a 1,381-square-foot bungalow – albeit a masterfully restored bungalow – in blue-collar Chicago Lawn or Englewood? Especially when federal rules specify that a qualifying family of four cannot make more than $87,000-a-year, or 120 percent of the Chicago area median.
Developing bargains
But again, the Chicago/MPS partnership comes into play. The program is piecing together a menu of subsidies that will write-down purchase prices, reduce closing costs, and lower the loan interest rates paid by qualifying buyers.
Contributing partners include Community Investment Corporation, Local Initiatives Support Corporation/Chicago, Chicago Community Land Trust, the National Community Stabilization Trust, Self-Help Ventures, and Neighborhood Housing Services of Chicago. In addition, the Chicago Housing Authority (CHA) is providing $16 million, plus some of its federal project-based rent vouchers, toward purchase of 200 NSP units for rental to its qualifying tenants.
The city also plans to dovetail NSP’s work with its own five-year plan (2009-2013) for investing more than $2 billion in affordable housing. City Hall will employ some of the same levers and techniques used in its “Find Your Place in Chicago” program that subsidizes home purchases in the mixed-income communities that are replacing the CHA’s demolished high-rises. Families who want to learn more about buying an NSP-rehabbed home – and the various subsidies available – are urged to contact Cardigan Shipman at cshipman@mercyhousing.org Once qualified, prospective buyers are also asked to attend a free, day-long counseling and advice session. Nobody wants the new owners to be overwhelmed or to repeat the cycle of foreclosure.
Certainly not Ophelia Cage, who waits hopefully for the kind of next-door neighbor who will help keep a watchful eye on Campbell Avenue, and maybe even join her as a police beat representative to the city’s CAPS program.
“It’s about time,” summed up Ms. Cage: “I can't wait.
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