Dear reader, as part of a special report for Shelterforce I sat down with the heads of four of the largest community development intermediaries in the country and asked a simple question: Are you still relevant?
There was a really nice article in today’s Gotham Gazette about larger, non-owner-occupied buildings that are headed into default and foreclosure. The author, Chris Opfer, does a good job of laying out the complications for tenants, who are frequently stuck when a building enters the netherworld of default. With affordable housing really hard to find for low income renters (refer to my earlier post “Foreclosure: The Ugly Stepchild of Affordable Housing“), trying to relocate from a rent stabilized unit can be a real nightmare.
Big vs. Little – What’s the Difference
So, just let me clarify that we’re talking about two very different kinds of housing stock. Many properties with six or more units of housing are rent stabilized (for a very handy FAQ, click here). In most cases, the owner does not actually live in the building, but is instead an investor who has purchased the property with the ambition of making a profit from it. Property investors make profits in two ways: by keeping expenses (mortgage payments, building repairs, maintenance, vacant units, etc.) lower than income (rents), or by selling a building for more than they paid for it. During the bubble, many investors were more interested in the latter strategy than the former. While property values were going up, up, up, this wasn’t so much of a problem, because you could sell your overpriced building to the next sucker who got incredibly cheap and easy financing. But when the music stopped, someone got stuck with a building that they couldn’t sell, and that no longer made enough money in rents to pay for those expenses (especially that really high mortgage).
The city is still struggling to come to terms with the number of larger, rent stabilized properties in this condition. Really excellent work has been done on this by University Neighborhood Housing Program through its Building Indicator Project. If you want to geek out on some seriously juicy NYC based research, it’s well worth a read. Oh, and it will scare the crap out of you:
“Currently, the BIP database tracks violation, lien and lender data for more than 62,000 properties in four boroughs of New York City, and the most recent data shows nearly 3,400 properties containing approximately 135,000 apartments scoring above our likely distress threshold of 800 points. This represents 5.5% of all properties in the database, and is a significant increase from the fall of 2009 when 3.3% were likely distressed. The percent of properties also increased slightly in all boroughs except Manhattan since the spring of 2010, bucking the trend of scores dropping slightly each fall.”
I should also take a moment to acknowledge the equally compelling work done by the Citizens Housing and Planning Council on Zombie Mortgages – carefully detailing the costs and risks of the over-leveraged, multi-family properties. Suffice it to say that there appear to be many larger, rent-stabilized properties at risk of foreclosure because of investor speculation in NYC.
This is a very different problem than the issue of 1-4 family home foreclosures that is plaguing the country. These properties are owner-occupied, and while the homeowners are in many cases also over-leveraged, there are other contributing problems (primarily loss of income and unemployment) that are causing widespread mortgage defaults.
From the perspective of reducing foreclosure-related displacement in big vs. little buildings, the critical difference in my experience is that in large buildings tenants are more likely to remain even if the building is foreclosed upon, but in small buildings tenants are almost always removed upon foreclosure. Indeed, protections for tenants in larger buildings are much stronger and deeper than for tenants in smaller buildings.
There is another important difference that’s also worth mentioning: in most little building foreclosures the owner / investor actually lives in the home. Why is this such a critical difference? Because when the owner lives in the property they have a real incentive to maintain the security and livability of the building as best they can. That means a lot to their tenants, as you can imagine, and substantially reduces the likelihood that they will feel compelled to move because of deteriorating building quality.
Speeding Up vs. Slowing Down
So, here’s the real policy issue – in large scale properties when there is a mortgage delinquency it’s better to speed up the foreclosure proceeding. In smaller, owner-occupied properties, it’s better to slow it down. The reason is fairly straightforward: with larger, non-owner-occupied buildings, getting to a resolution that includes a restructuring of the debt (usually through foreclosure) means the building can have a shot at a fresh financial start. Many of these buildings would be fine if they weren’t saddled with unrealistic debt. They have good paying tenants, are currently in reasonable repair, and meet an important need in the housing market.
On smaller, owner-occupied units, slowing down the process to allow homeowners more opportunities to correct their situation preserves options for both owners and tenants. Because tenants in these properties are routinely evicted upon foreclosure, it’s better to try and correct the mortgage default through modification, refinance, repayment of arrears, or other similar strategies.
Note that both of these strategies are aimed at keeping tenants in place and reducing the overall number of folks who will be put out of their homes as a result of mortgage delinquency.
I should conclude by noting, for those of you who might want to know, that free help for tenants and homeowners is available in NYC by simply calling 311 and saying the word “foreclosure.”
It’s no surprise to anybody who spends time on affordable housing that single and small multi-family homeownership (defined as 1-4 housing units / home) has never been a big part of housing policy per se. In spite of all the polemic about the role of Fannie and Freddie in the mortgage crisis, and all the fallout caused by those nasty public and private issuances of mortgage backed securities, the fact that there was a housing bubble does not mean it was the consequence of housing policy. Quite the contrary – the housing bubble appears to have occurred without any real reference to housing policy. In spite of calls for more affordable housing by various political leaders (on both sides of the aisle), the housing bubble was clearly the result of economic policy (artificially low interest rates, lack of regulatory oversight) and a global surplus of cash looking for “value” investments in US mortgage securities.
But there is a big reason why single and small multi-family homeownership (S&SMF, for short) has never really risen to the top of the pile in terms of housing policy, and this reason has a direct bearing on the difficulty in finding foreclosure prevention solutions now.
Retail vs. Wholesale:
Most affordable housing (certainly in NYC) is built by large developers as affordable rental housing. Whether the development is dedicated exclusively for affordable housing, or affordable units are included as part of a much larger development (sometimes as a condition for permission to build at scale, sometimes because the developers want to subsidize a portion of the development), a whole industry is dedicated to this type of affordable housing development. There was bubble-related speculation in this market as well, but the causes and implications of this are much different (and the subject of another post to come). It is this industry, working in close coordination with NYC’s Dept of Housing Preservation and Development (as well as other state and federal agencies), that is striving to meet Mayor Bloomberg’s promise of creating or preserving 165,000 units of affordable housing by 2014 (http://on.nyc.gov/pU3Awp). The goal is laudable and appears achievable.
When it comes to S&SMF, however, city policy has extended no further than some support to assist low-income homebuyers in covering closing costs, or in current efforts by Restored Homes (a city-affiliated nonprofit, www.neighborhoodrestore.com) to acquire foreclosed homes, fix them up and sell them to low- and moderate-income homebuyers. At best, such efforts have yielded a few thousand homeownership opportunities, and the REO acquisition program has a target of just 100 homes.
Why are affordable rentals so much easier to develop than affordable homeownership opportunities? Because:
- Affordable rentals are bigger and taller, and pack a lot more folks in less space, so they cost less per unit to build; homeownership is built one parcel at a time and holds fewer people per square foot, so it costs more to develop.
- NYC is expensive: it takes more income for individuals to afford even an “affordable” home, so there’s more demand for affordable rentals, which don’t require closing costs or higher monthly income levels.
- There is enormous demand for affordable rental housing (NYU’s Furman Center put the vacancy rate at a meager 3% in 2008, http://bit.ly/pMMOD8), and while lots of folks would love to own homes, high entry costs keep demand down.
- There are lots of both nonprofit and for-profit developers of affordable rental housing who specialize in high-density building. They are a highly organized sector in frequent communication with each other, with public officials, with banks, and with lots of other important stakeholders. The homeownership sector has relatively few nonprofit partners (such as Neighborhood Housing Services, www.nhsnyc.org), and no organized developer community.
- The administrative burden of developing housing is much reduced on a per unit basis when you build large, because you can centralize functions for building development, qualifying residents, dealing with repairs, handling inspections and so on.
The elephant in the room in all these considerations is, of course, money. The low income housing tax credit, the federal section 8 program, state level bond financing programs, city subsidies, banks seeking to meet Community Reinvestment Act requirements – all are much better aligned to invest in rental housing. While experimentation has taken place to use existing subsidies to encourage homeownership, the high cost of housing in NYC and the barriers noted above have dramatically diminished outcomes and most programs have withered on the vine.
All this is to say that the preponderance of resource and capacity is aimed at rentals, and has been for a long, long time. It’s a huge and thriving industry, and I believe it’s poised to go through another round of expansion in the very near future. Which leads me to my key point….
OK, now let’s talk about foreclosure.
Crisis? What crisis?
Every year, thousands of affordable housing developers (again, mostly developers of rental housing) gather for the annual New York State Association for Affordable Housing (NYSAFAH) Conference convening in NYC. We all pack into the massive ballroom at the Marriott Marquis for speeches and policy talks, a chance to see old friends and make connections. I love this event, really, and I wholeheartedly support NYSAFAH’s annual policy goals.
I spent several hours and heard lots of colleagues (both on stage and off) talking about the challenges of securing public subsidy, the price fluctuations of tax credits, the implications of prevailing wage debates in the state, the latest developer casualties of the down market – all indulging our somewhat ghoulish fascination with the current muddle in our corner of the world. The thing that bothered me was that not once did foreclosure come up as a topic. It was not addressed by any panel, not considered in any policy position, not covered in any analysis of current trends.
This bothered me for several reasons, but I’ll cut right to the chase:
This really gorgeous chart comes courtesy of the Federal Reserve Bank of New York (click here for the link to the FRBNY publication). As you can see, we’re talking about 29,000 homes currently in foreclosure proceedings, and another 19,000 that are over 90 days delinquent.
So, round numbers, there are almost 50,000 properties where homeowners are currently at risk of displacement. In addition, let’s assume that another 50,000 tenants in these same properties are equally at risk of displacement (I’m making this guess based on a study by NYU’s Furman Center that’s now a few years old, but that estimates tenant displacement to be about equal to homeowner displacement – check out this really excellent recent update by Josiah Mader at Furman: http://bit.ly/n1jTWk).
Even allowing for the three years it currently takes to go through a foreclosure proceeding in NYC, we’re talking about some 100,000 residents at risk of displacement today. We don’t know what this number will be like, although we know that the current sluggish economy is going to continue taking its toll on homeowners (loss of income being the primary reason for mortgage distress).
I believe this number alone has very significant implications for affordable rental housing in NYC. Remember that 3% vacancy rate that I mentioned earlier? Even then that number was dropping as pressure built on affordable units in the outer boroughs, and it’s very far below the national average of 10%.
Where will all those displaced folks go? Many of them will be “recycled” into S&SMF properties that have come through foreclosure into new ownership, but bear in mind that these will now be distressed properties in distressed communities. Why? After 3+ years of neglect during the foreclosure proceeding, followed by bank ownership and sale to a speculative purchaser, many of these homes will be converted to strictly rental properties at high risk of illegal conversion, poor maintenance, and distressed tenantry.
Many others will continue to put downward pressure on an already incredibly tight rental market where my NYSAFAH colleagues are looking for opportunities to build and expand. What does this mean for my development friends as we sit in the Marriott ballroom? I think it means that we, as a city, are not really ready for the level of residential displacement that is still little more than a trickle. It means that communities distressed by foreclosures today could become communities distressed by small holder slumlords tomorrow. It means that those high density neighborhoods where affordable rentals are concentrated (along with the most capable nonprofit partners, and the most robust developer activity) could receive disproportionate attention and resource in comparison to those low density homeowner neighborhoods where such supports are far more fragmented or altogether lacking.
I believe we need to begin developing more aggressive policies today that include the following:
- A much stronger inspection regime for properties both in foreclosure and post foreclosure, to insure against illegal conversions and other important code and maintenance violations.
- Greater protections for tenants during and after foreclosure, including outreach to let them know of their rights and obligations.
- Incentives for new purchasers of foreclosed and distressed properties to keep existing tenants (and even former homeowners) in place, to limit displacement and better insure some personal investment in maintaining the properties.
- Coordinated dialogue and fresh thinking among developers, policy makers and public officials to understand how our various housing markets could interact for better or worse during this period of substantial displacement.