Through a special fund, New York City buys up delinquent mortgages to help homeowners and stabilize neighborhoods.
When Steven McDonald moved to the United States from Jamaica, he and his brother dreamed of owning a home. For two decades they saved and hoped until, in 2011, they were able to buy a two-family house in Springfield Gardens, Queens.
It was a perfect fit: walking distance from the LIRR and close to a park where McDonald’s son could play. “The minute we pulled up to check it out, we knew, yeah—if this is within our budget, this is it,” McDonald said.
But a few years later, after the mortgage became delinquent, the bank foreclosed on the property. McDonald had no idea what was going to happen next: He couldn’t sleep, afraid that he was going to lose the tangible dream he had hoped to pass on to his son. The bank had already denied McDonald a loan modification, and he felt thoroughly out of options.
What he did not anticipate was the knock on his door from MHANY Management, an affordable housing nonprofit, telling McDonald that they represented the investor who had purchased his mortgage note, and that they wanted to help him remain in his home. While McDonald was initially “skeptical and alert,” he said, he soon discovered that MHANY intended to follow through on that aim—and that the investor it represented was the City of New York.
MHANY’s counselors look at a family’s income and outstanding mortgage to determine how much money can be forgiven, and what new mortgage payments could feasibly look like. They also talk to homeowners about whether they have enough income to stay on as a rental tenant—in such a case, the owner could seek a deed in lieu of foreclosure, deeding the property to a group of nonprofits, which would then keep him or her on as a tenant. Should the homeowners decide that they do not want to continue owning or living in their house, they have the option of selling the home, which would then get renovated and put into an affordable housing program.
The counselors work with homeowners through the city’s Community Restoration Fund (CRF) program, the first of its kind, which allows New York City to acquire distressed mortgages in order to create affordable homeownership and rental opportunities for low-to-middle income families. Back in 2016, the city’s Department of Housing Preservation and Development (HPD) acquired 24 mortgages via the Federal Housing Administration—including McDonald’s. Last month, in another round of acquisitions, the HPD was able to buy 38 homes with distressed mortgages in the Bronx, Brooklyn, Queens, and Staten Island.
The city acquired those 38 mortgages from Fannie Mae, through a program that creates smaller, geographically focused pools of loans and encourages participation from nonprofit organizations. It funded the $8.7 million purchase through private financing, settlement money from Morgan Stanley over its mortgage bond practices, and the city council’s discretionary fund.
How the CRF program works: Distressed mortgages are purchased on behalf of the city by a nonprofit called the Preserving City Neighborhoods Housing Fund Development Corporation, and then held by a trust that’s a consortium of nonprofits, including the Center for NYC Neighborhoods and Neighborhood Restore. Once the notes are purchased, the nonprofits take over and work with homeowners “to help get them where they need to be,” said HPD Associate Commissioner Kimberly Darga.
“First and foremost is working with homeowners to keep them in their homes, through a modification of their mortgage that is suitable for them,” Darga said. Should that be impossible, the nonprofits try to keep the homeowners on as renters, or help them find another home in the same neighborhood so that they have an opportunity to remain in the community. And if the homeowner no longer wants to live in or own the house, the nonprofits try to resell it at an affordable price through a housing program.
Normally, private investors and real-estate companies are the ones buying up distressed mortgages, which means “these homes would get flipped and sold for much more money and create neighborhood change,” said Cristian Salazar, the deputy director of communications for the Center for NYC Neighborhoods. In addition to displacing families, such moves can change the nature and the affordability of a community. “We’re showing we can stabilize these neighborhoods,” he said.
There are barriers to entry for local governments interested in programs of this nature. Often, when distressed mortgages are available to purchase, well-resourced private equity firms can bring assets to an auction or negotiation fairly quickly. As a result, it can be difficult for municipalities to compete. According to Darga, the FHA program is “structured in a way where they make it a little easier for local units of government and nonprofits to acquire notes.” Cities can request that notes be pulled out of a national pool and do a direct sale negotiation with FHA.
Fannie Mae’s program, while designed to allow nonprofits to acquire notes, doesn’t do direct sales, Darga said. As a result, one of the major challenges is coming up with the resources to participate in programs like the CRF against larger investors. “The biggest thing we didn’t quite anticipate was being able to compete at auction with the private equity funds,” she said.
“What we would like to see is more opportunities for nonprofits to have a level playing field to get these notes,” said Salazar, who wants institutions that have control over distressed mortgages to give more weight to organizations that are working toward neighborhood stabilization.
Without the CRF, said Cecilia Joza, the director of housing counseling at MHANY, “this pool would have been sold to the highest bidders and developers who will eventually flip the property. When these properties are sold for higher values, the tax assessment is higher for the community. Aside from displacing the current homeowners and disengaging the communities, properties may end up empty or locked up for a while,” a situation that can lead to vandalism and blight.
After the notes have been purchased, the next hurdle becomes working with homeowners to come up with a feasible solution for handling the property. Once a mortgage note is obtained, the consortium knows what the outstanding debt on the mortgage was, and what any penalties on the property were, but frequently has no information about who is currently occupying the house. This entails a lot of knocking on doors and trying to get in touch with homeowners who sometimes live out of state or are wary of yet another person talking to them about home financing.
If, after repeated efforts, homeowners don’t reply, then the foreclosure process begins. But for those who do agree to work with counselors, what follows is an ongoing conversation about documentation, income, and what homeowners want to do with their property.
“Honestly, it was so nerve-wracking and insane before [MHANY] came into the picture,” McDonald said, “because I don’t know how it works; I don’t know if at any moment someone’s going to show up at the house and say, ‘Okay, you have this amount of time to get out.’ I had no clue there are programs out there to actually assist in guiding you through the rules and regulations.”
Out of the 24 mortgage notes purchased in 2016, five homeowners have successfully converted to a mortgage modification plan, two have been approved for temporary loan modifications, and four are considering deed-in-lieu options. The others are in various stages of loss mitigation efforts. The process takes a long time, Joza said—MHANY Management counselors are in frequent touch with the homeowners, sometimes on a daily basis.
Foreclosures spiked in New York City in 2017: There were more than 3,000 homes scheduled for auction, a year-over-year increase of 58 percent. Most of these homes were in southeastern Queens, eastern Brooklyn, and parts of the Bronx. The CRF program is making a small but needed dent in a problem that did not fade away after the recession.
“Initially, I felt there was no hope—no real solution to what I was going through,” said McDonald, who was able to keep his home through a mortgage modification plan with the CRF. “I’m a testament to what they do.”