Nonprofit Uses Creative Impact Investing to Stem Foreclosures

It’s been a decade since the real-estate bubble burst, but New Jersey still has a foreclosure problem. Last year, one out of every 62 homes in the state received a filing of foreclosure, compared with one of every 197 nationwide.

“There are lots of places where the market is clearly turning the corner,” says Wayne Meyer, president of New Jersey Community Capital, or NJCC. “Unfortunately, it’s still a huge issue here.”

Mr. Meyer’s group is fighting back. Its weapon of choice: impact investing. Since 2012, the New Brunswick nonprofit has bought pools of troubled mortgages — 2,452 loans in all — with the goal of modifying homeowners’ loans to help them avoid foreclosure. When the properties the group buys are vacant, it sells them at a discount to charities that redevelop them as affordable housing.

NJCC’s initial response to the crisis was to offer loans to help housing organizations buy and redevelop foreclosed homes, but the group quickly realized that wouldn’t be enough, says Mr. Meyer.

“We were at the back end of the problem,” he says. “Houses were already vacant. They were abandoned. They were draining the life out of neighborhoods, so we needed to figure out a way to get ahead of the problem.”

So far, the community-finance organization has helped 649 families stay in their homes and has sold 115 properties to nonprofits for redevelopment as affordable housing.

Commercial Financing

Buying troubled mortgages is expensive. For example, New Jersey Community Capital paid $65 million in 2013 for 517 underwater loans for properties in counties affected by Hurricane Sandy. To pay for loans like these, the nonprofit raises market-rate investment from private-equity firms, financial institutions, and others.

But how does New Jersey Community Capital fulfill its mission to increase affordable housing and return a profit to investors?

It’s a little complicated. Troubled mortgages being sold at auction usually cost about 65 percent of the property’s present value. For a house with a $300,000 mortgage but a value of only $200,000, for example, NJCC would pay $130,000 for the loan.

The group’s nonprofit partners would then contact the homeowner to let them know they are eligible for mortgage modification or other debt forgiveness. Because NJCC bought the loan at a discount, it can often offer $100,000 in loan forgiveness to the homeowner to bring the mortgage in line with the home’s present value. Eventually, when the homeowner bounces back and has been able to pay the mortgage regularly for at least a year, the New Jersey group can sell that mortgage for roughly 90 percent of the amount of the modified loan, or $180,000.

The $50,000 difference between what the group paid for the loan and what it sold the loan for later covers the nonprofit’s costs and allows it to return a profit to the investors who put up the money to buy the mortgage in the first place.

If the home was vacant, NJCC does its best to sell it to a nonprofit to develop as affordable housing, at 80 to 85 percent of the present value. New Jersey Community Capital gets enough money to cover its costs, while the nonprofit purchasing the home still gets the property at a discount.

‘Very Tough Business’

New Jersey Community Capital is one of a handful of nonprofits buying troubled mortgages in bulk. It recently joined forces with two other groups that have used the approach — Hogar Hispano and the National Community Stabilization Trust — to work on a new batch of mortgages.

“It’s a very tough business for a nonprofit to be in,” says Julia Gordon, executive vice president at the trust. “To play in this space, you need access to significant amounts of capital, and most nonprofits just don’t have that.”

Hogar Hispano, an economic-development charity formed in 2004 by the National Council of La Raza, now known as UnidosUS, has purchased about 700 distressed mortgages on its own.

Early on, however, it struggled to raise the investment dollars needed to bid on pools of loans. “Many capital folks couldn’t figure out how a nonprofit mission could help them with their for-profit bottom line,” says Marcos Morales, the executive director.

The group used a grant from the National Council of La Raza to buy several individual loans to build a track record, a move that convinced investors to get on board.

Case-by-Case Strategy

Boston Community Capital, a nonprofit community financial institution, has taken a different approach to foreclosure prevention — also using impact investment. It negotiates with lenders to buy individual loans that are in default and then offers a new, more affordable mortgage to the homeowner.

Take, for example, a homeowner who has a steady income but is behind on a $350,000 mortgage for a home that is now worth just $200,000.

“Our message to the lender is, ‘Look, nobody’s going to give you $350,000 for a mortgage on a home that’s only worth $200,000,’ ” says Elyse Cherry, chief executive of Boston Community Capital. “Sell it to us at a market rate, and we will turn around and sell it back to the homeowner, stabilizing the homeowner and stabilizing the neighborhood and getting you, the lender, pretty much what you would get if you simply sold this on the open market.’”

Using that strategy, the group has been able to help more than 925 families in seven states stay in their homes — mostly low- and moderate-income homeowners. That translates into $150 million in new 30-year, fixed-rate mortgages and $60 million in reduction of principal.

Like the program in New Jersey, the Boston group is self-sufficient in its approach. The 30-year, fixed-rate mortgages it offers have an interest rate of 6.375 percent, which is higher than the 3.4 to 4.25 percent that Boston Community Capital pays for the money it borrows to make the loans.

While the Boston and New Jersey groups take different approaches, they face a common challenge: winning over the wary homeowners they want to help.

“People are in foreclosure,” Ms. Cherry says. “Their lenders haven’t called back, and they’re in danger of being out on the street. Often, scam artists have reached out to them. So, the trust issues are pretty high, understandably.”