How Foundations Can Heal the Housing Crisis

Now that Congress has finally passed legislation to tackle the burgeoning problem of vacant foreclosed properties that were victims of the subprime-mortgage crisis, foundations must answer the question of how best to deploy their billions of grant-making and investment dollars to help solve the problems facing communities across the country.

Several billions in federal dollars will soon become available to help cities and nonprofit groups buy and renovate many of the vacant properties across the country. Some estimates suggest as many as half a million such properties will dot the country by the end of year, and in the process reverse decades of hard-won achievements by inner-city neighborhood-revitalization groups whose work has been supported in large part by foundations.

Led by the Ford Foundation, the Kresge Foundation, and the philanthropies that have united to form the Living Cities coalition, as well as several community foundations, philanthropy has demonstrated it understands the need to take action to deal with the problems left behind as millions of homeowners lose their houses because of credit terms they should never have been offered. Yet more Americans who faithfully work hard and scrimp and save to pay their mortgages have seen their lives shaken up as the values of their homes sink far below the size of their mortgages.

But the problem is what foundations can do that will truly make a difference. Here are some pointers, based on in-depth research with housing experts across the country:

The overwhelming scale of the problem shouldnot be an excuse to do nothing. The ultimate solutions to the housing disaster must emerge from Congress, the Federal Reserve, and the White House. But the process of getting those institutions to agree and craft an administrative process for getting federal money out the door won’t be pretty, neat, or fast. Even if government agencies try to move as quickly as they can to get money to cities and nonprofit groups, the pace of foreclosures and vacancies will barrel along while the federal machinery gears up.

Foundations can take advantage of the weeks and months before federal money starts flowing out of government coffers to make grants to localities and nonprofit groups so they can test the best approaches to dealing with foreclosed properties. If federal money were available tomorrow to deal with foreclosure issues, few organizations would be ready to acquire, rehabilitate, and redevelop blocks of units. Foundation money can help local groups get their activities under way so they know how best to use the money that will come from the federal government.

Foundations can help nonprofit groups gain the skills and money needed to take action. The subprime-mortgage foreclosure problem should not be oversimplified. Homes vacated under the pressure of foreclosure frequently need substantial, expensive rehabilitation just to get the properties habitable, not to mention marketable. Nonprofit groups will need to learn to manage rental units at sites scattered across a region, and they will, at least initially, have to lease homes that can’t be quickly sold in soft markets. To handle those tasks takes more people and more-sophisticated management systems than what is available at most nonprofit groups, and all of that will cost more money.

Although the capacity of many nonprofit groups to acquire and develop large numbers of properties is pretty limited, a few organizations, such as Housing and Neighborhood Development Services, an Orange, N.J., group known as Hands, are putting together alliances of community-development organizations with local government support to negotiate for blocks of property. Without flexible operating capital, that isn’t going to work. While nonprofit groups are hardly the only players needed in the subprime crisis, they are more likely than any other type of institution to think in community-building terms, making social goals as significant as buying and selling property.

Foundations need to make sure nonprofit groups have the money to be able to undertake this task.

Long-term success will not come from investing in housing development, but in sustainable neighborhood-improvement efforts. The executive director of Hands, Patrick Morrissy, constantly hammers the point that the subprime crisis should demonstrate the need for community-development groups to redouble their efforts and for foundations to focus more money on such organizations.

Some grant makers have privately bemoaned the trajectory of community-development corporations that have moved from community organizers and advocates to organizations that focus primarily on building housing.

Successful responses to the proliferation of vacant housing requires not just a renovation here and a sale there, but a full-throated effort to rebuild neighborhoods — a task that community-development groups know how to do. Foundations should be reviving their investments in developing and rebuilding economically troubled neighborhoods, not simply financing projects to buy and dispose of foreclosed properties.

Think investment as well as grant making. Even with federal resources, pulling neighborhoods out of the vicious downward spiral they face with high property-vacancy rates will require lots of capital. Foundations have already been showing more interest in recent years in using their investments to support their missions, so now is the time for them — and other organizations with vast tax-exempt endowments — to put billions of their dollars to work as a capital base for groups that are trying to stimulate new investments in financially challenged neighborhoods.

This is a great social-investment opportunity for foundations, to invest portions of their principal as equity rather than loans behind bulk property-redevelopment plans, joining with nonprofit groups in the risk and reward of bringing foreclosed properties and entire neighborhoods back to health.

Some foundations have worried in the past that investing in community-development ventures is not wise, because those nonprofit groups often take on projects in precarious, deteriorating neighborhoods.

But it is important to note that very few of the hundreds of thousands of low-cost housing units developed by those organizations and supported with financing from nonprofit groups like Enterprise Community Partners, Local Initiatives Support Corporation, and NeighborWorks have fallen prey to subprime foreclosures.

Unlike many for-profit lenders, brokers, and builders, community-development corporations didn’t promote mortgage products they knew purchasers couldn’t afford. Most nonprofit housing developers steered low-income purchasers away from exotic financing toward long-term, fixed-rate mortgages, supplemented with pre- and post-purchase homeowner education and counseling. Nonprofit groups more than qualify as worthy recipients of foundation aid to help reverse the nation’s subprime plunge.

Remember the small cities affected by subprime foreclosures. For good reason, a lot of attention has focused on places like Detroit and Indianapolis, where entire neighborhoods have been ravaged by predatory lenders, predatory investors, and the subprime-mortgage freefall. But plenty of midsize communities have also been racked by foreclosures that don’t get as much attention and do not have access to nearby billion-dollar foundations that have done so much on their own and through consortia like Living Cities.

Think of the smaller metropolitan areas, those that don’t have big foundation neighbors with significant track records in housing and community-development investment, but suffer high proportions of loans in foreclosure, places such as Sandusky and Norwalk, in Ohio; Natchez and Meridian, in Mississippi; Forest City and Salisbury, in North Carolina; and so many others.

Frequently, small cities face all of the problems of the nation’s major cities without many local philanthropic resources to turn to for support.

Advocacy for changes in the entire system of financing housing is essential. The subprime crisis is something of the epitome of broken, dysfunctional systems. For all of the players in the foreclosure tsunami, the incentives have been negative. Lenders, brokers, and loan-repayment companies all took what they could get and passed the problem along to the next organization in the process. The response of an entire system seemed to be “it is not my job” to craft solutions.

Foundations must devote money to advocacy efforts that push to change the nature of housing financing so that the United States does not face this dynamic again and again.

The system needs a fix, and nonprofit advocates can map the solutions for government and banks to understand, devise new approaches, and spread ideas that work nationwide.

Organizations like the Center for Responsible Lending, in Durham, N.C., and many others have been in the forefront of outlining the dimensions and causes of the subprime-mortgage foreclosure problem.

Nonprofit advocates now have a major role ahead in changing the policies and practices of government and lenders that led to this economic disaster.

The Council on Foundations reports that a large proportion of foundations in its survey of members are doing something in response to the subprime-mortgage foreclosure crisis, mostly through their support of mortgage counselors. That is all well and good, but in the wake of federal action, now is the time for strategic investments that build the ability of the nonprofit world so that the federal government’s action does not go to waste.

Rick Cohen is national correspondent for The Nonprofit Quarterly magazine.