“They’re creating a new environment where the people who are living in the homes are living sustainably,” Chat Reynders told me during a recent conversation I had with him and his partner Patrick McVeigh. These two SRI investors weren’t talking about some New Age alternative energy-based community in Arizona’s Sonoran Desert, however, but rather neighborhoods in and around Boston, where their firm, Reynders McVeigh Capital Management, is headquartered.
The investment management firm has partnered with Boston Community Capital (BCC) to help their clients invest in BCC’s Stabilizing Urban Neighborhoods (SUN) initiative, a lending program designed to fight neighborhood destabilization by acquiring foreclosed properties and reselling them to existing occupants before evictions occur.
The program is built upon a unique lending model that purchases foreclosed properties from the mortgage holder at a steep discount, resells these properties to the existing homeowner or tenant–at a price somewhat above BCC’s purchase price–and provides a new, affordable, fixed-rate mortgage based on traditional underwriting criteria. The increased price helps mitigate BCC’s risk. To qualify the potential owner must have a job where the payment on the mortgage would represent only a specific percentage of their income and the money comes directly from the individual’s paycheck. There are also provisions that would prevent the homeowner from receiving an inordinate windfall should the property’s value increase dramatically.
“The owner doesn’t participate in all of the upside because there’s a moral hazard in that,” explains Reynders. “The neighbor who does pay his mortgage or who has had a responsible mortgage doesn’t want to see his next-door neighbor being bailed out and then suddenly getting a windfall if the price of the house should go up. Boston Community Capital shares that upside with this owner.”
Investing Returns, Stable Neighborhoods
SUN minimizes the potential for such a “moral hazard” with a “shared appreciation” zero-interest, non-amortizing second mortgage, reducing a foreclosed homeowner’s share of eventual property appreciation to account for the reduced principal amount of the new mortgage. Most important, by preventing evictions, the initiative keeps families in their homes and puts a stop to the foreclosure trends that threaten the security of these communities.
“What we care about here are replicable models where you can utilize capital to make a real difference,” explained Reynders of the firm’s involvement. “This foreclosure crisis is happening all over the country and all over the world. We think this is a model that is replicable and should be used in other communities around the country.”
The SUN program kicked off this past October and quickly raised more than $30 million in funding. They’ve just finished the first round of refinancing, which involved between 50 and 60 homes, and they currently have a long list of potentially foreclosed-upon homeowners who would like to participate.
“We’re beginning to see some banks appreciate the benefit of models like this,” explains McVeigh. “I don’t think it’s lost on banks that they need to support the communities that they’re lending in. I think that when you see a successful model like this working, it’s going to lead to more banks following through on it. At least that’s our hope.”
“Part of the reason our clients are interested in this is that they’ve seen how banks have destroyed these neighborhoods over the past decade by writing these terrible loans to individuals that had no chance of success,” adds Reynders. “Our interest is in creating the model of how you can do this right so that banks can re-enter the market. They can see that even though groups like Boston Community Capital are lending to supposedly the highest risk audience, their success rate is much greater than banks that are lending to supposedly more secure markets.”
More Than One Way to Float a Loan