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How to turn foreclosures into homeownership

By ,
Stephen H. O'Connor, is the executive director of PlanSmart NJ.
Stephen H. O'Connor, is the executive director of PlanSmart NJ.

Credit Senator Raymond Lesniak for being way out in front of the residential foreclosure crisis in New Jersey.

Back in 2012, Lesniak sponsored a pair of bills that would have created an expedited process for acquiring foreclosed and abandoned properties for the purpose of transforming these distressed assets into affordable and market-rate housing. Unfortunately, and despite broad support, every attempt at passage was vetoed by Governor Christie.

More recently, Ambassador Murphy has proposed a similar strategy, realizing that the vast inventory of abandoned and foreclosed properties represents both a challenge and an opportunity. The major difference between the two approaches is funding. While Lesniak proposed to tap into the state’s bonding authority, Murphy is looking to capture New Jersey’s share of the billions of dollars in fines collected by the Department of Justice that were levied against Wall Street and other bad financial actors involved in the mortgage crisis.

While both are good ideas, there’s a better and more immediate way to fund a housing rehabilitation and homeownership program on a scale unlike anything attempted by this or any other state in the country. It’s called the Urban Housing Assistance Fund.

In 2008, the Legislature passed the Statewide Non-Residential Development Fee Act (the “Act”), which imposed a 2.5 percent fee against every new non-residential development project constructed in the state. Each municipality could then establish an ordinance modeled after the legislation to enforce the fee. Once collected, the dollars raised were funneled into a municipal housing trust fund. As of today, there is a cumulative statewide balance of some $193 million contained within roughly 300 individual municipal housing trust funds in New Jersey.

In addition to enabling the creation of individual municipal housing trust funds, the Act also created the Urban Housing Assistance Fund. This Fund, which was established specifically to assist urban aid municipalities in the rehabilitation and production of housing, was designated to receive an annual appropriation of $20 million. That never happened. The Act also called for the creation of a stateside housing commission. That never happened either.

So here were are, nine years later, and New Jersey holds the distinction of having the highest rate of residential foreclosures in the country. In total, there are some 78,000 residential units in New Jersey that are in some form of foreclosure. Nine years of back payments at $20 million a year can buy and renovate a lot of housing.

So what do we do? First, let’s fund the Urban Housing Assistance Fund and we’ll start slowly. If every municipal housing trust fund would immediately transfer 20 percent of its current balance into the Fund that would generate $38.6 million. Now let’s dedicate these dollars to addressing the foreclosures that exist in Newark, which ranks first in the state with 2,255 residential units in foreclosure.

118 West State Street, Trenton, New Jersey 08608 | tel 609.393.9434 | fax 609.393.9452 | www.plansmartnj.org

Of this total, we find that there are 317 units that are owned by a bank. Since banks don’t like to own real estate, and they’re under a federal obligation to invest in low-income communities, it’s reasonable to assume that these units can be purchased at a great discount, or better yet, donated to a non-profit entity. More on that later.

Let’s also assume that the majority of the 317 bank-owned units are in decent physical condition and that $100,000 is sufficient to buy, renovate and bring each unit up to code. To achieve this goal, we’ll need $31.7 million from the Urban Housing Assistance Fund. Now we “sell” the units.

By converting the $100,000 per unit investment into a 30-year fixed-rate mortgage at today’s low interest rates generates a $477 monthly mortgage payment. Let’s double that to $1,000 a month to include taxes, insurance and utilities. Since the national standard for affordability is established at 30 percent of income, a household with good credit needs to earn $40,000 a year to afford a total monthly housing cost of $1,000. No investors allowed.

The need to establish a competent and transparent entity to control this process is critical to its success. One candidate might be the Newark CEDC. As a non-profit organization, the banks could be motivated to donate their city-owned assets. Once acquired, a public database would be established to create a municipal housing bank.

As the holder of all 317 mortgages, the Newark CEDC would collect the $477 monthly mortgage payment from each new homeowner. On an annual basis, this translates to $477 month times 12 months times 310 units equals $1.8 million. This sum can then be used by the CEDC to buy and sell more foreclosed units, tear down abandoned properties and fund small business loans.

Currently, the homeownership rate in Newark is 22 percent; it’s 65 percent for the state as a whole. So in addition to boosting home ownership, utilizing local contractors to carry out the renovations would stimulate local employment and the Newark economy.

Remember, these are not public tax dollars, but revenues generated by the fees assessed on non-residential development throughout the state and paid for by the developer. The legislation and the mechanism already exists. All we need now if for the next governor to establish a statewide housing commission and fully operationalize the Urban Housing Assistance Fund.

Stephen H. O’Connor, Ph.D. is the Executive Director of PlanSmart NJ and an Adjunct Professor at the Kislak Institute for Real Estate at Monmouth University.

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