Investors gain from family losses

(This is the second article in a two-part series that began in Saturday's Daily Bee.)

SANDPOINT - A year has gone by and the family hasn't kept up with house payments. The eviction process is complete and the trustee's sale notices have been published. No one showed up on the courthouse steps to bid on the property, so it has gone back to the lender.

The place can't be rented because, by law, foreclosed properties must remain vacant. And with so many new foreclosures being triggered every day, the bank is prepared to sell the home at a heavy loss in order to get it off the books.

The eventual sales price will be far less than what it would cost to construct the same home. Although there are millions of families who would benefit from this opportunity - families like those in Bonner County who have long been crowded out of home ownership due to high prices - they won't be moving into these properties in the current environment.

Lenders want cash for homes they are now selling for as low as half the appraised price. For that reason, the floodtide of foreclosed homes is flowing directly into the hands of sophisticated real estate investors who pool private money and buy properties in bulk.

"We turn individuals into our banks; people who are moving money out of IRAs or 401(k)s," said Chris Yates, who owns Denver-based C.M. Yates, Inc. "Now we're building our own hedge fund and that's what's going to fund our acquisitions."

Yates started out when the market was hot by picking up one property at a time, using conventional financing to buy new construction homes and quickly "flip" them for a profit. He was, in effect, the guy you saw on the late-night infomercials about how to get rich quick in real estate. When the housing market collapsed and banks closed their lending coffers, Yates seized a new kind of opportunity - snatching up foreclosed homes at massive discounts and re-selling them at an instant profit.

In that way, he has once again become the guy you see on the latest round of "how to make money in the foreclosure market" infomercials.

"I buy so far below market that I don't have to wait for values to increase to make money," he said. "My average purchase is 50 cents on the dollar."

Yates said it's not unusual for his firm to buy homes for less than $100,000, throw a few grand into repairs and then turn them in the $180,000-$200,000 price range. It's an effective way to nearly double your money and still attract a buyer who finds the home affordable, the investor explained.

"Even though we are selling the house at below market value, we're still making money and they're ending up with equity in a home they can afford," he said.

Yates has kept one eye on the horizon, half expecting to see states, municipalities or affordable housing agencies move in to compete with him while prices are low. But so far, the playing field belongs to investors alone.

"It's a huge opportunity for housing authorities, but they're not taking advantage of it," he said. "The good news for us is that we are taking advantage of it. We're buying homes cheap and eating up the inventory."

But that could change with the advent of a new movement that aims to route foreclosed homes into affordable housing inventory.

A national organization called Living Cities has pulled together a cooperative venture that includes the Ford, Annie E. Casey, Kresge and MacArthur Foundations, as well as Bank of America, Chase, Deutsche Bank and the U.S. Department of Housing and Urban Development. The working group also includes organizations such as NeighborWorks, Housing Partnership Network and the National Governors' Association.

The Living Cities partnership has been active for the past 15 years, investing more than $500 million into the revitalization of 23 U.S. cities. It has now turned its full attention to the foreclosure crisis in heavily hit markets. Living Cities plans to spend up to $10 million to buy foreclosed homes to create affordable housing in Cleveland, Dallas, Detroit, the Twin Cities, New York City and Washington, D.C., as well as parts of Massachusetts and Rhode Island.

Here in Bonner County, there has been no serious discussion about using a similar approach, but some affordable housing advocates see the crisis as what could be a one-time chance to build an immediate inventory of homes that fall within the means of working families.

"Now would be the time to grab up some of those homes," said Andy Chapman, president of the Bonner Community Housing Agency, a group that formed in the fall of 2007. "Maybe we could arrange a revolving loan fund through Panhandle State Bank or somebody, if we could get it guaranteed through IHFA."

The timing for such a move could be ideal. The Idaho Housing & Finance Association - a financial services organization that provides funding for affordable housing in the state - has been tapped to administer a total of $19.6 million the state will receive under the federal Housing and Economic Recovery Act of 2008's Neighborhood Stabilization Program (NSP).

"The primary concept of the NSP is to get homes that have been foreclosed off of the bank portfolios and back into the hands of homeowners," said Julie Williams, senior vice president for IHFA. "It's better for the banks, it's better for communities - it's better for everyone."

Funds would be distributed at the local level by non-profit housing organizations "who have experience in creating affordable homes," Williams said. The homes would be made available to families that fall within the state's low- to medium-income threshold and make no more than 120 percent of the median income for their particular area.

"Basically, that's the income of our workforce," said Williams.

A portion of the funds would be used to provide loans to those who make less than half the area median income. Banks, meanwhile, will be required to discount the foreclosed properties by at least 15 percent under the IHFA guidelines.

    "That is to create a one-time benefit for lower-income families to get them into home ownership," Williams said.

IHFA officials recently met with the Idaho Bankers Association and "had nothing but positive feedback," Williams added.

There is indication that the state's bankers are currently meeting among themselves to come up with their own brand of economic stimulus plan to help clear out the foreclosed properties that are beginning to threaten the financial health of the communities they serve.

In Idaho, there were nearly 9,700 foreclosures between mid-2007 and the end of 2008, the IHFA reported. And while that foreclosure rate ranks low compared with other parts of the country, it has caught the attention of bankers who do business in a state where the total population is less than 1.5 million people.

Across the region, financial institutions are comparing notes and considering pooling their resources - in much the same way that real estate investors have been doing - to get working families back into homes that are sitting empty and unsold.

Curt Hecker, president and chief executive officer for Intermountain Community Bancorp, the parent corporation for Panhandle State Bank and several other community banks in the region, would not confirm whether his institution has been involved in those regional discussions, but said the bank would be supportive if the idea takes root.

"I think community banks like ours would want to participate in a program that would turn these homes into affordable housing," Hecker said. "It would be interesting to do a hybrid approach to what the real estate investors are doing and challenge a different kind of investor - i.e.: the banks - to put up some money and form a resource pool."

If banks throw their weight behind such a plan, they will first have to navigate a mortgage tangle that followed on the heels of the sub-prime loan frenzy. In order to gain access to foreclosed homes, they might well have to buy them back from the larger lenders they sold them to in the first place. Buy them back, that is, if they can track down where they eventually ended up.

Mortgages that originated on the local level were sold, resold, "bundled" with other loans and then sold again.

"The local banks don't hold these mortgages - they sold them to the secondary market before the ink was dry," said Tom Harvill, manager of American West Bank's Sandpoint Financial Center and president of the Idaho Panhandle Habitat for Humanity Chapter. "And the loans that were made by independent mortgage lenders were sold to somebody like Countrywide, which just as quickly turned around and sold it to Fannie Mae or Freddie Mac."

Both of those institutions - which were formed to purchase and secure mortgages as a way to ensure that banks would have a consistent stream of money to loan out to homebuyers - crumbled under the weight of foreclosures last year.

Their combined $6 trillion in mortgages - many of them attached to empty homes now in foreclosure - were placed in the conservatorship of the federal government last year.

In the only thing resembling a silver lining for beleaguered mortgage holders, Fannie Mae placed a short-term moratorium on evicting owners of foreclosed homes - a safety valve that will shut off at the end of this week.

"They put it in place through Jan. 9," said Laura DeLand, a Realtor at Century 21 Riverstone in Sandpoint who specializes in selling foreclosed Fannie Mae listings. "They did it so that nobody would get kicked out of their homes during the holiday season."

Three quarters of DeLand's real estate sales now involve foreclosures and she expects to see more of them as the national crisis spreads across this region.

"They're flowing in consistently now," she said. "And next year I think we'll see a ton."