REGIONAL REPORT

MIDWEST

Midwest HFAs Focus on Foreclosures

AFFORDABLE HOUSING FINANCE • May 2008

BY JERRY ASCIERTO

For many Midwest cities, the recent foreclosure crisis has made an already bad situation much worse.

While foreclosures have reached a critical mass in the Rust Belt, Midwest housing finance agencies (HFAs) are allocating more resources to address the problem, even as the price of low-income housing tax credits (LIHTCs) continues to fall.

The Ohio Housing Finance Agency (OHFA) is hoping to spur more developers to rehab foreclosed and vacant properties as rental housing. Some last-minute changes to its 2008 qualified allocation plan (QAP), recommended by a state task force on foreclosures, may provide the stimulus.

“This was the first year we had language in our allocation plan that specifically talked about rehabbing vacant properties,” said Sean Thomas, OHFA’s director of planning and preservation.

First, OHFA amended site control requirements for those seeking tax credits to rehab vacant properties. In the past, developers of such scattered-site projects had to identify at least 50 percent of the properties when applying for tax credits. OHFA relaxed that requirement to 10 percent; basically, developers just need to identify the neighborhoods they’re serving.

Second, OHFA added the rehabbing of vacant properties to its “maximizing outcomes” pool, the final pool of credits awarded each year. The pool ensures that certain priority items, which may have been overlooked in previous allocation rounds, are funded.

Only five of the 164 applications received by OHFA for the 2008 allocation round were for rehabbing vacant properties. But the QAP amendments were done one month before applications were due, so Thomas expects more applications to come in next year.

Ohio is also allocating $4.5 million from its housing trust fund to finance the redevelopment of 150 vacant single-family homes in Cleveland for homeownership. Six Cleveland “model blocks” have been selected, each with an “anchor” project, such as the redevelopment of a hospital or school nearby. Two of the five applications received for vacant-property, scattered-site rehabs are located in the same Cleveland neighborhoods.

“We’re trying to link all these different efforts to rebuild the community,” said Thomas. “What we’re learning as we try to address this problem is that it has to be a combination of different efforts.”

Many multifamily properties are located in the same blighted neighborhoods, proving that the problem is not isolated to single-family homes. “A lot of these properties in the model blocks have already received tax credits,” said Thomas. “If it keeps getting worse it’s going to be harder to rent those properties. Part of our strategy is to protect our existing investments in these areas.”

Model group

OHFA’s scattered-site redevelopment vision is a tall order for the state’s affordable housing developers. “The amount of assemblage work will be hard for most developers to put together in the amount of time that the QAP allowed for,” said Stephen Smith, president of Cincinnatibased developer The Model Group.

In March, The Model Group finished construction on Magnolia Heights, an 18-building, 98-unit scattered site redevelopment in Cincinnati’s Over-the-Rhine neighborhood. All units were Sec. 8 properties, and the work was done in conjunction with 42 market-rate condominiums that The Model Group was renovating in the same neighborhood.

“As the neighborhood started to gentrify we saw that the affordable housing stock was at risk,” Smith said. “We were able to use LIHTCs as an economic stimulus tool for the neighborhood and partner with some local community development corporations to do market-rate condos at the same time.”

Magnolia Heights was financed with $10 million in LIHTC equity and $2.3 million in historic tax credits. The credits were syndicated by the Ohio Capital Corporation for Housing (OCCH).

The Model Group owned all 98 units in Magnolia Heights. But a scattered-site development of foreclosed properties is a more challenging proposition. Developers would need to negotiate with many different lenders to get the units out of foreclosure— basically developing one unit at a time—and some would likely have to be bought outright.

“The best thing would be if the city were to foreclose on those properties and somehow get them back through a landbank process,” said Jack Kukura, OCCH’s chief of acquisitions. Such a land bank, a fund which the city or county could use to buy foreclosed properties, could make it easier for developers to execute a scattered- site redevelopment of abandoned homes.

Cuyahoga County

Ground zero for Ohio’s foreclosure problems is Cuyahoga County, where county Treasurer Jim Rokakis is working on a different kind of land-bank proposal. Cuyahoga County had about 15,500 foreclosure filings in 2007, up from around 13,500 the year before. The county is on track to see another 15,000-plus foreclosure filings again in 2008. And the foreclosure crisis has spread out to Cleveland suburbs like Euclid and Cleveland Heights, which contain about 1,200 and 900 foreclosed vacant properties, respectively.

Until recently, Ohio was one of only two states (Virginia was the other) that had no regulatory oversight of the appraisal industry—appraisers didn’t need to be licensed, for instance. “There was nobody home at the regulatory level,” Rokakis said. “This is what happens when unbridled greed has a six- or seven-year reign.”

The county treasurer’s office started a Foreclosure Prevention Program in 2006 and to date has helped 1,800 people avoid foreclosure. But in that time, 15 new foreclosures have been filed for every prevented foreclosure, Rokakis said.

Cuyahoga County is hoping to stop the blight by creating a local land bank that would allow it to purchase vacant properties for demolition. “We’ve got 10,000 properties that need to be demolished,” Rokakis said. “They’ve been gutted, stripped, and vandalized, and we have to get them down.”

From Detroit to the Twin Cities Michigan is also looking to stem the tide of foreclosures. The Detroit metro area led the nation in foreclosures last year, with 72,616 foreclosure filings, a 68 percent rise from 2006, when Detroit also led the nation.

The Michigan State Housing Development Authority (MSHDA) amended its 2008 QAP to put more emphasis on preservation projects and areas hard-hit by the foreclosure crisis.

MSHDA included new “holdback” categories (similar to OHFA’s “maximizing outcomes” pool) in its 2008 QAP. Half of all holdback credits will go to projects in the Detroit area, and another 15 percent will go to projects in poverty-distressed cities.

The foreclosure crisis is also getting worse in Minnesota. The Twin Cities have a combined 2,500 vacant, boarded-up properties, about a third of which have been either severely vandalized or ruined by neglect.

“The number of foreclosures has tripled in the last year, and we expect it to increase significantly in this next year,” said Chip Halbach, executive director of the Minnesota Housing Partnership, a nonprofit that serves as a public policy advocate for affordable housing issues and provides grants and technical building assistance to developers in rural Minnesota.

In the fall, Minnesota’s HFA gave $11 million to the Family Housing Fund, a nonprofit that distributed the funds to developers to rehab about 70 vacant properties in the Twin Cities for resale.

Federal shortfall

Midwest developers are also struggling with falling LIHTC prices per dollar of credit. OHFA’s Thomas expects LIHTC pricing to be around 83 to 84 cents through the first half of 2008. For some projects, that translates to a $500,000 gap in funding, reducing the number of tax credit units that can be built.

In Minnesota, developers will lose between $5 million and $10 million in LIHTC equity should prices stay in the low 80-cent range throughout the year, Halbach estimates.

The shrinking Department of Housing and Urban Development (HUD) budget is another significant challenge for Midwest developers. For the first time, Minnesota allocated money in its 2007 budget to help public housing agencies facing funding shortfalls from HUD. The state allocated $2.5 million, a figure matched by Minnesota Housing, and will disburse the $5 million to about 20 public housing agencies for both capital improvements and operating support on HUD properties.

Many Rust Belt cities led the nation in foreclosures before this crisis, and many will continue to do so after the nation’s housing markets settle down. But with few concrete solutions currently on offer from the federal government, these states are tackling the issue head-on.