A New Way Forward On Foreclosures

There are two popular myths about why the foreclosure crisis -- which continues to tear apart communities across the country -- cannot be solved. Both are wrong.

Many in the financial industry say the principle of moral hazard and lenders' financial duties to their investors leaves us no choice but to force people from their homes. At the same time, some in the non-profit world and government say that it's not possible to find the money needed for tackling this nationwide crisis.

Through our work at Boston Community Capital, a community development financial institution, we have discovered that both myths are false. By operating as a business and not a charity, wehave used the capital available in the markets to fund foreclosure avoidance, instead of relying on donors and taxpayers. And with a new $25 million expansion deal, which uses traditional secondary market tools in an innovative way, we have been able to demonstrate that it's possible to harness the power of the financial system to keep a program like ours going indefinitely.

In short, there is a path forward where everyone can win, that may point the way for other organizations across the country.

In 2009 we launched the Stabilizing Urban Neighborhoods (SUN) Initiative. Through careful screening, SUN identifies homeowners who are facing foreclosure but have stable income and could responsibly make mortgage payments based on the current fair market value of their home -- as opposed to the often greatly inflated value of their housing-bubble-era mortgage.

SUN buys the home, whichmeans the lender gets current market value and can clear the non-performingmortgage off its books. SUN then sells the home back to the original homeowner, with a new fixed-rate monthly mortgage he or she can afford -- on average, about 40 percent less per month than the prior mortgage. To guard against fraud, SUN imposes a shared appreciation program, which gives Boston Community Capital a portion of any gain in value from a home appreciates over time. We reinvest those funds back into the community.

In this manner, the Sun Initiative has already helped almost 400 families remain in their homes. Now, we've seen that it's possible to do far more.

How? By going where the money is.

We raised our initial capital not through donations, but through investments from foundations andhigh-net-worth individuals who participate with the clear understanding that they will get a fixed, steady, competitive return on their investment. To protect against losses, we employ strong underwriting standards and requireborrowers to establish mandatory reserve funds for emergencies. As a result, nearly all of our new mortgages are paid on time and in full by our homeowners.

That success has given us the power to raise new capital through the secondary market. Earlier this month, East Boston Savings Bank lent us $25 million in new capital to expand the SUN program in and beyond Massachusetts. In exchange, the bank will receive a regular interest payment guaranteed by the revenue from a portfolio of the mortgages BCC has assembled.

I know many still distrust any transaction that involves selling off mortgages into the secondary market, citing AIG and the other demons of the 2008 crash. The problem was not the existence of a secondary market, which is vital to ensuring our local banks can keep raising enough capital to write new mortgages. The problem was that those mortgages were not soundly underwritten, that profit was separated from risk, and more than anything that home prices were not realistic - they were bad investments.

But the people in these communities -- they are good investments. And we've proven it. We've taken the loans we made to people written off by the financial system, mostly low-income families in default, and used them as an asset in a bread-and-butter financial transaction with a regular commercial bank.

The possibilities are limitless. If SUN can raise funds for a foreclosure avoidance program through the traditional financial market, then the model has the potential to be scaledinto a national solution. The money is out there; we just have to put it to work for both investors and homeowners.

The SUN model provides a sustainable and scalable strategy that could help hundreds of thousands of Americans. Communities need solutions that benefit everyone -- from homeowners to lending institutions to investors. The sooner we commit to and expand models that are proven to work, the better off we all will be.

Elyse Cherry is Chief Executive Officer of Boston Community Capital.