Not too long ago, in a predominantly black neighborhood on the South Side of Chicago, where median household income is around $35,000, a homeowner was in trouble. She found herself with a mortgage for $142,200 at 7.99 percent interest, resulting in a payment of $1,042 monthly.
Along came American Homeowner Preservation (AHP), a socially responsible hedge fund based in Chicago, which bought this homeowner’s loan as part of a pool of mortgages located in low- to moderate-income neighborhoods. AHP reduced the balance of this homeowner’s mortgage to $77,727 and dropped the interest rate to 1 percent, making the monthly payment just $250. They also settled $20,000 of back payments owed for $2,000.
It might sound too good to be true. It might sound like a scam, but it’s not. AHP has helped save 720 homeowners and counting from foreclosure, in 30 states so far.
Starting today, for a $100 minimum investment, anyone can invest in AHP and help them grow and continue in their mission to help keep families in their homes and thereby help stabilize low- to moderate-income communities.
“The 99 percent can help the 99 percent,” says Jorge Newbery, AHP founder and CEO.
AHP started in 2007 as a nonprofit that marketed itself first to underwater homeowners in low- to moderate-income neighborhoods. (“Underwater” means owing more on your mortgage than the market value of your home.) AHP would work out terms with homeowners, like the one above, then make an offer to buy the loan from the bank or hedge fund that owned it. Banks and hedge funds, however, wouldn’t play nice, despite the fact that there was a massive glut of underwater mortgages on everyone’s books after the subprime mortgage crisis. So in 2010, AHP decided to turn itself into a hedge fund and flip the script. Instead of waiting for underwater homeowners to come to them, they began to buy pools of such mortgages located in low- and moderate-income neighborhoods from other hedge funds and financial firms.
Large banks, big financial firms and hedge funds still buy and sell pools of mortgages worth hundreds of millions of dollars, in much the same way they did before the financial crisis. To these institutions, a mortgage or any type of loan is an asset. Each one typically comes with a set monthly payment for a certain period of time, with a certain level of risk that homeowners may default. When financial firms decide they need to buy or sell certain assets to maintain a certain level of risk and return in their entire portfolio, home mortgages are one of the things they trade with each other.
Those pools still contain millions of underwater mortgages. In the years leading up to the subprime mortgage boom, potential homeowners like the one on the South Side of Chicago were a frequent target for subprime mortgage firms — not banks or big firms, but newer, smaller firms that popped up to take advantage of the easy money made from making quick, high-interest home loans and selling them into pools of mortgages to large financial firms and hedge funds. The hardest-hit victims of these firms: communities of minority homeowners. In cities like Cleveland, Las Vegas, Chicago, Jacksonville and others, 20 percent or more of housing units remain seriously underwater (mortgages worth more than 125 percent of market values). In the Chicago metropolitan area alone, there are more than 539,000 seriously underwater homeowners.
Especially in low- to moderate-income neighborhoods, costs of foreclosure proceedings can often exceed what banks will ever recover from foreclosing a mortgage, according to Newbery. So banks and hedge funds have been more than happy to pick out underwater mortgages in such neighborhoods and sell them as a pool to someone else for a steep discount. The $142,200 loan above? AHP purchased it for $1,649, so that AHP and its investors still make a healthy return on the new mortgage value of $77,727 plus 1 percent interest.
Using their model, AHP has wiped out nearly $79 million in debt for 720 homeowners so far, while also reducing monthly payments for those homeowners by a cumulative total of $3 million.
The idea of buying debt and forgiving part or all of it is catching on. Rolling Jubilee is a $700,000 fund that has bought and forgiven more than $31 million in different kinds of debt. On last night’s episode of Last Week Tonight, host and comedian John Oliver announced a similar transaction in which a real company his show created paid $60,000 to purchase nearly $15 million in medical debt and simply forgave it.
In housing, however, homeowner skepticism remains a major obstacle for AHP. They don’t want to wipe out all homeowner debt, since it ultimately represents wealth for each homeowner, but that means they have to depend on homeowners to respond to their renegotiation offers.
“When we started doing this, we thought everybody whose loan we buy is gonna be thrilled, they’re going to want to stay in their home, and they’re going to lose their homes if it were not for these terms. The reality is that hasn’t been the case,” says Newbery. A lot of times homes are vacant — AHP has put back more vacant homes into the market than they have helped homeowners renegotiate their mortgages.
Meanwhile, thinking AHP’s letters and voicemails are just a scam, “Many a times either the homeowner doesn’t respond, so we eventually have to start foreclosure,” Newbery says. “I remember the first time we had to start a foreclosure on a homeowner. It seemed completely contrary to everything that we were set up for.” AHP has had to foreclose on 35 percent of the mortgages it buys.
One of the related challenges is that financial regulations prohibit a for-profit hedge fund from communicating to borrowers through community-based groups. Community advocates, including mayors or city council members, could instead hold an event where they introduce AHP to the community, giving them a stamp of legitimacy. But that has yet to happen.
“We’d love to try something like that especially in some of these cities like Cleveland, Chicago, Detroit. Actually anywhere across the country, even Ferguson, Missouri, places that seem to be underwater with no end in sight,” Newbery says.
The Equity Factor is made possible with the support of the Surdna Foundation.
Oscar is a Next City contributing writer, and was a Next City 2015-2016 equitable cities fellow. A New York City-based journalist with a background in global development and social enterprise, he has written about impact investing, microfinance, fair trade, entrepreneurship and more for publications such as Fast Company and NextBillion.net. He has a B.A. in Economics from Villanova University.