CPDC’s Turning Point (2005 – 2010)
Tribute #11 – Our Sustainability: Surviving the Mortgage Crisis
In 2007, the U.S. economy was struck by a mortgage crisis that swept the country. Due to economic conditions, many non-profit developers were forced to downsize or fold, causing the stock of affordable housing to slowly decline. CPDC was able to survive the crisis by recapitalizing three assets within its portfolio: Admiral Oaks, Stony Brook, and West Wood Oaks.
The Housing Collapse and its Impact on Single and Multi-family Lending
The real estate market in the U.S. was booming in the early 2000s. Home prices jumped above six percent in 1999 and increased rapidly and steadily as the decade turned. Real estate was seen not only as a great investment but, a very safe one. As prices increased, they eventually moved out of line with fundamentals like household income according to a 2008 study by the Brookings Institute. At the same time, the Federal Reserve Board was lowering interest rates and banks were making it easy for homebuyers to obtain mortgages. A combination of these factors, among others, contributed to what was known as the housing bubble.
During the housing bubble, loans were readily available, even to those with poor credit and spotty financial history. Loans made to individuals with blemished credit were called subprime mortgages and carried with them higher interest rates and greater risks (or higher rates of default) to the lending institutions. CNN reported that nearly half of all loans distributed in 2006 were subprime.
As people lost their jobs, interest rates increased, and home prices fell, the housing bubble burst. Many families were unable to manage their mortgages, leading to millions of U.S. households undergoing or being threatened by foreclosure. With families forced to tighten their budgets, the need for affordable housing options was increasing. Meanwhile, paralyzed by their bad assets and looking to reserve cash, banks stopped lending in both the for-profit and non-profit sectors. In addition, the price of Low-Income Housing Tax Credits (LIHTC)—a key financing tool for non-profit developers— dropped from $1.00 to near historic lows. This made financing a new deal difficult for non-profit developers that relied on selling the LIHTCs to create additional equity for their acquisitions and/or rehabs.
Preserving Affordable Housing through Recapitalization
CPDC reacted to this reality by choosing to recapitalize its current assets. Recapitalization would allow the organization to make energy efficient improvements to decrease utility expenses at the property level; increase the quality of its facilities as a way to improve the resident experience; and acquire new capital during a difficult time. CPDC analyzed its portfolio, and identified Admiral Oaks, Stony Brook, and West Wood Oaks as ripe candidates for restructuring.
During the recapitalization of Admiral Oaks, CPDC acquired a $7.8 million first mortgage from Bank of America along with Low-Income Housing Tax Credits (LIHTC) and Tax Credit Assistance Program funding from the Maryland Department of Housing and Community Development. Stony Brook’s recapitalization included a first mortgage from Capital One, LIHTCs from the Virginia Housing Development Authority (VHDA), and a new 20-year contract with the U.S. Department of Housing and Urban Development (HUD) for continued funding. West Wood Oaks’ deal structure consisted of a new mortgage from Enterprise Social Investment Management, LIHTCs issued by VHDA, and an agreement with HUD for Section 8 funding.
These three recapitalizations helped CPDC strengthen its balance sheet, preserve existing affordable housing options, and ultimately survive the mortgage crisis.