Maybe the vulture has gotten a bum rap.
No, Cathartes aura has not the beautiful song of the nightingale, nor the flying prowess of the falcon, nor the majesty of the eagle. But for pure utility, the vulture ranks with any of its avian brethren. Vultures clean up nature’s nasty messes, the incumbent refuse of the life cycle.
Despite this great service, people still see vultures as nasty.
That connotation is why the term “vulture investor” sounds so pejorative. But like their winged analogues, vulture investors serve an important purpose, maybe now more than ever.
With banks and other lenders looking to do nearly everything possible to shed their books of distressed assets, desperate for any cash, in swoop the vulture investors to feed on the carrion of the housing crisis — the foreclosed home.
While foreclosures in Nashville have hardly hit the staggering rates seen in Las Vegas and throughout Florida, their increase is certainly alarming. Research firm First American CoreLogic said 1.36 percent of Nashville-area mortgages were in foreclosure in November — a number that is well below national and state averages, yes, but one that has more than doubled in one year.
In some neighborhoods — including Antioch, North Nashville, Chestnut Hill and along Gallatin Pike from East Nashville all the way to Madison — entire streets and most homes in several whole neighborhoods have become investor- or bank-owned.
The standard solution to this problem for decades has been a quaint ritual: the courthouse sale. The bank appoints a substitute trustee, the trustee puts a notice in the newspaper full of stilted common-law language and hawks the foreclosed home to the highest bidder on the steps of the courthouse and afterward, everyone slaps each other on the back and goes for a lemonade.
But with underwater mortgages — where the amount borrowers owe is larger than their homes’ value — flooding the market, the old way needs new life.
Deep-value investors — the technical, if less poetic, name for vultures — are providing the necessary capital to pump blood into dying homes and neighborhoods and they come with very different types of plumage. There are nonprofit groups, individual house-flippers and first-time buyers looking for a deal as well as out-of-town real-estate companies looking for a local foothold.
In Nashville, the biggest bird is the federal government.
Subspecies: Cathartes aura stimulus
Earlier this month, the federal government announced that Nashville is one of 56 cities nationwide selected for a grant as part of the Neighborhood Stabilization Fund. The U.S. Department of Housing and Urban Development has awarded $30.5 million to the city to shore up the market in neighborhoods where foreclosures are driving down property values.
Almost half of that money will go to a handful of local affordable housing groups that plan to buy and rehab at least 205 foreclosed homes. The rest will go to help 100 homeowners make down payments and to develop 140 vacant lots into affordable rental property.
As a function of population, Nashville earned one of the biggest grants, which affordable housing advocates and government leaders attributed not just to need — dozens of other cities have a far higher foreclosure rate — but to a strong local affordable housing tradition.
“This was a very competitive process and I’m delighted that Nashville’s proposal was chosen,” said Mayor Karl Dean. “This means new affordable housing, getting abandoned homes and neighborhoods reoccupied, and putting people to work.”
The Neighborhood Stabilization Fund grant will be administered by a partnership of the federal government, the Metropolitan Housing and Development Agency, Pinnacle Financial Partners (which is providing $5 million in loan guarantees) and local nonprofits. The last group — specifically The Housing Fund, Urban Housing Solutions and the Woodbine Community Organization —will do a lot of the heavy lifting just as they have been forced to do during The Great Recession.
Subspecies: Cathartes aura angelus
Loretta Owens, The Housing Fund’s executive director, calls the new capital “the latest Music City Miracle.” As the foreclosure crisis grew, she said, her group and others like it were champing at the bit to buy up the properties.
“Everyone was interested in it,” she said. “MDHA was doing work and Urban Housing Solutions, Woodbine and The Housing Fund were kind of on the fringes of the foreclosure market.”
She said getting people into foreclosed homes should not be looked at as an opportunity to make a few bucks, but as a positive for the entire market. Foreclosures drop the value of a neighborhood’s homes. That can in turn feed into other parts of a city.
“A neighbor who has kept up with their mortgage could suddenly be underwater when their home value drops because they are surrounded by foreclosures,” Owens said. “The goal is to stabilize, to absorb these units.”
She said there are some 30-home subdivisions in Antioch with only two or three homes occupied.
“These people didn’t do anything wrong. [The value of] their asset went down while they were cutting the grass,” she said.
So, she said, the first priority is to get the grass-cutters new neighbors. That’s good for the existing homeowner, good for the new homeowner and good for the market at-large. In some neighborhoods, though, it’s not foreclosure that’s the problem; it’s vacancies.
“We have to ask what the neighborhoods needs. It may be rentals,” Owens said. “Chestnut Hill qualified not because of foreclosures, but because of vacancies and accelerating disinvestment.”
A better plan there is to take over land held by developers who have decided it’s not wise to pour money into an apartment development that may not show a return. With less interest in profit margins and a focus on helping people transition to long-term rental sites and eventually to homeownership, nonprofits are best suited for such work.
One place this may be successful is Neely Meadows Apartments in Madison. Urban Housing Solutions scooped up the distressed project for $3.9 million earlier this month with an eye to making it a mixed-income affordable complex. Existing tenants at Neely Meadows will be able to stay on, with other units dedicated to transitional housing for the homeless and other difficult-to-rent-to populations.
As the current foreclosure crisis is largely unprecedented, for-profit investors, lenders and local governments are ill equipped to find a solution for distressed assets and target potential buyers, said Todd Swanstrom, a Brookings Institution analyst.
Nonprofits, on the other hand, have been dealing with foreclosures and transitional housing for decades, albeit on a smaller scale than is needed today to truly turn things around. The nonprofit vultures swoop in where angels — especially banks and investors gun-shy in the wake of the burst bubble — fear to tread.
Owens thinks the entrepreneurial vultures will get back into the game eventually, but nonprofits are needed to jump start the market.
“We are OK with the free-market system,” she said. “Ideally, this program will be the catalyst.”
Subspecies: Cathartes aura profitus
The call of Cathartes aura profitus has not been loud of late in Middle Tennessee.
Since the goal of the traditional vulture is solely to make money from an unusual opportunity, the bird won’t land until the bottom is found. Why take a chance on buying a property from the bank when the bank may be more desperate three months from now and willing to drop the price another 10 percent?
Things are starting to loosen up, though, as it appears the Nashville market is inching toward a bottom — if it hasn’t already gotten there.
Chicago-based Trilogy Real Estate represents one kind of vulture we may see in these parts, the eager out-of-towner. The real estate investment firm started raising money to buy distressed apartment buildings early last summer.
A former residential developer, Neil Gehani formed Trilogy in 2008, just as the Chicago housing market imploded and his plan to build a high-end hotel in the Windy City was scrapped. He shifted to buying distressed luxury complexes and, in addition to Chicago, is eyeing property in Nashville, California and Arizona.
Gehani said he’s holding out on making moves until he’s sure the market is stable.
“You want to be careful you don’t catch a falling knife,” he says.
There are indigenous profit-savvy vultures, too. The Cerebral Fund, a joint venture of local real estate high-fliers Todd McCalla and Grant Hammond, proudly and unequivocally declares “This is a vulture fund” on its Web site.
McCalla and Hammond scour through large-scale, distressed subdivisions on the books of developers and banks and buy them up, not willy-nilly, but smartly, as the fund’s name suggests.
Soon after they started the vulture fund more than 18 months ago, they bought seven distressed subdivisions in Davidson and Williamson counties for roughly half the asking price. It’s a project not for the faint of heart — nor the short on capital — and they’re still contemplating their next steps. Still, they’ve been bold in a time when many vultures are content to sit quietly in the trees and let newer species do the heavy lifting.
Cleaning up the carrion
Most analysts say Nashville’s market has bottomed out, but there’s still plenty of inventory in the broader real estate market. Nashville has a 14-month supply of residential property, the largest inventory among major American markets, and foreclosures tend to stay on the market much longer than their less-distressed neighbors.
But Nashville-area home prices have found some firmer footing of late, which suggests opportunistic outsiders and innovative local thinkers — as well as more than $30 million in federal cash — will soon begin in earnest to digest the carrion of the crisis.
- ALEX B FRUIN INHERITANCE TRUST; CANDACE F STEFANSIC INHERITANCE TRUST; CANDANCE F STEFANSIC INHERITANCE TRUST; FRUIN, ALEX B TRUSTEE; FRUIN ALEX B INHERITANCE TRUST; STEFANSIC, CANDACE F TRUSTEE; STEFANSIC CANDACE F INHERITANCE TRUST; STEFANSIC CANDANCE F INHERITANCE TRUST
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