The mortgage crisis might seem like a distant memory, but in some ways, American families are more vulnerable than ever. More than 83,000 new families are impacted by foreclosure every month. Nationwide, one in every 200 homes goes into foreclosure.
Jorge Newbery is out to change that. His company, American Homeowner Preservation (AHP), buys distressed mortgages in mid- and low-income neighborhoods that others shun, and then works to keep families in their homes. Even with its hands-on approach and social mission, AHP has turned a healthy profit—returning an average 12% to investors since 2011. AHP was qualified to offer under Regulation A+ offering in May 2016, allowing anyone to invest as little as $100. We spoke with Newbery recently about AHP’s progress as it nears its 9-year anniversary.
What is the situation in the low- and moderate-income neighborhoods you work in?
There are neighborhoods in the suburbs that are predominately white and have had significant real estate appreciation. But you go into low and moderate minority neighborhoods and there’s been little or no appreciation. The only homes that are dropping in value are those that are under $50,000. These neighborhoods are just left behind. It’s a nationwide problem. But for low- and moderate-income families, jobs are really the big issue. There’s a high unemployment rate despite what the statistics are saying.
How does American Homeowner Preservation help address that?
We’re a tiny part of the solution. We can buy the mortgages at a fraction of the price. The big name hedge funds don’t want to touch these mortgages, and that creates an opportunity for us to buy at a discount. But it’s only a component of the solution, it’s not addressing the real core, which is a lack of jobs and economic opportunities.
Give me a typical example.
Say a family owes $100,000 on a home that’s dropped to $50,000 in value. We can buy the mortgage for $15,000 to $20,000—or 30 or 40 cents on the dollar. That’s our niche. Most buyers want to buy those higher value loans. But in higher income neighborhoods the prices are much more expensive. You’d have to pay 50% to 60% on the dollar. The homeowner often owes multiple years in delinquent payments. We say, give us $2,000 and we’ll forgive all the delinquent interest and fees. AND we’ll lower your payments. They’re betting on themselves. We’ll do the modification. If they don’t make their payments, they don’t get the $2,000 back and we would foreclose. Ideally that doesn’t happen. But in reality sometimes it does happens.
Tell me about your progress to date.
May 1st will be our 9-year anniversary! We started buying loans in 2011. At first we were a non-profit advocate for families, but we found the only way to make this viable was to buy the mortgages, versus trying to work out solutions with Bank of America or Wells Fargo. We saw how the banks handled things. It’s an extraordinary amount of paperwork. The process could take six months to a year and a half—just to see if they could make a modification! They would go through the motions of the modification and then reject it, evict the family, and the home would get vandalized. By the time Bank of America was done with it, the value would have dropped another 30 percent.
When we were at a crossroads, we’d ask, ‘What would B of A do in this situation?’ And the right decision was often just the opposite. It’s turned out to be the right thing to do socially as well as financially. There’s no reason for all of those roadblocks and delays and processes that they put in place. We get it done in a week. We’re much more borrower friendly. [For bank servicers], the longer the loan is in default the more money they make. There are perverse incentives that drive this – that’s the reason it will probably never be fixed.
And your track record?
Since 2011, we’ve helped around 1,000 families that have had loans modified or some solution that have kept them in their homes. And another 1,000 vacant, abandoned homes are back in service. We’re still a custom, one by one solution, but we’re working to make it more scalable. We forgive millions and millions of dollars in principal and annual payments—it’s close to $4 million less each year that people are paying. These are transformative solutions we’re offering. It’s one of the rare situations where you can get great returns and still benefit families.
What are your biggest challenges?
Borrowers are often skeptical. In many cases they’ve received letters from B of A and other banks, and have already tried it and it doesn’t work, so they ignore our offers. We put the actual numbers in the letter: you owe $30,000 and we’ll settle for $2,000 and lower payments. Some people think it’s too good to be true.
Most of the attorneys on the defense side are also perversely incented—the longer the homeowner has to pay them the legal fees and not their mortgage payments, it’s good for them. We come along and reduce attorneys’ fees. Our interests are not always aligned with theirs! We got so frustrated with foreclosure mills that work with the banks that we just opened our own office in Washington DC—it’s the only jurisdiction in the country that allows a non-lawyer to be a partner in a law firm. It’s called Activist Legal. They take our cases for all states, and assign them out to local co-counsels in each of the seven states where we are most busy.
What kind of returns do you offer investors?
In past funds, we’ve paid 9% – 12% to investors depending on how long the funds were committed. Now we just pay a straight 12%—or 1% month. The first 12% of whatever we earn annually goes to investors, and we usually we earn over 20%.
Our Reg A offering opened it up to retail, non-accredited investors. We have people putting in $100 and people putting in $1,000. We had someone invest $100,000 a couple of days ago who had started with $100. It’s been nice to see the mix of investors. They all get the same deal. Our current fund can raise up to $50 million.
AHP grew out of your own painful experience in real estate, as chronicled in your book, Burn Zones.
Yes, Woodland Meadows [a giant low income housing complex in Columbus, Ohio that Newbery bought in 2002 and lost after it was severely damaged in an ice storm]. I lost everything and was $26 million in debt. A lot of the strategies we use at AHP come from that era. If a lender came to me and said, you owe us $8 million—that’s not going to work. If you’re aggressive, that’s not going to work. I learned that that’s not the way to resolve these things. If you go in with a much more cooperative attitude then you’re more likely to get a resolution that benefits everybody. The challenges and experiences I had have definitely driven the strategy. That’s our advantage here.
More information on AHP here.