Readers Express Doubt in Boston Community Capital

BY Paul Solman  October 29, 2010 at 8:24 AM EDT

A trio of related emails to answer today. First:

Name: James Tracy

Question: Having watched your program tonight on Boston Community Capital’s efforts to save homeowners from foreclosure, several conclusions seem obvious. Both the homeowner/borrower and the lender(s) would be far better off resolving their issues/obligations/loans, with each other than allowing a third party to intercede, with dubious motives. It is relatively clear that BCC will profit from both of the principal parties shortcomings. It is also relatively clear that Harvard’s well meaning, but inexperienced, law students are also being played.

Paul Solman: It will be exceedingly difficult for Boston Community Capital to profit from the deals it brokers for one simple reason: it’s a NON-profit. If you remain skeptical of their motives, check out their website.
The margins they build in are to cover the likelihood of default, which is very high in an economy with unemployment like ours — very high in the neighborhoods they serve.

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The second email:

Name: Bruce Temple

Question: In tonight’s episode you asked one of the foreclosed homeowners whether she thought viewer’s would sympathize with her position. I am struggling to understand the answer you accepted from her. She bought the house for $80,000 and had several hundred thousand due on the mortgage. You assumed she took out home equity loans. Where is the economic justice when she benefits from loans on the property and then effectively defaults on the property only to be able to buy it back at a fraction of the amount that collateralized the home equity loans? Putting the emotional costs aside for a minute — I can’t figure out why this process (Boston Community Capital) deserves any support let alone precious time on your otherwise very helpful reports.

Paul Solman: This story addressed a question that came up forcibly in a series of stories we did on foreclosure in and around Cape Coral, Florida back in April and one in particular, on strategic default.

The question: why can’t homeowners buy back their own homes once they’re foreclosed on? Buy back at the new market price, that is?

In market economics, “justice” is, very generally speaking, the greatest good(s) for the greatest number. According to that criterion, BCC would deserve support because:
1) the investors who own the mortgage would be better off, since the foreclosure process costs extra money and an abandoned house is often vandalized, costing even more;
2) the neighborhood is better off, since vandalism drives home prices further down; and
3) the homeowner is better off.

In economic terms, there are “negative externalities” (costly side effects) to proceeding with foreclosure, compared to the alternative of reselling to the homeowner, with a responsible third party overseeing the process and providing the discipline that the previous lenders and their agents never did.

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Finally, the third email:

Name: Dave Sherman

Question: Paul- I watched your Oct. 20 report on efforts to save homeowners from foreclosure in Boston and was surprised by the positive views of the transactions undertaken by Boston Community Capital. As I understood their transaction structure, they sell foreclosure properties to homeowners at a price that is 25 percent higher than they paid, require borrowers to essentially impound their wages to pay their mortgage before other expenses and take 50 percent of any appreciation in property values. How is this transaction not predatory lending? If property values recover faster than expected and these homeowners are required to pay the lenders 50 percent of the appreciation are you going to report on the community outrage surrounding these predatory loans?

Paul Solman: “Predatory lending”? C’mon, Dave. BCC is lending to people who wouldn’t have a prayer of getting a home loan otherwise. As CEO Elyse Cherry explained in the story, non-profit BCC is obliged to pay back its lenders. And if they wind up “making” money over time, they’ll plow it back into other community preservation ventures and/or soften their terms to borrowers.

Again, look up BCC and see what YOU think.