Moving From Financial Oversight to

Financial Sustainability

Sonia LeeDirector, Affiliate Financial Services

Oversight

“One of the roles that most decently functioning boards play quite well is providing financial oversight. Compared to other board functions, financial oversight is relatively clear: there is a dedicated officer role, the treasurer; nearly all boards have a finance committee; and there are tangible products such as an annual budget to approve, financial statements to distribute, and an auditor to select.”

Beyond Financial Oversight: Expanding the Board’s Role in the Pursuit of Sustainability,

by Jeanne Bell, published April 26, 2011 Nonprofit Quarterly

2

Traditional Financial Oversight Tools are Insufficient / Ineffective for Sustainability!• They look backward; too often “as of” a long past date

• May not drill down far enough

• No historical data to provide comparisons

• They do not provide forecasts

• Data does not show what impact has been driven by a financial activity

• They don’t show if programmatic activities are performing as planned

• They don’t monitor operational risk, such as • Compliance to regulations

• Compliance to grant provisions

• Delinquencies ratios

• Leverage ratio to portfolio

• Leverage ratio to portfolio delinquencies 3

Typical financial tools don’t uncover the following:

1. Delinquent Mortgage Payments• Delinquency balances are hidden

• Using unrestricted funds to subsidize taxes and insurance

• Overstated mortgage receivables

• Incorrect categorization of past dues

• Partial payments considered current

2. Unsustainable Pricing and Financing• Using the same pricing methodologies as in the past

• Each house is priced the same instead of using affordability index of applicants

• Not using a shared appreciation model

3. Insufficient Cash Flow• Using cash accounting, not accrual

• No forecasting

• Unpaid mortgage receivables

• Insufficient management of expenses; lack of cost containment

• Using debt (line of credit) inappropriately

4

Boards get Blindsided by….

4. Philanthropic Dollars are not Increasing• A ReStore does not replace fundraising

• Plan not established for fundraising

• Replacing fundraising with mortgage leveraging

5. Excessive Mortgage Leveraging• Unknown of risks of leveraging

• Performing vs. Non-performing portfolio ratios

6. Restricted Funds• Lots of money, but all restricted

• Fundraising only obtains specific funds

• Grant funds requirements are not understood leading to non-compliance

• Relying on 1 source of funds

7. Inappropriate use of Escrow Funds• Funds are not segregated from affiliate funds

• “Borrowing” from escrow funds

• Non- compliance with RESPA regulations

5

Boards get Blindsided by….

Shifting to Sustainability

“Sustainability encompasses both financial sustainability (the ability to generate resources to meet the needs of the present without compromising the future) and programmatic sustainability (the ability to develop, mature, and cycle out programs to be responsive to constituencies over time).”

Beyond Financial Oversight: Expanding the Board’s Role in the Pursuit of Sustainability, by Jeanne Bell, published April 26, 2011 Nonprofit Quarterly

6

• Ensure effective planning. Boards must actively participate in an overall planning process and assist in implementing and monitoring the plan's goals.

• Monitor and strengthen programs and services. The board's responsibility is to determine which programs are consistent with the organization's mission and monitor their effectiveness.

• Ensure adequate financial resources. One of the board's foremost responsibilities is to secure adequate resources for the organization to fulfill its mission.

• Protect assets and provide proper financial oversight. The board must assist in developing the annual budget and ensuring that proper financial controls are in place.

• Ensure legal and ethical integrity. The board is ultimately responsible for adherence to legal standards and ethical norms.

• Enhance the organization's public standing. The board should clearly articulate the organization's mission, accomplishments, and goals to the public and garner support from the community.

Basic Board Oversight Responsibilities

7

Set clear objectives with defined timelines that are in line with strategy

Operate with excellence

Outreach for Donor funds and Government Grants to further the mission

Mortgage Servicing, Leveraging and cost containment

Training on mortgage lending

Determine the amount of money you have, need and want

HFH’s Strategic Plan & Sustainability

Build a Sustainable OrganizationFoundational ObjectivesFund the Mission• Increase revenue sources, especially

unrestricted funds• Work your network to leverage prospects• Develop a strong alignment with resource

development team

Grow Skills & Leadership Capabilities• Evaluate affiliate requirements vs. roles

and staff accordingly• Create a high-performing culture; ensure

everyone is onboard with the plan and contributes to its execution

• Provide and encourage learning opportunities for staff and key volunteers

Operate with Excellence• Implement and enforce consistent

application of policies / procedures• Define success; create and use business

measures to determine actual to plan and adjust as necessary

• Ensure affiliate has sufficient staff/volunteers to carry out plan

4 Impact Goals

Built on a Solid FoundationScriptural Basis• Luke 19: 11-27 The Parable of the Minas.

Consequences that come from good stewardship, obedience to the Master, and being faithful to our calling.

8

An affiliate’s board and its ED/CEO have a fiduciary responsibility to protect its assets:• Define roles and responsibilities• Regular and systematic feedback and assessment • Demonstrate responsible stewardship over financial recourses• Institute sound internal controls

• Proper authorization and approval• Proper Documentation• Proper Physical security and access• Early detection of issues / errors

• Determine reliability of funding – High, medium and low, plan accordingly

• Regular and open communication, even on tough topics• Request meaningful reports from each program to effectively assess

progress

9

Fiduciary Duty of Boards

The Pursuit of Financial Sustainability

Have to do Habitat well Volunteer engagement Grow fundraising Minimize mortgage delinquencies Judicious use and preservation of subsidies Appropriate and sustainable pricing, mortgage term and amounts,

and equity protection Board members should become financially literate Identify major sustainability areas and focus on them All board members and staff have to understand and be in

partnership with all aspects of the “business model” Continued compliance with construction and safety regulations Compliance with new mortgage regulations for origination and

servicing Technical capacity to implement all the strategies

10

• Recruit top talent for R&D

• Must have a plan – renewal and acquisition strategy

• Have a system for your fundraising program

• Know your donors; what are their renewal rates

• Never rely on a single source of funding; must have a mix

• May need to invest in a tool to assist in the process

• Seek unrestricted funds where possible – not all funding has an equal effect on the bottom line

• Restricted funds must be managed according to all donor conditions

11

Fundraising – HFH’s Sweet Spot

• Grant readiness

• Consider hiring a grant writer

• Get to know your local politicians (legislators), ensure that they understand your issue and its importance

• Understand the funding cycles – money runs out!

• Advocate, advocate, advocate

• Know the source of the funds – state funds may be from a federal source who ultimately has oversight

• Have a clear understanding of the rules of the grants to avoid giving money back

• Don’t rely on the contact on the funder’s officer do your own research

• What obligation does the funds have on the homebuyer12

Grants

Sustainability

Sustainability is not a goal,

Sustainability is a process!

13

Mortgage Receivables Begins with Family Selection...

Board approved Policies and procedures Well trained staff / volunteers to execute Comprehensive homebuyer education Compliance with all regulations and laws

Then Quality Loan Servicing…. Full understanding of what servicing entails and laws associated Knowing when delinquency begins Consistently applied policy and procedures Loss mitigation options Foreclose when necessary Consider a third-party servicer

Collect and use quality data to manage mortgage receivables

14

Affiliate’s Biggest Asset

If it is due the 1st of the month (May 1st ):

• If not paid, it is delinquent the next day (May 2nd), which is the 1st day of delinquency

• It is 30 days delinquent if it is not paid before the next due date.

• It is 60 days delinquent, if not paid before the following due date

• It is 90 days delinquent, if not paid before the following due date.

The first day of delinquency is important:

• To consistently trigger policy collections actions and to comply with12 USC 1701x(c)(5) requiring that before the 45th day, you must provide the delinquent homeowner information about credit counseling and the HUD toll free number for finding a certified nonprofit credit counseling agency. Should homeowner be a servicemember, the Servicemember Civil Relief Act (SCRA) notice also has to be provided by day 45.

• Absence of past due notifications can be used as a foreclosure defense

Mortgage Servicing Delinquency Defined

15

Your “delinquency rate” is the percentage of mortgages that are 30 days or more delinquent

More than 20% overall or 12% for 60 days and more is a problem

More than 20% for 60 days and more is a major problem

Mortgage Servicing Delinquency Defined cont’d

16

17

Mortgage Receivable Report

Reporting Period: 6/30/16 Total Mortgages: 175

Delinquent # Mortgages

Delinquent

Arrearage % Delinquent

1-29 days 20 $8,000 11.4% (late)

30-59 days* 12 $9,600 6.9%

60-89 days* 5 $6,000 2.9%

90 plus days* 8 $12,800 4.6%

Total This Month 45 $36,400 14.4% (25.8%)

Total Last Month (173 mortgages)

40 $30,200 23.1%

Total Same MonthPr. Yr. (163 mortgages)

45 $31,200 27.6%

*For comparison with national statistics , an affiliate’s “delinquency rate” is based on delinquent payments that are 30 or more days late. (14.4% above)

Shifting to Sustainability

Financial Sustainability: “the ability to generate resources to meet the needs of the present without jeopardizing the future”.

Programmatic Sustainability: “the ability to develop, mature, and cycle out programs to be responsive to constituencies over time”

“Sustainability encompasses both the financial and programmatic” aspects of a nonprofit.

“The Recession’s Gift: An New Opportunity for Boards to Excel”. An interview with Jeanne Bell, Nonprofit Quarterly

18

• Converts future mortgage cash flows into a lump sum today

• Recovering home cost sooner than mortgage term

• A tool for serving more families, building more homes, and creating more mortgages

• Recovers some value mortgages would otherwise lose

$Lump Sum Today Future Mortgage Payments

19

What is Mortgage Leveraging?

Mortgage Payments

New Homes

20

Mortgage Leveraging

• Precursors

–Compliant origination

–Quality loan servicing

– Low delinquency rates

–HIFI recommends not leveraging more than 60% of performing mortgages

Mortgage Sale

Mortgage-Backed Loan

Zero-Equivalent Mortgage

USDA 502

FlexCAP

21

Types of Leveraging

22

Cost Containment

• Engage staff to solicit ideas

• Make it a priority

• Build it into the budget

• Utilize credit line effectively

Creates long term value, capacity to endure, and

stewardship.

23

Think Sustainability

24

Thank You

Questions?