HomeMy WebLinkAboutSubmittal-Commissioner Francis Suarez-Article4/25/2016 Detroit's Home Mortgage Plan Hopes to Revive the City's Housing Market - CityLab
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Detroit's Ambitious Plan to jump -Start Its
Housing Market
Home loans haven't covered the cost of buying and renovating a run-down
house, so the city thought up something new.
JULIAN SPECTOR 10 @Julian5pector I Feb 18, 2016 1 * 5 Comments
Reuters / Rebecca Cook
Detroit has a lot of cheap housing, but much of it desperately needs
renovations. Residents have avoided buying houses in the city, looking instead
to rent or move to the more expensive suburbs. That's partly because lending
policies make it hard to get money to buy an old house and fix it up.
Banks peg the amount of a home loan to the appraised value of a house. When
the house is in good shape, that's all you need. But if the house has a low'
market value because the market itself has collapsed, or it requires extensive
http://www.citylab.com/housi ng/2016/O2ldetroit-home-mortgage-housing-m arket-apprai sals-lendi ng-cli nton-global-initiative/463395/
4/25/2016 Detroit's Home Mortgage Plan Hopes to Revive the City's Housing Market - CityLab
and costly repairs, the would-be buyer has to scramble to find renovation
money elsewhere. That might mean racking up credit card debt, or delaying the
work for months until some money can be found.
The city of Detroit is tackling this problem with a new lending program
unveiled Thursday. Detroit Home_Mort. ase offers buyers a mortgage for the
cost of the house, plu a second mortgage o cover up to $75,000 of repairs.
The goal is to deliver 1. 0loans over the next three years,
at a fixed rate of 5 percent interest with no bank fees. Mayor Mike Duggan
hopes this will spur homeownership in the city and kickstart a housing market
that's been languishing since the city's financial troubles began.
"If you have a steady job and a good credit score, you can go in today... and you
can get a mortgage regardless of the appraisal," Duggan said at the
announcement. "You can buy that house, you can have ownership."
How Detroit's
Foreclosure Auction
Fails Homeowners
A new state law designed to foil
property -tax scofflaws is making
it harder for low-income
homeowners to keep their
houses.
On its surface, the plan flies in the face of a
core tenet of financial responsibility: don't
borrow more for your home than it's worth.
But the housing market in Detroit is such
an nomah that the traditional rules don't
always apply. For starters, the city's
mortgage market is nearly dead. Only 462
of the single-family homes sold in 201
used a mortgage—that's j3 percent;
almost all were cash transa t' .
home purchases to reach a broad segment
of the population, there has to be greater
credit access for all the people who can't
pay cash.
Meanwhile, vacant homes are falling apart,
succumbing to mold and the elements, not
to mention scrap dealers snagging loose pipes or doors. Any purchase of one
of those houses is contingent upon having the money to repair it.
"There hasn't been, at scale, any type of loan product that would cover those
repairs," says Nic Salter, head of U.S. economic empowerment at the Clinton
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4/25/2016 Detroit's Home Mortgage Plan Hopes to Revive the City's Housing Market- CityLab y
U
Global Initiative. "That's what this new program does."
U
Duggan raised the appraisal gap issue with the Clinton Global Initiative in
January 2015, and CGI helped assemble a crew of partners to do something
0
about it, including two national foundations, five regional banks, local
mortgage counselors, and the Obama administration's Detroit Federal Workin1
Group. U r_
En P O
In order to work, the program needed to lower the risks of lending. That's
where the Michigan-based Kresge Foundation comes in, offering $6 million to
guarantee the renovation loans in the event that an unexpected hardship forces
Ge owner to sell 'before eir house reaches the value of the loan, says Kim
Dempsey, deputy director of social investment at Kresge. Prospective buyers
don't have to worry that they'd be swamped in debt if they have to sell early,
and lenders don't have to worry about losing their money on an
unconventional arrangement.
"This doesn't need to be a
permanent program—this
meant to correct a market
1S
failure."
Detroit Home Mortgage includes several local counseling groups to advise
buyers on the risks associated with the second loan and help them balance the
debt. The long-term success of the program will hinge on how many of the
buyers succeed in growing their home value and paying off the extra loans.
Detroit Home Mortgage also aims for a larger effect.on the housing market by
-o
spurring new home sales to close th "appraisal gap," says Frank Altman,
president and CEO of the Community ei es--ment Fund, which oversees the
pool of renovation mortgages.
Broadly speaking, appraisals for home sales compare the house to similar
houses that have sold in an area recently. In Detroit, that process is skewed by
a low volume of sales and and high number of decrepit properties. A nice
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4/25/2016 Detroit's Home Mortgage Plan Hopes to Revive the City's Housing Market - CityLab
house on a street full of abandoned and crumbling edifices will have a lower
appraised value. A house in an area where the only recent sales have been
bargain barrel foreclosure auctions will be similarly affected. This gap between
the inherent value and appraised value of a home makes it hard to invest in
U
one, because you could put $50,000 into improvements and see the appraisal
a
budge far less than that.
The program's 1,000 mortgages would mark a colossal influx for a market
0 40.N
that's used to a few hundred mortgages a year. In turn, as those new buyers
.0 1
improve their homes, they'll nudge up appraised values for themselves and
°
neighboring properties. "We need to start moving up the recorded values, so
you start to move from a vicious cycle to a virtuous cycle," Altman says.
If that happens, Salter notes, it will generate spillover effects beyond increased
home ownership rates: vacancies in a neighborhood could decrease, local
businesses could get more customers, and the local economy could benefit
ove ra ll.
"If you get enough home transactions going, you'll actually fix that appraisal
gap over time," Salter says. "This doesn't need to be a permanent program
—this is meant to correct a market failure."
About the Author
Julian Spector is an editorial fellow at CityLab, where he covers
climate change, energy, and clean tech.
ALL POSTS I V @Julian5pector
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