A Home-strung Recovery?

Even amidst Detroit’s continuing renaissance, structural liabilities present a challenge for the mortgage financing needed to spur critical homeownership.
Tim Ross
Tim Ross

Detroit has been in the national spotlight frequently over the past two years, as national media outlets have begun to pick up on the remarkable urban renaissance currently underway in the Motor City.

But for all the big deals and redevelopment energy in those select downtown pockets, many Detroit neighborhoods are getting left out — and possibly left behind. By no means are all the investment dollars and optimism limited to the urban core and the hot areas of Midtown and New Center. The difference between the preferred redevelopment corridor — which is being reimagined and rebuilt as a thriving mixed-use environment — and the city’s more residential neighborhoods is significant, even stark.

There are several reasons for this, but one of the most important is an issue that just doesn’t get discussed with enough urgency or frequency: mortgage finance.

Financing challenges remain

For mortgage bankers, the ability to make a home loan in the city has everything to do with the ability to sell that loan in the secondary mortgage market. To make that happen, the property must be appraised, and that appraisal confers certain limitations. This is the challenge in a depressed neighborhood.

Even in an up-and-coming part of the city, traditional home loans may not be viable. Banks, foundations, and other entities may be able to make grants and other monies available to address some of this issue, but the fundamental problem still exists.

Another structural problem is that real estate salespeople and mortgage loan officers derive their compensation as a percentage of the sales price or loan balance, not on the terms and conditions of the loan. The reality is the financial calculus doesn’t add up, and mortgage lenders who were once the traditional providers of mortgage loans have left the city for other markets. Since property values are relatively low, there are more cash purchases by investors as well as land contract transactions. Land contracts provide a way around lending rules, as they don’t require an appraisal, but they can carry a higher interest rate and provide a method for an investor to dump a bad investment.

In other words, development groups are buying up significant tracts of land or groups of properties and working to redevelop, rehab, and subsequently cash out. There’s nothing inherently wrong with that. But it’s not enough, because traditional homeownership in the city isn’t just important, it’s essential.

Positive trends

The good news is, there are stronger pockets of older, stable neighborhoods where higher rates of homeownership and property values remain. Money is being invested to support traditional housing opportunities in those and other parts of the city.

In some cases, grant money has been cobbled together by the city and nonprofits for investment in these areas that will allow families and individuals to own homes. The Michigan State Housing Development Authority offers down-payment grants, and large banks and civic institutions have backed creative financing options like forgivable grants for those who wish to occupy and improve properties. 

Even in an up-and-coming part of the city, traditional home loans may not be viable.

City-backed initiatives, such as the Detroit Home Mortgage program, provide down-payment assistance and allow buyers to finance up to $75,000 over the appraised value of the home. In turn, the Strategic Neighborhoods Fund is investing more than $100 million from a combination of financing from the city, state, and philanthropic organizations.

Unfortunately, these efforts are just a drop in the proverbial bucket. Last year, the number of mortgages in the city jumped by 35 percent, the biggest spike in more than a decade. The total number of new mortgages, however, still was under 1,000.

Moving forward

Every city has its own unique set of civic circumstances, infrastructure idiosyncrasies, and zoning challenges. Detroit is no different, and the city’s patchwork quilt of neighborhoods is worth preserving.

Banks are obliged to lend in some of these neighborhoods, to support a regulatory requirement for community reinvestment. But we’re not yet at a place where traditional mortgage lenders can step back into the market and offer more realistic financing options. Today, more aggressive solutions to encourage lenders to move back into the market are sorely needed.

There’s more to the redevelopment equation than creative funding solutions and financing reform. The momentum we enjoy today cannot be sustained without improving the quality of public schools and employment rates.

Urban renewal and redevelopment is inherently difficult. It’s almost never a smooth or uniform process. If we want to turn that renewal into a true revival — and create a strong and sustainable downtown Detroit community — we need to empower mortgage lenders and start working now to make that happen.

Tim Ross is CEO of Ross Mortgage Corp., a residential mortgage banking company in Troy that is one of the top independent lending firms in the Midwest.

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