Community Developments Investments (February 2018)
Detroit Home Mortgage: Innovative Rehabilitation Financing
Frank Altman, President and Chief Executive Officer, Community Reinvestment Fund
This couple, both architects, purchased their home in a distressed Detroit neighborhood with a Detroit Home Mortgage. They used their design skills to rehabilitate the home. (The Reinvestment Fund)
In the years following the Great Recession, many home buyers throughout the city of Detroit could not qualify for a mortgage, nor could they finance necessary property rehabilitation. These were home buyers with stable incomes and good credit histories, but the appraisals were falling short. Houses across Detroit were inexpensive to purchase relative to homes just outside the city limits, but the lack of financing forced many families to move outside the city to purchase a home. For those staying within the city, the choice was to purchase a home with cash or to rent instead of building equity and investing in their futures.
Depressed real estate values also made it difficult for longtime residents with good credit to get secured real estate loans to make basic health and safety repairs. Consequently, many homeowners were forced to use expensive credit card debt to pay for property improvements, often piecemeal over a period of years, or deferred required maintenance altogether. The lack of availability of mortgage financing had stalled the real estate market, limited entry into the market to those buyers with cash, and contributed to a lack of property rehabilitation and maintenance.1
In response to this problem, in February 2016 the Detroit Home Mortgage program was launched as a collaborative effort of local and national banks, foundations, and nonprofit groups. The program has since expanded and now includes Huntington Bank, Flagstar Bank, Chemical Bank, Liberty Bank, Independent Bank, AAA Bank, Citizens Bank, Comerica Bank, The Kresge Foundation, the Michigan State Housing Development Authority (MSHDA), the Ford Foundation, the Community Foundation of Southeast Michigan, Community Reinvestment Fund USA (CRF), and others. The program was established in the belief that a distressed real estate market, with a dysfunctional mortgage market, can be changed to support the financing needs of aspiring, creditworthy Detroit homeowners. In the Detroit market the vast majority of homes need rehabilitation to make them habitable and the number of move-in ready homes is insufficient.
The idea for the Detroit Home Mortgage program was born at the urging of Mayor Mike Duggan, with organizing support from the federal government and the Clinton Global Initiative. Further supporting the collaborative effort is the Office of the Comptroller of the Currency, as it continues to foster responsible, prudent lending by national banks in a manner that can restore market forces in communities struggling with blight and high vacancies (see "OCC Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization"). As a result of this unified vision of needed change, and a pooling of ideas, experience, and resources, Detroit Home Mortgage was launched and Detroit is slowly seeing change.
Today, the program has been made widely available to those seeking to purchase or rehabilitate a home in Detroit. Early success can be seen toward achieving the main objectives of the program in addressing the "appraisal gap" issue, including supporting increased access to home purchase in Detroit, and providing a basis for normalized (higher) property values through purchase, occupancy, rehabilitation, and maintenance to help restore the market. Detroit Home Mortgage has helped support value stabilization, and the city has already seen the number of mortgages increase by more than 25 percent year over year since the launch of the program as these efforts begin to restore home buyer confidence, with approximately half of the increase due to the Detroit Home Mortgage program.
Further, the program is supporting both Detroiters themselves (with more than 80 percent of Detroit Home Mortgage home buyers coming from a Detroit address) and new home buyers from outside the city.
From 2015 through year-end 2017, Detroit Home Mortgage has helped to increase home buyer confidence, and participating program lenders have increased lending efforts and utilization of the mortgage. Also, the program has begun to see some indications of property value normalization as appraisal values are beginning to make the properties eligible for conventional financing.
As of December 31, 2017, approximately 75 families have been prequalified for a mortgage and are actively shopping for the home of their dreams in the Detroit neighborhood of their choice; and over 150 families have closed on their mortgage or are approved. Some have moved into their dream home and others are eagerly waiting for construction to finish. Life is changing in Detroit—home by home, family by family, and neighborhood by neighborhood.
With Detroit Home Mortgage, banks are now able to lend to a qualified home buyer the full amount needed to purchase an already renovated home or to buy and rehabilitate a home. In addition, banks can loan qualified existing homeowners the full amount needed to rehabilitate their current homes.
How It Works
With Detroit Home Mortgage, qualifying borrowers receive a first mortgage for the appraised value of the house (less 3.5 percent down payment) and a second mortgage of up to $75,000 to fill the gap between the appraised value and the sale price plus any renovation costs (see sidebar "Detroit Mortgage Financing: Challenges and Solutions"). The program aims to increase homeownership, eventually raise property values, and spur reinvestment in any Detroit neighborhood where the appraisal gap exists. The program does not have a minimum loan size and does not have income restrictions.
All participating Detroit Home Mortgage program lenders offer the same low fixed interest rates, with no bank fees, and utilize the same underwriting guidelines (based largely on the Federal Housing Administration's "Single Family Housing Policy Handbook" 4000.1). First mortgages are fixed-rate and fully amortizing over a maximum of 20 years, and are held on the balance sheets of the banks. All second mortgages have a 5 percent fixed interest rate (which is kept low through affordability support provided by MSHDA), with amortization terms that match the first mortgage. After any necessary rehabilitation is completed on a property, the second mortgages are sold into a loan fund, developed and administered by CRF, an innovative facility that many of the local and regional financial institutions have funded, along with support from The Kresge Foundation and MSHDA.
Home Buyer Education and Consumer Protection
Borrowers utilizing the Detroit Home Mortgage must complete the standard home buyer education curriculum from the U.S. Department of Housing and Urban Development and MSHDA, which is offered by 10 housing counseling agencies. In addition, a specialized component of the curriculum has been developed to help ensure borrowers understand the financial risks involved in borrowing an amount that exceeds the appraised value of a home. Information about this risk is also incorporated into a disclosure form that a borrower must sign at closing. Further, additional support is provided for those borrowers who will use the program to finance the home's rehabilitation, including additional specialized curriculum and assistance provided by a dedicated team of construction project managers.
Like all loans, Detroit Home Mortgage first and second mortgages must be repaid. Another innovative feature of the program, however, is the protection offered to the homeowner. In cases of hardship that require a homeowner to sell a home at a short sale, The Kresge Foundation has made a guaranty to forgive that portion of the second mortgage necessary to make the borrower whole.
Alignment With Public Rehabilitation Efforts
The Detroit Home Mortgage program aims to help eliminate blight from communities by turning vacant and deteriorating houses into safe and appealing homes for individuals and families. As residential properties are targeted for rehabilitation through the program, which has up to approximately $150 million in lending capital available, the physical appearance of Detroit neighborhoods will greatly improve and the number of residents will continue to grow.
One example of this is a recent collaborative effort with the Detroit Land Bank Authority. Since its inception in 2014, families acquiring homes through the land bank faced the daunting challenge of finding a mortgage to support the rehabilitation of the property to make it safe and livable. In fact, many land bank home purchasers made the tough choice to complete renovations as personal cash flow permitted, putting them at odds with rehabilitation timelines, which are a condition of the land bank purchase. Today, the land bank is working with past and current purchasers of primary residence properties by providing information on Detroit Home Mortgage as a possible option to complete the renovations for a move-in ready home. Since the program's inception, 300 land bank homeowners have been contacted regarding Detroit Home Mortgage, with almost 60 individuals electing to discuss their personal situation with a Detroit Home Mortgage lender, and 19 applying for a program loan.
Another example of support from the Detroit Home Mortgage program is the city's initiative to redevelop a low- to moderate-income area of the Fitzgerald neighborhood (the first of several targeted efforts planned). The city issued requests for proposals for both housing rehabilitation and productive landscape development. The development includes 100 publicly owned structures to be renovated and hundreds of lots that will be placed into land stewardship.
The city has asked the Detroit Home Mortgage program to work closely with the selected developer and city officials on converting renters in the development area to homeowners, in an effort to prevent the potential effects of gentrification. The development area has 1,700 residents. The Detroit Home Mortgage teams will focus on engaging this community with a series of education events to increase awareness of its program and how it can assist in the rehabilitation of residents' properties.
Grassroots Community Engagement
The Detroit Home Mortgage program is supported by direct outreach by program lenders, a strong social media campaign that resonates with the target market, media support for the co-branding of the program with bank partners to play off the strength of their market presence, and a strong community marketing outreach. This community outreach spans neighborhood efforts and events, ministerial and coordinated congregation events on homeownership, counseling agency courses and events, and targeted campaigns to existing property owners with uncompleted renovation work. The partnerships necessary to transform the real estate market include outreach, education, and promotion to real estate agents.
In August 2016, more than 250 real estate agents gathered at an outreach event for updates on planned neighborhood changes and city initiatives; to build new networks with Detroit Home Mortgage lending staff and home buyer counseling agencies; and to receive training on specifics of the Detroit Home Mortgage program. Based on the overwhelming response and enthusiasm, Detroit Home Mortgage lenders continue to meet one-on-one with realtors to provide education on the program. Another example of direct outreach was a December 2016 gathering of 75 residential property developers who came together to learn about the program and the opportunities it presents to support homeownership in the city.
The program also supports neighborhood-based community development corporations (CDC) that have a long-term commitment to their communities. In addition to real estate development, these CDCs add value to neighborhoods through community building, blight removal and beautification, commercial revitalization, public safety initiatives, and other activities.
The support of CDC efforts is especially important in Detroit since, for many would-be home buyers, the prospect of purchasing a home that must be renovated prior to occupancy is a daunting challenge they are often unprepared to face. Most would prefer to purchase a home in move-in condition over a home that they need to renovate. To accelerate the rate of homeownership in Detroit, it is necessary to bring more renovated homes to the market, and Detroit realtors have lamented that housing market recovery in some neighborhoods is already being stunted by a lack of move-in ready inventory. To help address this, CDCs and other private developers (including those supported through new programs related to the Detroit Home Mortgage effort2) are now able to begin to acquire and renovate properties with an expectation that home buyers will be able to finance a purchase at a normalized property value (using conventional financing or the Detroit Home Mortgage product).
The Detroit Home Mortgage program is available citywide, allowing home buyers to decide which neighborhood fits their needs. Some areas will see faster change than others for several reasons. First, some areas benefit from targeted efforts by CDCs and the city. Second, some natural clustering of home buying is expected, and finally, some neighborhoods have not seen the same level of disinvestment. These neighborhoods will most likely be the first areas to see the appraisal gap shrink, making the Detroit Home Mortgage unnecessary—and therefore, making it ultimately successful.
1 According to Home Mortgage Disclosure Act reporting and Realcomp data, less than 12 percent of residential home sales in Detroit had been financed with a mortgage from 2011 to 2014. The same data show that 80 percent of the home equity requests were declined due to a lack of collateral.
2 Beyond addressing mortgage financing with the Detroit Home Mortgage product, the teams from CRF, through the support of The Kresge Foundation, have worked extensively with private, public, and nonprofit stakeholders to address challenges and develop integrated strategies for rebuilding Detroit's single-family home buyer "ecosystem."
- Extensive home buyer education and counseling, including high combined loan-to-value ratio (CLTV) education
- Affordable loans (low loan amounts, no lender fees, and low interest rates)
- Integrated equity protection (includes a rider to the second mortgage note)
- Alternative financing for rehabilitation (i.e., preferable to unsecured loans at higher interest rates)
- Project management support for homeowner rehabilitation
- A tailored product and origination process (based on Federal Housing Administration standards)
- Loan compliance with qualified mortgage guidelines (including ability-to-repay rules)
- Customized borrower disclosure for high CLTV at loan origination
- Personalized servicing between banks and CRF
- Integrated post-purchase counseling referrals and support (including foreclosure)
Marcie Kansou was the first buyer to purchase a renovated home in Detroit's Rosedale Park neighborhood under the Detroit Home Mortgage program. (The Financial Services Consulting Group)
The house in Rosedale Park had been vacant for a year and needed work, but Marcie Kansou had a strong intuition the moment she walked in. "It felt like home and I knew this was the place I should be," she said. Kansou closed on the home at the end of June 2016. In so doing, she became the first person to purchase a home through Detroit Home Mortgage, a collaboration of participating banks, nonprofit organizations, foundations, and the Michigan State Housing Development Authority that provides borrowers the opportunity to borrow up to $75,000 more than a home's current appraised value.
Kansou works at Southwest Solutions, supervising its infant mental health program. She grew up in Rosedale Park, in a home a few streets away from the one she wanted to buy. Her family moved out when she was a teenager because of crime and other issues. Because of this past experience, Kansou had security concerns and talked to the immediate neighbors. They assured her that the area was safe and the neighbors look out for each other.
"Without a doubt, if not for Detroit Home Mortgage, Marcie would not have been able to get the financing for this home," said Scott Gutschow, the Huntington Bank loan officer who helped her. Kansou purchased the house for $53,000, but it needed $40,000 of rehabilitation work. The house was appraised at $75,000. After her down payment, she got a first mortgage for $72,000 (20-year fixed at 3 percent) and a second mortgage (20-year fixed at 5 percent) to cover the rest of the renovation costs. Kansou was able to roll in her closing costs, first-year payments of property taxes and insurance, and other expenses. She also does not have to pay private mortgage insurance. "I feel that I got a great deal," Kansou said. "I was renting before. Now I have a place that I can truly call and make my own, where I can bring family together and continue traditions that actually began in this neighborhood."
The home Kansou bought is the last vacant house on the block. She feels a deep sense of nostalgic comfort moving back into the neighborhood. She appreciates houses with historical character and, although the home she bought needs some major electrical and plumbing work, she can tell it was loved by the previous occupants because of the amenities and careful touches.
Sample Mortgage Financing Challenge
- Value of property = $40,000
- Mortgage = $32,000 (80% LTV)
- Down payment = $8,000 (20% down)
- Additional cost of repairs = $20,000
- Total cost of property and repairs = $60,000 ($8,000 down + $32,000 mortgage + $20,000 repair financing)
- Mortgage amount = $52,000 ($32,000 + $20,000)
- LTV = $52,000 / $40,000 = 130%
- Not eligible for traditional financing
- Would require $28,000 down to be eligible at 80% LTV (initial $8,000 down and $20,000 in repairs)
Sample Detroit Home Mortgage Solution
- Cost to buy and repair home = $60,000 (mortgage + repairs + down payment)
- Value of home = $40,000
- First mortgage = $38,600 (96.5% value)
- Down payment = $1,400 (3.5% down)
- Second mortgage = $20,000 (amount above value)
- CLTV = ($38,600 + $20,000) / $40,000
= $58,600 / $40,000
Note: CLTV = (first mortgage balance + second mortgage balance) / property value.
This publication is part of:
Collection: Community Developments Investments
Letty Ann Shapiro
On the cover
Before-and-after image of a home in New Orleans rehabilitated by Redmellon Restoration & Development, a mission-driven real estate development company.
Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.