Why there are almost no mortgages in Detroit

This is the second in a three-part series on the Detroit real estate market. Read the first part, on the city residents who rent to distant buyers, and the third part, on the riskier alternative for people who want to buy without mortgage.

Almost no one in Detroit gets a mortgage, and it is well known. Ask Cymone Thomas,

“There are beautiful homes in Highland Park… great family homes,” she said, describing the blocks in the area on solid two-story, three- or four-bedroom brick blocks with courtyards. Many of them need work, but they can be really affordable, well under $ 50,000.

“I really want a house because I have a son, I want him to have his own garden,” she said. But when a house sells in his neighborhood, it’s almost always in cash.

And it’s common: in Detroit, where the median home value is still below $ 40,000, there were less than 500 home loans out of 7,700 home sales in 2014. Money is king, and many sellers request cash-only transactions.

United States the housing market is recovering, and house prices are again on the rise. But as some real estate markets explode, pockets of Detroit and other cities remain devastated after the recession, homes are selling well below what they once were worth.

And just getting a mortgage in these markets has become more difficult. The result is that in the markets where single family homes are cheapest, there are hardly any loans outstanding. The Urban Institute in 2015 studied ten other smaller markets where, while the number of inexpensive homes has increased, the number of mortgages under $ 50,000 has nonetheless declined. In low-end markets – potentially a source of opportunity for first-time homebuyers or low-income buyers – there appear to be virtually no loans outstanding.

The reasons for the disappearance of mortgages are complicated. Most obviously, the credit and wages of many people were hit by the Great Recession. Cymone Thomas is an example: “I think about it, but my finances are not very good. I have great credit, but my income just isn’t there right now, ”she said.

Debt ratios are a common reason not to qualify for a mortgage; a racial wage gap thus exacerbates a growing racial gap in wealth.

The absence of low-end loans is also linked to the institutions: the lenders, brokers and insurers who market and sell these products. In the case of Detroit, many such institutions have been physically absent for a long time.

“Because the Detroit real estate agents failed to make any money, they didn’t leave but they weren’t actively trying to take out mortgages,” said Linda Smith, director of the real estate development group of Detroit U-Snap-Bac – whose office is, perhaps ironically, in a former bank on the East Side. She works directly with realtors and lenders to encourage them to return to the Detroit neighborhoods.

Appraisals are also a problem: In Detroit and many areas where foreclosure rates are high after the recession, homes have not been maintained, property values ​​have plummeted, and many purchases require some degree of rehabilitation. . But in many cases, the borrower would need a loan to cover both the purchase and the rehabilitation, and the appraisal is too low for the lender to approve a loan of that amount. A local public-private partnership called Mortgage in Detroit is an attempt to solve this problem through loans structured specifically for this purpose; Quicken Loans has in partnership with the Detroit Land Bank Authority to repair and then finance homes in certain neighborhoods, increasing and stabilizing property values ​​in concentrated areas.

Yet even Detroit-based Quicken is not aggressive in marketing loans at the bottom of the market: the company made 1,433 home purchase loans in Wayne County in 2015, according to data from the Home Mortgage Disclosure Act, but only 126 of these loans were within the city limits of Detroit. Of these, only 26 were loans under $ 50,000. Nonetheless, Quicken is one of the major lenders in Detroit, and the company says it is working to resolve valuation issues through its land reserve program.

The general lack of financial services and lending institutions in low-income black neighborhoods is nothing new. It dates back to the 1930s, to historical lineage, when the US government made maps delineating areas where it was safe to insure loans, and urban black neighborhoods in red ink – telling public and private institutions that no loan was a good loan in the black part of town. The credit crunch combined with aggressive housing discrimination in predominantly white neighborhoods and suburbs meant that blacks in American cities, even those with middle-class incomes, could not buy houses at fair prices. .

“If you take a middle-income white neighborhood, you know it has nice schools, nice streets, and manicured lawns, and you take out all the loans, in 20 years those streets would be full of nests. hen, there would be fewer schools in the school district, and they would have more closed houses and property values ​​in those neighborhoods would go down, ”said John Taylor, who heads the National Community Reinvestment Coalition.

Decades of continued discrimination, institutional racism and lack of federal law enforcement mean the quarters of Milwaukee and Saint-Louis in Detroit today remain in a vicious cycle of underinvestment, combined with a pattern of almost no lending now in the same places that were originally marked. The only time it stopped was during the subprime boom, when black and latino buyers have been disproportionately sold high priced loans.

The Community Reinvestment Act demands banks to be more proactive in the neighborhoods where they work in order to even avoid de facto redlining, but non-bank lenders do not operate under the same rules and represent a growing share of the mortgage market.

Tim Ross runs a Michigan lender called Ross Mortgage, in a shiny suburb that builds the Detroit Freeway. Ross made nearly 432 loans in Wayne County in 2014, but only 15 of them were in Detroit proper, and of those, none was for less than $ 50,000.

“Independents like us have to make a business decision as to whether or not we choose to make this investment in certain communities,” he said. He pointed to a combination of regulatory compliance costs and brokers’ disinterest in marketing in areas where homes are very cheap. “It’s hard to make a loan of this size and earn a proper income. “

In other words, lenders and brokers are leaving it up to the city, nonprofits, and cash investors only to rehabilitate homes (and increase property values) or demolish once structures. solid in favor of empty land or new development (which would ultimately increase property values ​​as well). Either way, Detroit’s low-income population is unlikely to enter the ground floor of this some greeted as a return.

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