Lending Real Estate

Government officials create mortgage program to save Detroit

Overcomes appraisal gap problem

Detroit

Government officials banded together to create a mortgage program solution that could significantly change the pace of Detroit’s slow housing recovery.

Detroit Mayor Mike Duggan, along with organizing support from the Obama Administration's Detroit Federal Working Group, Clinton Global Initiative, local banks, foundations and nonprofits, unveiled the Detroit Home Mortgage: a new mortgage program to help solve Detroit's appraisal gap problem.

"This is a game-changer for Detroit," said Duggan. "We are confident that Detroit Home Mortgage will increase homeownership in the city of Detroit. This initiative is critical to rebuilding Detroit's neighborhoods. With an opportunity to get a home mortgage, qualifying homeowners and homebuyers have a real opportunity to buy and renovate a house in the city and make it a home."

According to the release, previously, federal lending guidelines did not clearly allow banks to loan borrowers enough money to cover necessary repairs because the loan amount was limited to the low, appraised value of a house.

Although many potential homebuyers had good credit scores and stable incomes, they could not get a large enough mortgage because the appraiser could not find a similar home nearby with a comparable sales price.

And while houses across Detroit remain inexpensive to purchase relative to homes just outside the city limits, the lack of financing forced many families either to pay cash or to rent instead of building equity and investing in their futures.

Under Detroit Home Mortgage, qualifying borrowers receive a first mortgage for the appraised value of their house (less their 3.5% down payment), and a second mortgage up to $75,000 to fill the gap between the appraised value and the sale price and/or the cost of renovations.

To use the program, borrowers must complete classes in homebuyer education and the financial risks involved in borrowing more than the appraised value of a home.

In addition, all participating banks will offer Detroit Home Mortgages at the same low interest rates with no bank fees. Plus, the Kresge Foundation will provide a $6 million guarantee on the second mortgage pool to protect borrowers in extreme cases of hardship that require a homeowner to sell his or her home.

"Collectively, The Kresge Foundation guarantee commitment and MSHDA's affordability grant allow the banking institutions to lend significantly more money than they would otherwise," said Kresge President and CEO Rip Rapson.

"Kresge has expanded its use of social investments – loans, guarantees and equity investments – to complement traditional grantmaking. This new mortgage program is an excellent example of how philanthropy can partner with public and private sector investors to unlock capital and move more resources to underserved communities," said Rapson.

Up until this point, Detroit’s housing recovery has struggled to move forward, with home prices barely increasing from their trough.

What’s interesting is that Detroit never really participated in the hoopla of the financial crisis.

“But the lack of frenzy in good times did not protect Detroit from the bad times, with the subsequent national collapse in home values hitting Detroit as hard as any market, if not harder. And since then, while local housing markets around the country have gradually dug themselves out, Detroit has been stuck,” Aaron Terrazas, senior economist at Zillow, said in a report last year.

Detroit is catching the attention of lenders. Along with Quicken Loans, which famous for its passion for the city, HomeBridge Financial Service’s opened a new office in the Detroit suburb as the start of a huge push by the lender to grow in the area.

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