Editorial: New mortgage plan a boost for Detroit; need reflects poor federal policies
Getting a mortgage for a home in Detroit, now nearly impossible, should get easier thanks to a new partnership between the city, state and several lenders to offer bridge loans to buyers of houses with assessed values that fall short of the market price. It’s a smart way to solve a problem that was holding back the city’s neighborhood stabilization efforts, but that it is even needed is an example of how federal policies are hurting America’s cities.
The $40 million mortgage aid plan will allow borrowers to get a first loan to cover the agreed upon selling price of a home. But as is often the case in Detroit, what the market deems as the home’s value often falls short of what the bank’s assessor says it’s worth.
That’s due in part to the limited number of comparative sales in most neighborhoods, and that the three-year assessment time frame doesn’t capture a healthy rise in Detroit’s home values.
The Detroit Home Mortgage, discussed in Mayor Mike Duggan’s State of the City address Tuesday, will offer buyers a second mortgage to cover that gap. So if a buyer and seller agree upon a $60,000 sale price, for example, and the assessor only values the home at $55,000, the second mortgage will cover the difference.
The money to back the loans is coming from the state housing authority, the Kresge Foundation, the Ford Foundation, the Clinton Global Initiative and other sources. Several local banks are participating.
It’s sorely needed. Last year, Duggan says only 500 mortgages were issued in Detroit, on 3,000 home sales. Most people can’t afford to pay cash for a home, so a lot of would-be Detroit homeowners are being shut out of the market.
Mortgage lending is tighter across the country, but even more so in urban areas with high percentages of low-income residents. That reflects the strict limits placed on lenders by the Dodd-Frank Act.
Among other things, the law, passed after the financial collapse of 2008, has encouraged banks to set higher credit score requirements on mortgage seekers. It has also demanded a greater demonstration by borrowers of their ability to repay the loan. And it has caused lenders to be extremely conservative in setting the value of properties.
While the intent is to avoid another sub-prime lending meltdown, it has also had the effect of shutting many lower income earners out of home ownerships, and made it tougher even for middle class buyers to purchase homes in less stable markets such as Detroit.
Federal Reserve Chair Janet Yellen acknowledged the negative impact in testimony to the Senate Banking Committee last year.
“Demand for housing is still being restrained by limited availability of mortgage loans to many potential home buyers,” Yellen said.
Duggan and Gov. Rick Snyder have come up with a creative end-around the tight mortgage market. With housing values rising in the city and more neighborhoods being revived, the risk to taxpayers should be low.
Ideally, Congress will at last act to amend Dodd-Frank to allow more potential buyers access to mortgages and negate the need for such programs.