Without the Detroit Home Mortgage program, Jennifer Levy and her husband wouldn’t have been able to buy their home.
In 2016, the couple were renting an apartment downtown, but wanted more space and easier parking. They fell in love with the very first house they toured in the University District. But there were a couple of snags: the house needed work and the appraisal came in for around $20,000 less than the asking price, which would require them to make a higher downpayment than they could afford.
Enter Detroit Home Mortgage, a signature city program that took a unique approach to address exactly these two common challenges in the city’s housing market. Launched in 2016 with support from major banks and foundations, it was heralded as a promising solution to help eligible homebuyers get mortgages. Five years later, the program is quietly coming to an end in October, and so far has completed less than a quarter of its intended 1,000 home closings.
As part of the program, Levy and her husband got a traditional loan for nearly all of the home’s appraised value, then got a second mortgage at a slightly higher interest rate to cover the appraisal gap and the cost of essential renovations.
“It was really amazing,” Levy said. “Without it, we would have to wait a while to get more savings and wouldn’t have gotten our house.”
That’s not to say it was an entirely smooth process. The program requires buyers to take a homeownership class and have licensed contractors submit bids and scope of work to the bank, all of which can slow down the sale. Levy was able to barely complete the requirements ahead of closing, calling them “onerous.”
“It added a bunch of steps, with multiple agencies, onto an already complex process,” Levy said.
Levy’s experience demonstrates both the potential, and challenges, of the program.
The couple were told that they were the 18th buyers to use the Detroit Home Mortgage in late 2016. As of late last month, there have been just 232 closings. But the Detroit Home Mortgage is now in its last year and will only issue loans that cover the appraisal gap — it ceased issuing loans for renovations in December 2020.
Foundations like Ford and Kresge pledged funding to guarantee loans, unlocking up to $40 million in new mortgage offerings. And it was touted by Mayor Mike Duggan as an essential tool to restore Detroit’s neighborhoods.
“This is a game-changer for Detroit,” Duggan said at a press conference launching the program. “We are confident that Detroit Home Mortgage will increase homeownership in the city of Detroit.”
As the Detroit Home Mortgage program winds down, has it lived up to its lofty goals?
Barriers to buying
The appraisal gap is a major barrier to homebuying in Detroit.
Typically banks are only willing to issue mortgages up to the amount a home appraises for. But in Detroit, and Black neighborhoods around the country, homes are valued for substantially less than similar homes in white neighborhoods.
The difference between an offer on a home and its estimated value is called an appraisal gap, and it requires either the buyer to put more cash down or the seller to lower their price. Since the housing bubble in 2008, the gap has locked out large segments of Detroit’s population from homeownership, making them available mostly to buyers with substantial cash reserves who don’t need mortgages at all.
Moreover, the homes often require a lot of work. There’s an estimated $2 billion worth of home repairs needed to bring substandard housing in the metro area up to a livable condition. But construction loans for homes are hard to come by, forcing buyers to put up even more cash for repairs.
These two factors have disincentivized home buying, slowing down revitalization in Detroit’s neighborhoods.
“If you bought a distressed house in Detroit, the initial cost of the home plus the rehab would be more than what it would sell for,” Laurie Goodman, vice president of housing finance policy at the Urban Institute, told Detour. “If you couldn’t get your money out, why would you do it?”
Catalyzing the market
The Detroit Home Mortgage looked to close that gap and open up more homes for potential renovation for those with credit scores of 600 or above — in other words, people who would mostly likely be able to get a loan in markets that don’t have Detroit’s appraisal problem.
To do this, a bank structures two loans based on a home’s “completed value,” or how much it will be worth after closing and renovations. The first loan covers 96.5% of a home’s appraised value, with only a 3.5% downpayment, and the second loan covers the rest up to $75,000. The completed loan creates a new comparable sale that appraisers could use in future assessments, potentially raising property values and narrowing the appraisal gap for the next homebuyer.
“Once that comparable sale is reported to the MLS, appraisers feel confident using it because they understand that negotiations are happening between buyers and sellers,” said Krysta Pate, Detroit Home Mortgage program director for the Community Reinvestment Fund, a national nonprofit that administers the program.
Pate said that in neighborhoods where multiple buyers secured mortgages through the program, the number of traditional mortgages has grown “exponentially.”
In general, Detroit’s housing market has improved dramatically since the program’s launch. Citywide, traditional mortgages have gone up from a low of 244 in 2012 to nearly 1,700 in 2019. Though there are some trends in the housing market unique to COVID-19, home prices in Detroit have also skyrocketed. The median sale price when the program launched in 2016 was $24,000. According to a RE/MAX market report, in December 2020, it was $71,000 — nearly triple.
Pate thinks the Detroit Home Mortgage had an important role to play in this resurgence. “Appraisers use a max of six comps to determine the value of the next home,” she said. “In some neighborhoods, it takes just two or three mortgages to spark activity. We’ve done a lot of catalyst work.”
Falling short of expectations
The Detroit Home Mortgage looked to get 1,000 closings when it was launched, but has so far only reached 232 buyers. Between 2016 and 2020, approximately 6,300 mortgages originated in the city. The Detroit Home Mortgage has accounted for less than 5%.
Proponents of the program argue that the lower than expected number isn’t a bad thing. Whenever possible, a standard mortgage is better for everyone: the seller doesn’t have to wait as long to close, the buyer doesn’t have to take out a second mortgage with a higher interest rate and the market reflects the true value of homes.
Joy Santiago-Clark, broker and president of Dwellings Unlimited, was part of a council of realtors assembled by the Community Reinvestment Fund that met regularly to discuss the program and ways to improve it. She also believes the program has done exactly what it intended to do.
“Values are only as high as the last comparable,” she said. “It created new benchmarks and began a snowball effect for the rest of the city.”
But Goodman of the Urban Institute, who co-authored a 2017 report on Detroit’s housing market and has analyzed local housing policy, noted that many factors not influenced by Detroit Home Mortgage loans — such as interest rates, supply and broader economic trends — also played a part in the city’s improved housing market. While 232 mortgages isn’t a “totally trivial number,” she said, it probably wasn’t a major factor, either.
“I think it’s fair to say that the Detroit Home Mortgage was a contributor, but wouldn’t go further than that,” she said.
A spokesperson for the city of Detroit told Detour by email that, “The fact that fewer Detroit Home Mortgages were issued — as the overall number of mortgages in the city climbed — is a sign that its role in the overall mortgage marketplace has been a success.”
But according to an ATTOM Data Solutions analysis for the Wall Street Journal, less than 25% of Detroit home sales were financed by mortgages in 2019. While that’s an improvement from when the Detroit Home Mortgage program began, it was still the lowest rate among the 50 biggest U.S. cities.
Brenna Houck used the Detroit Home Mortgage in 2017 to purchase her home in southwest Detroit, after she and her partner had struggled for months to find a home that wasn’t scooped up by investors with more cash.
“It allowed us to buy a house in Detroit that had some issues and was within our price range,” Houck said.
But she also had caveats, mostly around the program’s requirements. The pressure of finding a licensed and insured contractor to submit a scope of work, while finalizing the mortgages — all before closing — nearly blocked the sale. One contractor dropped out, so Houck needed to find another contractor who would do the work at a similar rate.
Meanwhile, the seller was getting impatient. “There was a lot of time pressure because the seller wanted it to go quickly once the offer was made,” she said.
That may be one reason why the program didn’t originate more mortgages. Ishma Best, realtor and founder of PREP Realty, had similar issues. He represented three buyers who used the Detroit Home Mortgage, but it didn’t go smoothly.
“The outcome was successful as far as getting the transaction closed, but the timing felt unsuccessful,” he said. “In some cases, it made the sellers not want to use a buyer with the Detroit Home Mortgage again for fear it would take a really long time to close.”
Buyers had to do all the research and wrangling of contractors to do the work stipulated in their loans. “It would have been better if there was a way for banks to get more involved to vet contractors that are ready, willing and able to work,” Best said.
Lack of publicity may have played a role in the program’s low number of completed loans as well — the Community Reinvestment Fund ultimately pivoted its marketing strategy to talk directly with realtors and community members.
It also could be that in certain neighborhoods, Detroit’s market improved quicker than expected, making the program less necessary. But getting a traditional mortgage is still a struggle for buyers in many neighborhoods across the city.
Detour submitted questions to CRF about the average credit score and race of the program’s buyers, as well as the neighborhoods where Detroit Home Mortgages were used, but did not get a reply by the time of publication. Pate said that CRF is working on a report on the program that it will share publicly in the “next few weeks.”
Pate added that with the banks and realtors they have at the table, CRF may look to develop a new mortgage product to address the rest of the market. “There’s still more work to do and we recognize that,” she said.
Corrections: In a previous version of this article, Jennifer Levy’s name was incorrectly written as Ivey. We also changed language regarding foundations’ role in the program to more accurately characterize their involvement.