That Detroit rarity: a home mortgage

Miles from downtown Detroit and its debates about gentrification, a more modest question surrounds real estate in many city neighborhoods.

Cash or charge?

Despite headlines about new luxury condos and million-dollar lofts, getting a mortgage remains a tall order in outlying neighborhoods across Detroit, with the vast majority of homes sold for cash to landlords and investors, according to sales data and numerous interviews.

Like most Detroit problems, it’s complicated. And it’s posing hard questions about who will benefit in a revival rooted in downtown and Midtown in the nation’s poorest big city.

“Cash is king in Detroit,” said Ray Johnson, a real estate agent. “Detroit is evolving into a new place, but outside of hot areas, neighborhoods just aren’t where they need to be to increase property values enough for banks to lend money.”

A joint report by Bridge and WDET, Detroit’s public radio station, found some cause for optimism in the housing market after a decade of decline. For example, home sales and prices are increasing citywide after bottoming out after the mortgage meltdown, which left more than 65,000 homes foreclosed.     

In some neighborhoods, prices are rising so swiftly they’re sparking bidding wars. But the gains are uneven and mortgage lending is mostly confined to more affluent neighborhoods such as Indian Village, Rosedale Park and Palmer Woods, according to records from Realcomp Ltd. II, a Farmington Hills-based company that lists real estate sales.

Last year, only about 710 of 3,800 homes (19 percent) sold by conventional means in Detroit were financed with mortgages, the records show. The difference between the two types of home sales was huge. Homes with mortgages sold for an average of $155,000, records show. Cash sales averaged $30,000.

It’s an imbalance that Mayor Mike Duggan recognizes could “cripple” the city’s chance for a comeback, said Erica Ward Gerson, chairwoman of the Detroit Land Bank Authority , which  assembles and sells properties.

She called the number of cash sales a “serious, serious problem” because they can deter home ownership and depress property values. Cheap sales are usually rentals or vacant, while pricier sales are often out of reach for ordinary buyers.

Duggan has teamed with banks, foundations and nonprofits to roll out several programs to increase home loans. They’ve had some success but most focus on stable neighborhoods, prompting fears that some are being left out.

“The strong neighborhoods are doing good but what about the weak ones?” asked Linda Smith, executive director of U-SNAP-BAC, a nonprofit that promotes home ownership on the city’s East Side.

“We can’t afford to wait for (help) to get here because once it does, what is going to be left when it comes to us?”

In poorer East Side neighborhoods, homes sold last year for $4,000 to $40,000 in cash, according to Realcomp data. A few miles away in downtown and Midtown, homes and lofts sell for $250,000 or more, the records show.

Gerson acknowledged the mortgage numbers are “pathetic.” But she said she’s “very excited” they’re improving after nearly hitting bottom.

In 2014, 97 percent of city homes sold for cash, according to data from the Urban Institute, a Washington D.C. think tank. The national average is 36 percent. The number of Detroit mortgages rose from 490 to 557 from 2014 to 2015, but remained low compared with other cities.

“In any other city, the total numbers would be shameful,” Gerson said.

Cities with similarly sized populations to Detroit – Memphis, Columbus and El Paso – last year had at least five times as many mortgages as the roughly 710 mortgages sold in Detroit, according to data from RealtyTrac, a California-based company that tracks real estate.

“Detroit is seeing a stabilization of older, established neighborhoods, but we’ve gone so far down that spillover to other neighborhoods is still a ways off,” said Kurt Metzger, director emeritus for Data Driven Detroit, who reviewed the records at the request of Bridge.

“It’s a more positive view than we’ve seen in quite some time,” he added. “I don’t think that’s any consolation to people who live in neighborhoods where they can’t get mortgages.”

Dividing lines

Among the city’s 139 square miles, perhaps nowhere are the dividing lines as stark as in the streets near the University of Detroit Mercy and nearby Marygrove College.

Inspired by the city and eager to be part of its comeback, Nate and Amber Hunt decided to sell their home in the nearby suburb of Ferndale and buy in a neighborhood known as the University District.

Last year, they postponed their search after Amber gave birth to their first daughter, Magnolia. When it resumed six months later, they were shocked that home prices had increased $50,000, said Amber, a marketing content manager.

They looked at a few houses and considered a fixer-upper. That changed when they opened the door of an expansive brick Tudor with stately wood molding, a library and basement bar decorated with hand-painted seascapes.

“We fell in love with it instantly,” said Nate Hunt, a software engineer. “Every room we walked in was like, ‘Yeah, this is the place.’ It felt like home.”

There were higher bidders. The Hunts got the house for more than $230,000 after sending the owners a family photo and letter explaining how they wanted to grow old in the home.

It was one of 57 home sales last year in an eight-block, one-mile radius east of Livernois. Only 13 were for cash.

Results were starkly different on the other side of Livernois. There were 82 sales over the same sized area last year; 65 were for cash.

Both are good neighborhoods. On the east side of Livernois, in the University District, private security patrols streets lined with 3,000 square-foot brick Tudors populated by professors and attorneys. On the west, the brick colonials and bungalows homes are about half the size, more likely to show their age and be occupied by renters.

Peter Whittaker is betting big on the lower-priced, west side of Livernois. The venture capitalist and his investors bought 87 homes, sight unseen, in a six-block radius there about five months ago. He didn’t disclose the sale price, but nearby homes sold for $16,000 to $28,000 apiece in cash.

“We buy neighborhoods, to be honest with you,” said Whittaker of Birmingham, whose company, Global Properties Management, is based in Miami.

He spoke to Bridge outside a boarded-up home on Santa Rosa, less than a quarter-mile from the Hunts’ home. Whittaker was raking leaves and supervising a crew of six workers who planned to spend a few weeks rehabbing the home before renting it.

The business model: Spend up to $15,000 renovating each home. Rent them for $850 to $1,000 per month. Sell the homes in bulk to overseas investors in about five years. Stay on as property managers.

Whittaker said his company specialized in high-end real estate in Florida and Houston before focusing on distressed property in Detroit. In the past 13 months, the company has bought a total of about 200 Detroit homes, he said.

Whittaker said he wants “do good and help people” by partnering with a local church to teach renters money management so they can eventually sign land contracts and buy the homes.

“I have a heart. I just don’t look at people and stick them in a home… From a landlord standpoint, I don’t think there’s anyone doing what we’re doing in Detroit,” Whittaker said.

But he said he’s realistic. He expects only 10 to 15 percent of tenants to make the transition to homeowners. Too many have “built up a tolerance to renting,” said Whittaker, who said he grew up in rental homes in Pontiac.

Fading mortgages, uncertain future    

Detroit once had one of the highest rates of home ownership among African Americans nationwide, according to the Urban Institute. Now, it’s majority renters: Since 2000, the percentage of renters has increased to 53 percent from 45 percent, according to the Census.

Among them is Marie Solomon, a grocery cashier who lives on Monica Street, a short walk from Whittaker’s empire. Standing on her porch, she can look out to five open and abandoned homes across the street.

“There’s a lot of areas in Detroit that look like ghost towns… ,” she  said. “The (city’s comeback) is going to help the places that are lively. But the rest of us? Oh, no.”

She pays $450 per month in rent. The house next door sold for $2,500 last year. Cash.

Stare at a map of sales long enough – with mortgages clustered in a few areas, surrounded by a sea of cash sales – and one question arises:

Is this another form of redlining, the pernicious banking practice of denying loans in certain parts of cities, often by race?

“It’s so redlining,” argued Jon Zemke, a Detroit landlord who lives in Midtown.

“Nobody gets a mortgage easy here. I could walk into a Detroit marina this afternoon and get a $100,000 loan for a boat. If I wanted to get a $100,000 mortgage, it would take six months and a colonoscopy.”

He’s joking about the colonoscopy.

Zemke owns dozens of homes and said he finances many with no-interest credit cards. He said he has waited six months for a mortgage because of numerous complications with Detroit real estate.

“It’s not economically viable to issue loans,” said Alanna McCargo, co-director of the Housing Finance Policy Center of the Urban Institute, a Washington, D.C. think tank that has extensively studied Detroit and recently released a report about its housing challenges.

She and others said lending is tight nationwide and Detroit poses numerous additional barriers.

The short list?

Most banks won’t issue mortgages for less than $50,000, which is more than many Detroit homes are worth. Appraising homes in Detroit is hard because property values nosedived after the real-estate crash. Acquiring clear titles necessary for mortgages can be tricky because homes in the city often have liens. Many houses are in such disrepair that making them livable can multiply purchase prices.

There’s more.

Federal regulations after the crash have increased the cost of issuing mortgages. Only 1-in-5 Detroit residents have credit scores high enough to usually get a mortgage, according to data from the Urban Institute.

“There’s no silver bullet for any of this,” McCargo said

“It’s complicated and compounded. It’s a story that needs to continue to be told because we need to be sure we are not leaving people out of the city’s recovery.”

Her group argues that Detroit should duplicate efforts in cities such as Rochester, N.Y., and Cleveland, which have programs and partnerships between government and nonprofits to assemble property and help renters become homeowners.

McCargo said recent programs in Detroit to expand mortgage access are positive steps but need to be increased.

A personal plea, mixed success

Even before he took office in 2014, Mayor Duggan realized the dearth of mortgages was a huge impediment, said Gerson, the land bank chairwoman.

In 2015, he traveled to Denver to the Clinton Global Initiative America to make his case to the former president and leaders of foundations and banks: Low appraisals and the refusal to loan small amounts would kill Detroit, the mayor said, according to Gerson, who attended the conference.

Duggan personally took at least one bank leader on tours of stable neighborhoods in Detroit where lending was impossible, she said.

In “lightning speed,” five banks, community foundations and nonprofits teamed to form the Detroit Home Mortgage program, which removes barriers to lending and issues mortgages for up to $75,000 more than appraised value, Gerson said.

Announcing the program last February, Duggan said the program could fund 1,000 mortgages in three to five years.

A year later, it has closed 29, said Krysta Pate, its director. Participating banks closed another 27 conventional mortgages with people who began the application process but discovered they didn’t need extra money to cover the appraisal gap. She called those numbers a success and predicted they will grow as the program works out its kinks.

Detroit developer Alex Pereira countered that the program is a “great idea” but an “abysmal failure” because it shifts the burden of overseeing rehabs onto home buyers.

The Detroit Home Mortgage program is one the highest-profile of several efforts to stabilize neighborhoods.

Others offer down payment assistance of up to $15,000 and zero percent loans of up to $25,000 for repairs. A land bank-led program, Rehabbed & Ready, repairs and sells homes to boost nearby property values.

Together with nearly 11,000 demolitions since Duggan took office, it’s a targeted approach after years of “scattershot” efforts to help neighborhoods, Gerson said. The city is starting with areas with low vacancy rates and gradually expanding to higher ones, she said.

She acknowledged it’s caused bad feelings in neighborhoods that aren’t included, but said “we are getting to everyone as fast as we can.”

Keep holding on

Help came just in time for LaShelle Breckinridge. Stuck in a land contract in her west side home, she was about to get evicted over a tax dispute with the home’s owner.

She needed $38,000 to buy out the land contract. Three banks turned her down for a mortgage.

The grandmother was about to walk away from the home she said she had paid nearly $30,000 in rent for over the years. She saw a sign advertising the Detroit Home Mortgage program and made a call.

After months of stress, she saved the house by obtaining a mortgage through the program, while also managing to lower her monthly payment to $561 from $850.

“When it was all over, after the closing, I just pulled over to the side of the road and just cried and cried,” said Breckinridge, who works in parking enforcement for the city. “When things look bad or bleak, I just told myself, ‘Hold on. There’s help out there somewhere. You gotta hold on.’”

Deeply religious, she recounted her ordeal in living room that prominently featured the family Bible. It was open to the Book of Job, a story of faith and struggle.