From music to the automotive industry, Detroit captured the world’s attention as a unique symbol of American ingenuity. Eyes are once again on the Motor City, anxious to see how it recovers from ongoing housing challenges and persistent barriers to attracting and retaining residents. The city’s population has shrunk by 25 percent since 2010.
Detroit’s single-family housing finance market is broken. The vast majority of home sales in the city are all cash purchases. While Detroit boasts an abundant and affordable housing stock, qualified homebuyers are largely unable to find mortgages that cover both the appraised cost of the home and the often necessary renovation and repair costs.
But a new CGI Commitment to Action developed through CGI America hopes to be a game-changer for families and homebuyers in Detroit. Today, Clinton Foundation President Donna Shalala joined Detroit Mayor Mike Duggan and leaders from local banks, nonprofit organizations, major foundations, and the real estate industry to announce the Detroit Home Mortgage initiative, a new program to increase homeownership in Detroit. Starting today, it will help qualified homebuyers access mortgages to purchase a home and pay for necessary renovations.
CGI’s collaborative model made it possible for nearly 20 partners spanning multiple sectors to come together to address this critical housing and financing challenge. I spoke with several of the key players about the obstacles to Detroit’s housing recovery, the magnitude of this CGI commitment, and their takeaways for other U.S. cities with similarly distressed housing markets.
Why the urgency to tackle the Detroit mortgage problem now?
To put it plainly, Detroit’s mortgage system needs reinvention.
“For years, it has been nearly impossible for someone wanting to purchase a home in Detroit to get a conventional mortgage because the appraised value is lower than the cost of the house, let alone needed repairs,” said Mayor Duggan. “In 2014, a mere 462 single-family homes in Detroit were mortgaged in 2014. The rest—88 percent—were cash sales.”
The Mayor said that largely because of the broken mortgage market, Detroit has shifted from being a city of owner occupants to a city with a majority of people renting, often paying more that a typic mortgage payment and without building wealth through home equity. “We want to reverse that trend and give people the opportunity to own their own home. Instead of paying a landlord $800 a month, we want Detroiters to own their home and start to build wealth.”
On top of the obstacles to mortgaging a home, financing home repairs is also a daunting feat. “Data show that more than 80 percent of applications in Detroit for home improvement loans were denied,” said Rip Rapson, President and CEO of the Kresge Foundation. “Even though there are plenty of affordable houses across Detroit, many of them need extensive repairs and rehabilitation to become livable.”
Could this be a game-changer in stemming population decline?
Detroit lost more than 160,000 residents between 2000 and 2010. The losses have slowed significantly in recent years, but the lack of mortgages and depressed property values have hindered the city’s efforts at population growth, despite a relatively affordable housing market.
Mayor Duggan believes that the Detroit Home Mortgage program can help to turn this problem around. Under the initiative, qualifying borrowers receive a first mortgage for the appraised value of their house, and a second mortgage up to $75,000 to fill the gap between the appraised value and the cost of necessary renovations to live in the home.
“This program will open a door to homeownership that has been closed to many Detroiters for a very long time,” said the Mayor. “That's a life-changing thing. We truly believe that this will make more people want to purchase a home in Detroit, possibly a vacant home and fix it up. That can help us reverse the 60 year trend of population loss, grow the city's tax base and further strengthen our neighborhoods.”
Lisa Davis, Program Officer for Equitable Development at the Ford Foundation—a key architect in developing this CGI commitment—explained that providing potential homeowners with increased access to financing could allow more people to call Detroit home.
“So many of the transactions in Detroit have been cash investors because mortgage credit has been scarce and values have been depressed by cash investors,” said Davis. “We are hoping this program will help to stop that vicious cycle and allow people who value living in Detroit and want to buy and fix up their own homes to do so. The homeowners who get the mortgages will benefit—but so will longtime residents of Detroit who have seen homes on their block go vacant or to absentee investors simply because people who do want to buy and live in them can’t get financing.”
How can prospective homeowners apply for a mortgage?
“We have tried to make it as easy as possible for homeowners to take advantage of the Detroit Home Mortgage program,” said Frank Altman, president and CEO of Community Reinvestment Fund, USA, which is managing the fund and servicing the second mortgage loans. “All of the participating banks—Huntington Bank, Flagstar Bank, Talmer Bank and Trust, FirstMerit Bank, and Liberty Bank—offer the Detroit Home Mortgage on the same terms and at the same low interest rates, with no bank fees.”
“Applicants must be in good financial standing with a minimum FICO credit score of 640 (or 600 in some cases) and have the adequate income and the required down payment, which can be as little as 3.5%, to meet program requirements,” said Altman. “The home can be anywhere in the city of Detroit and must be the borrower’s primary residence. All DHM borrowers also receive homebuyer and specific program education prior to loan closing.”
How did such a diverse group manage to pull off an initiative this big?
Drawing on the ideas and resources of nearly 20 partners, the Detroit Home Mortgage initiative is a collaboration that is unique in both its scale and its complexity.
“This is a true partnership with government, private enterprise, foundations and community all joining together to find a real solution to the mortgage conundrum facing the citizens of Detroit,” said Gary Torgow, Chair of Talmer Bank and Trust. “The impetus was a real desire to help solve an issue that only could be done through great collaboration and cooperation.”
Altman explained how the ambitious initiative was born. “The idea was conceived at the CGI America conference last June in Denver, when a group of banks, foundations, nonprofits and Mayor Duggan convened to discuss how we all might work collectively to restart the mortgage market in the City of Detroit,” said Altman. He said that CRF, a community development financial Institution (CDFI), has administered similar housing finance efforts in other communities, but never at this scale.
“It is definitely a complex collaboration, but it was vital to involve all these actors to get a program that could operate on a major scale,” said Altman. “We see the collaboration as a jumpstart that will increase sales prices and eventually lead to a healthy mortgage market in the city.”
Meanwhile, partnering foundations provided support in ways that reflect the strength, and new tools, of philanthropy. For example, Kresge is participating as both a traditional grantmaker, but also as an investor through its Social Investment Practice.
“Kresge Foundation is not a financial institution, not a bank, not a lender,” said Rapson. “But in the last few years we’ve embraced social investing as a complement to our ability to make grants. We know that a full suite of capital tools—loans, equity investments, deposits guarantees and grants are necessary to make meaningful headway against complex social problems.”
“As a private foundation, we can take risks that traditional financial actors cannot,” he continued. “In this case, that means offering a guarantee that will help protect home owners in the case of a hardship life event that makes it difficult to repay their second mortgages.”
Reflecting the very team mentality that drove the launch of their CGI America commitment, the partners are quick to praise each other, even across sectors. “I think that the local and regional banks and CDFI’s are the real heroes in this program,” said Davis of the Ford Foundation.
“Institutions such as the Community Reinvestment Fund understand that the Detroit market is coming back and that appraisals are lagging real values for homes. It’s very heartening to work with CDFIs and local banks who understand the challenge and have the dedication to do the work of lending to everyday people.”
What are the implications of this commitment outside of motor city?
While this collaboration is ambitious, it doesn’t have to be unique—or limited to just one city. As the partners carry out their CGI America commitment over the next three years, they will share lessons that are applicable to other markets.
“Unfortunately, there are a number of other cities whose mortgage markets are also broken,” said Altman. “The key to replicating the program elsewhere is to find a similar, community-minded group of banks, foundations and public officials who want to create a similar fund. If this approach can work in Detroit, it can work anywhere.”
People interested in applying for a Detroit Home Mortgage can learn more at detroithomemortgage.org