An assemblage of broken systems has limited mortgage lending in Detroit and a new study finds racial disparities persist for loan seekers amid a shortage of move-in ready housing.
The lack of suitable housing, bias in appraisals and credit barriers are all part of the “complicated picture” of securing a home loan in Detroit, according to a year-long study released Monday by Detroit Future City’s Center for Equity, Engagement and Research.
While lending in the city has improved in the past decade, many areas see few, if any, mortgage loans each year, and subpar credit and unfavorable debt-to-income ratios keep Black buyers even further behind.
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“This lack of mortgage lending limits the wealth-building opportunities for African American Detroiters, who make up nearly 80% of the city’s population, and which, unlike the white and Hispanic populations, have seen a decline in homeownership over the past decade,” the 64-page report says of the majority-renter city. “The lack of lending limits the potential for economic progress in a city that is still among the nation’s most poor.”
DFC President and CEO Anika Goss told BridgeDetroit that the nonprofit has “tried to move the needle for African American and Hispanic home ownership.” Mortgages, she notes, are up after a low slump.
“But if there are areas that we really need to pay attention to, it’s this disparity around denials between white households across income and African American households across income, and across geography,” she said. “There has to be some flexibility in what we use to determine (credit) and access to capital for African American homeowners in urban settings.”
Denial rates
The availability of mortgage credit in Detroit evaporated following the Great Recession. It didn’t begin to recover until the city hit a low of 220 home loans in 2012. By 2020, there were 2,111 home purchase mortgages in Detroit out of an applicant pool of 4,059, DFC’s report notes.
Overall, mortgage application denials have declined in the city from 51% in 2012 to 24% in 2020. And in recent years, more home loans in Detroit have been approved for African Americans due in part to increased lending across a larger area and an improving housing market.
Even so, there was a “significant and persistent” disparity in the denial rate between African American and white mortgage applicants from 2018 to 2020, regardless of income, the DFC report notes.
During that time, high income white borrowers represented about 60% of all home loans in Detroit. Moderate-income African Americans secured about one-third.
In 2020 specifically, upper-income African American applicants were denied more often than moderate-income white applicants, 23% to 20% respectively.
Credit history was the top reason loans were denied for African American borrowers.
LaKesha Hancock, director of housing counseling for U-Snap-Bac, leads the organization’s homebuyer education classes, which draw in 60 to 90 prospective home-buyers per month.
The barriers to homeownership are many, she said, and range from credit shortcomings to high-priced listings that leave purchases out of reach for lower-income Detroiters.
Hancock is among those advocating for broader credit scoring methods that factor in a client’s ability to make rent and utility payments. Some bigger banks and nonprofit lenders are doing it already, she said.
“We need you to look at a client that has been paying $1,500 per month for rent for years on time and use that as a way to qualify them for this $190,000 mortgage,” she said. “They are paying rent that is more than what a $190,000 mortgage will be.”
Lenders, DFC’s study notes, typically ask for a credit score of no lower than 620. In 2021, the Urban Institute in Washington D.C. reported that 52% of Detroit residents had subprime credit scores – under 600.
“Meaning that roughly half of city residents could be denied a mortgage based on their credit scores alone, even if they have sufficient income,” the study reads.
The foreclosure crisis, predatory lending, tax over assessments, redlining and the racial wealth gap have disproportionately impacted households of color and damaged key factors that go into mainstream credit scoring.
“Unless (clients have) all 700 (credit) scores and $5,000 to $6,000 saved and debt-to-income ratios that meet the lender’s requirement and can qualify for upwards of $150,000, it’s not easy. Period,” Hancock said.
She estimated that an average of 55 people went through U-Snap-Bac courses in December, January and February.
“It’s safe to say about 20% go through and complete the process of buying a house,” she said. “What’s in that 20% are people who are ready to purchase within 90 days.”
For the majority of Hancock’s clients, it takes six months or more.
To increase home loans, DFC’s report calls for the development of alternative measures of creditworthiness for prospective buyers, appraisal reforms and efforts to build-up Detroit’s move-in-ready inventory.
“There is not one single action that will improve outcomes for Detroit’s homebuyers, but a number of steps must be taken to reach the goal of improving homeownership opportunities for Detroit residents,” it says. “These solutions must center on racial equity to reduce disparities in lending by race.”
Bad appraisals ‘kill the deal’
Another hurdle to securing home loans in Detroit and nationwide is racial disparities in property appraisals.
Last year, President Joe Biden created the Interagency Task Force on Property Appraisal and Valuation Equity to develop a set of actions to root out racial and ethnic bias in home valuation.
Last week, the task force put out an action plan to tackle the problem. The commitments include increased oversight and accountability for appraisals and plans to cultivate an appraiser profession that is well-trained and “looks like the communities it serves,” the White House said in a statement.
Nationally, only about 1.2% of property assessors are African American, according to the National Fair Housing Alliance.
“If (appraisers) don’t understand Detroit and are not appraising Detroit correctly, then your home – regardless of race – will still be undervalued,” Goss said.
Gordon Hawkins, broker and owner of Hawkins Realty Group, said appraisal discrimination is a real problem in Detroit and he’s seen it kill deals.
“I’ve had several incidents within the last couple of years where appraisers basically just came and said ‘we’re not going to appraise this.’ It was ridiculously low appraisals,” said Hawkins, who sells primarily in the city’s Islandview and Greater Villages.
“It’s an ingrained bias because it’s the city of Detroit,” he said. “They may do it knowingly or they may do it unknowingly. When this happens, it usually kills the deal. Obviously the buyer can’t get the mortgage without the property appraising.”
DFC’s study says building a more diverse population of property appraisers can help eliminate bias that homebuyers in African American neighborhoods can face. Beyond race, appraisers should be familiar with the nuances of Detroit’s housing market, and how the desirability of housing can dramatically change over the span of a few blocks.
‘We’re this far behind’
Goss said there has to be a more intentional approach to what is used to determine credit, and there has to be flexibility.
“A lot of banks are trying to encourage bankability and focus on the unbanked in Detroit and other urban settings, not just here but all over the country,” she said.
Prior to approving home loans, lenders use an underwriting process that dissects a borrower’s income, employment history, credit score and the appraised value of the property. The process helps a lender determine whether it’ll approve a loan and, if so, the corresponding interest rate.
“We need a healthy mortgage capital flow in Detroit. We can’t do that if we’re this far behind in terms of mortgage origination,” she said. “We’re perpetuating inequities across race and geography.”
DFC, in a study last year on the state of economic equity in the city, reported that between 2010 and 2019 Detroit continued to see a decline in homeownership. It reflected the city’s shift from majority homeowners to mainly renter households.
Nonprofits, philanthropic groups, the city proper, and others have introduced programs to boost homeownership.
Quicken Loans, now known as Rocket Mortgage – Detroit’s largest lender – made 313 mortgages in the city in 2020, accounting for about 15% of all loans in Detroit, according to DFC’s analysis of data gathered under the Home Mortgage Disclosure Act.
Flagstar Bank said in an email to BridgeDetroit that it made 702 loans in Detroit from 2018 to 2020, or 52% of its 1,346 applicants.
Some reasons for Flagstar’s denials were low credit scores, buyers with credit issues, insufficient funds for down payments and debt-to-income ratios.
Flagstar, which has five branches in Detroit, said challenges with getting home loans in Detroit also are tied to the condition of the housing stock, a lack of inventory as well as appraisal gaps.
The bank said it offers special lending programs, seminars and financial literacy events in the city to appeal to prospective Detroit buyers.
“We have an employee whose full-time job is to focus on mortgage originations in Detroit who is located in our downtown branch and is trained to help low- to moderate-income borrowers find mortgage programs that will work for them,” the company said in a statement.
Last spring, Rocket Mortgage rolled out and expanded its initiatives to increase access to banking, credit-building opportunities and home financing. Among the programs, they introduced Detroit Home Loan+, which provides a $2,500 lender credit toward closing costs and resources to help buyers become creditworthy.
Rehabbed & Ready, a program developed by the Rocket Community Fund and Detroit
Land Bank Authority, was recognized in the DFC report as a key program for the renovation and sale of vacant land bank homes.
The program, created in 2015, has helped raise home values in four west side neighborhoods: Bagley, Crary/St. Mary, College Park and Evergreen/Outer Drive.
The Rocket Community Fund, City of Detroit and Invest Detroit made a $5 million joint investment into the public-private partnership last spring to expand it into 10 more areas targeted by the city for redevelopment.
Laura Grannemann, vice president of strategic investments at Rocket Community Fund, said Rehabbed & Ready targets houses in neighborhoods with an appraisal gap by typically investing more in repairing the properties than they get back in the sale price.
“What this allows us to do is both address blight issues in the neighborhood, which of course has a ripple effect on homeowners in the surrounding area, but more importantly, it sets the comparables for a neighborhood that other houses can value their home based on,” she said.
In the neighborhoods where Rehabbed & Ready exists, Grannemann said they’ve seen prices stabilize. They have invested in 125 homes and the latest financial commitment seeks to reach 200 more, she said.
Detroit’s Home Mortgage program, a partnership with foundations and banks like Flagstar, helped borrowers purchase homes and offered up to $75,000 more in financing to close appraisal gaps, or for renovations.
Additionally, Southwest Housing Solutions in Detroit provided counseling to 5,000 potential buyers between 2015 and 2019. But only about 525 went on to purchase a house due to credit history, down payment issues or other reasons, DFC’s report notes.
Granneman said Detroit has a long history of systems and policies that have created gaps in who is getting access to loans.
“We see that through property tax foreclosure and a lack of access to home repair for residents and ultimately a lack of financing as well,” she said. “We’re proud of the work we’re doing to fight that cycle.”
Something ‘I can call my own’
Two years ago, Jazlyn Lindsay-Avinger was a recent college graduate with student loans, a new baby and not much credit.
The Wayne State University grad had been living with her mother and was considering renting a home with her then-fiance.
The couple quickly realized a monthly lease would cost them more than homeownership. Her mother was able to get a home with help from the Opportunity Resource Fund, a statewide nonprofit loan fund for single-family mortgages.
Lindsay-Avinger ended up going the same route. She first qualified for about $80,000 but said she couldn’t find a house in an area that she felt safe. The nonprofit helped her boost that to $115,000.
She started looking in July 2020 and closed on a move-in ready, three-bedroom colonial in the city’s Fitzgerald neighborhood that November.
Lindsay-Avinger and her now husband, James Avinger, 29, pay $760 per month, half of what they would have paid to rent, she said. A lot of major lenders, she said, wouldn’t have been able to provide as much flexibility.
“As a younger person, I want to have something that I can call my own,” said Lindsey-Avinger, 28. “I own a piece of property in the city where I grew up. That to me is so important. To secure something for yourself.”
Lindsay-Avinger, her husband, their daughters Joelle, 2, Jordyn, two months, and Avinger’s son, Jaleel Jamison, 8, all live there together.
“I’m literally five streets from my daughter’s Montessori, one mile from my mother and 12 minutes from my job off the Lodge freeway,” said Lindsey-Avinger, a sales representative for AT&T. “It’s a safe and stable home in a great community. We live comfortably every day.”
Christine Narayanan, president and CEO of Opportunity Resource Fund, said the organization dates back to the mid-80s and has been a licensed single-family mortgage lender since 2011.
The nonprofit’s Fresh Opportunity Mortgage makes “character” loans to people like Lindsay-Avenger, who can demonstrate their ability to pay, even with a weak credit history.
Since 2011, Opportunity Resource Fund has originated 109 mortgage loans in Detroit and Pontiac totaling about $5.8 million.
The fund, Narayanan said, took risks with clients who had a bankruptcy in their recent history or medical debts. They also based the ability to pay on a client’s rent, car and utility payments. The program requires homeownership counseling and financial training, pre- and post-purchase.
“We do look at credit scores and we do look at credit history, but we can afford to be more lenient than a traditional bank,” she said. “We’re not a bank. We have a different playing field.”
Narayanan said none of the nonprofit’s Detroit homeowners have been foreclosed on and the organization hasn’t lost a dollar of its investor capital.
‘Nothing is ready’
In 2012, mortgages were limited to a handful of neighborhoods in Detroit. As the market has bounced back, more parts of the city are being targeted by purchasers.
Detroit had mainly African American buyers in the last few years and most of those purchases were concentrated on the city’s northwest side. White buyers have limited much of their home purchases to the greater downtown, riverfront and neighborhoods like the villages and University District, the DFC report notes.
More home loans are being made in Detroit, but some areas have seen little to no activity. In 2020, there were no applications in 46 of the 297 of the city’s census tracts, according to DFC.
“There are a lot of places in the city where there’s just not any activity going on,” said Edward Lynch, senior program manager with DFC’s Center for Equity, Engagement, and Research. “The condition of places matter.”
Part of the issue, said Linda Smith, executive director of U-Snap-Bac, is that in Detroit right now there’s nothing affordable that’s move-in ready.
“Nothing is ready to sell,” she said. “There’s limited stock.”
Hawkins, the real estate broker, who has been selling Detroit homes for about a dozen years, said the situation has created a “housing crisis.”
“It becomes stressful, especially if you are working with buyers. Some of these folks are on a deadline. They have to be out of their homes and don’t know where to go,” he said. “They are looking to you to cure this problem. It’s really insurmountable.”
Grannemann, with Rocket’s Community Fund, said there are a lot of housing investment efforts in neighborhoods across the city, but many are small-scale. She expects in the next six months, between federal COVID relief funding and other sources, there will be significant investments in home repair.
“Everyone realizes that housing quality and housing stock is a huge barrier for our city’s growth,” she said.