The author really wants to turn this into a race thing.
The reality is that these homes are unprofitable investments especially in the short-to-medium term. No sane banker wants to make an unprofitable investment. The only way the investment gets made is someone who gets extra intangible utility from the investment (e.g. they like the neighborhood, close to family, etc.), has a longer time horizon, and lots of extra money to support the short-to-medium term financial costs.
It's not a race thing. It's a money thing -- banks and investors will steer a wide berth around people considering clearly unprofitable investments, so those investments will frequently not get made, and when they do, they will tend to be made by people who are willing to put up their own money.
The article explains it itself, even though it metaphorically apparently doesn't want to listen to itself:
"Should someone take an interest in buying one of these homes, it might be priced as low as $500 or $1,000.... And the cost of rehabbing these cheap houses and making them livable can range from $50,000 to $90,000 for a small bungalow. Renovation will cost more than these homes will sell for."
Emphasis mine.
You simply can't mortgage a house like that, if the owner intends to renovate for living in it. There's no collateral. Of course it's a cash-only deal... what else could it be? What mortgage terms are we condemning the banks for not writing, exactly?
Should the city continue reviving, these property values will go up. Once the property values go up, the banks will be able to have collateral, and mortgages will resume flowing. But it will do all sorts of harm to try to push the banks to short circuit that process. Are we really demanding that banks write mortgages to poor minorities that they will basically have no ability to service if they experience the slightest economic disruption? Is that really helpful to anybody? Aren't we basically still in the recession we created by writing mortgages far in excess of any underlying value?
I'm all for helping the poor, but chaining them with unserviceable debt or forcing the banks to get screwed isn't "helping the poor".
Isn't that exactly the role of a (real estate) developer? To buy up a large amount of land, so that the improved properties therein exist in a neighborhood of similarly-improved ones? So that each one is worth more than if you did this as a one-off?
As I understand it, the reason these will only sell for 90k once renovated is because that house would be an island of desolation. A large-scale developer can fix that.
"Give me some money so I can create value here" is what you say to investors, not creditors, and putting someone in that role will make them want a much bigger upside than they'd get from a secured loan.
Right, but the point is, it's wrong to say that "the mortgage industry" is holding this up if there's another group that would be more than willing to invest the money.
The big developers all have their own business models that have been iterated on to maximize profit. For example, one might look at coastal areas to turn into resorts. They have teams of people that examine all the angles. How amenable is the local government to outside investment, can they get tax breaks, looking at the land itself to identify issues with building.
I believe Detroit is a veritable no-man's land so far as this kind of risk management is concerned. Cities are usually prime targets for developers, one can assume a fairly efficient market as far as real estate development is concerned. That there's no action can reasonably indicate that there's no potential there, and not that nobody's looked at it.
The poor weren't forced out by the government. They're forced out by shifting economic tides, causing them to be foreclosed on, and their home then sold to someone on better economic footing.
To blame the government is silly, unless you want to blame them for not implementing robust safety nets. That'd be a fair argument.
50k to 90k for the renovation of bungalow? These numbers just don't make sense. 90k buy you a mansion in developing countries and even in western Europe you can get a small (say 100 square meters) pre-fab stone house, minus floors and appliances.
I think the only valid point this article makes is "mortgage is hard to get at the moment". Yes, any kind of (sane, i.e. no loan shark thing) credit is currently hard to get anywhere in the first world.
My guess is that those numbers are for "taking the entire house pretty much down to its foundation (maybe saving just the frame) and paying market rates for materials and labor to rebuild it". Which is, unfortunately, what a lot of these houses take. Motivated buyers can invest the labor themselves, but materials are unavoidable and not cheap.
It may not feel like you're really doing that much to maintain your house when you live in one, but they can go downhill fast when unoccupied.
No, I have not. But I helped creating a lot of not-for-profit events and setting up some hacker spaces out of rotten spaces. 20k for a kitchen? Seriously? I call that bullshit. Every chef who would dare to ask for that would have gotten the finger. You can create a functional kitchen for 0.5 - everything above that is luxury, which I'd love to have (I'm a passionate amateur chef) - but I'd never ever would invest 20k into that upfront.
FFS, one of the most well known places in Berlin was started with not more than 12 crates of beer with a board on top to simulate a bar (Bar 25).
I'd love to know where you're buying from, that you can get a range, oven, refrigerator, cabinets, and counter for $500. (I'll be generous and leave the dishwasher off.)
I have an East SF Bay developer friend who told me in California you can't build a house for less than about $150k (just the structure) because of permitting costs and building codes. It doesn't surprise me major renovations for a Detroit bungalow are in the $50k - $90k range.
While I was getting similar inklings from his writing the real issue reveals itself throughout the article.
Detroit's recovery is hindered by government regulation at city, county, state, and federal levels. At the end they mention Detroit cannot get it MSAs redrawn until 2023!!! Really?
Throw in your concern, change is only happening because private corporations, individuals, and even the union, are losing money trying to jump start an area and having to do so because the regulatory structure is working against recovery.
Note to government, if you want to end blight you are going to have to vacate government debts against the property with regards to the new owner. Rules would have to be put in place to prevent obvious gaming of the system, but to saddle buyers with costs they didn't not incur only sabotages your stated goal.
tl;dr the regulatory structure is sabotaging Detroit's recovery, not the mortgage industry.
The main reason the homes are unprofitable investments is 'a race thing'. Metro Detroit has had a stable population for the last 50 years— the reason so many houses in Detroit are abandoned is because of near-total white flight.
I was just reading [1] about how Detroit's original decline was due, to a significant degree, to the mortgage industry:
Through a system called Red-Lining in the mid-20th century, which the federal government actively facilitated [2], banks refused to lend to any residents of neighborhoods with even a few residents who were of 'undesireable' races, including of course, blacks. This wasn't a conspiracy theory; it was all done in the open. Consequences:
1) Even for whites happy to integrate: A few black families move in, credit dries up, nobody can sell or improve their homes, and your housing values plummet.
2) And even worse for blacks: Imagine trying to buy a house without credit. Now imagine doing that coming from the rock-bottom financial circumstances imposed on most blacks in the mid-20th century.
3) Blacks who did obtain homes couldn't get home improvement loans, resulting in deterioration of their homes and a reputation among whites for not caring about their properties.
4) The effect on supply and demand: It forced a very large and growing number of black residents into a small, artificially limited number of rentals (they could only live in certain neighorhoods, remember), driving up rental rates and driving down the quality of their residences (landlords could fill their properties without doing maintenance). Even more perversely, even if someone would sell them a house, blacks had to pay more than whites for the same house - the black bidder had far fewer options. Again, remember the people in the worst financial circumstances were the ones facing these problems.
Back then bankers said the same thing: They are bad credit risks.
----
[1] The Origins of the Urban Crisis:Race and Inequality in Postwar Detroit by Thomas J. Sugrue: A prize-winning scholarly history. Highly recommended; it changed dramatically how I understood racial issues and urban development (http://press.princeton.edu/titles/10233.html)
[2] It was called 'red-lining' because the Federal Home Loan Association (I think I have the right agency) would literally draw red lines around these neighborhoods and identify them to banks as the worst possible credit risks.
It was as if Detroit was hit by a perfect storm of boom-town, bust-town with all the sexy variables thrown in.
What you described is a big part of it. And being mostly a one-industry town was another part, in an age of rapid globalization, and with strong unions making Detroit the more expensive place to produce.
Moreover, the core of Detroit was sliced up by an extremely extensive network of freeways, and in patterns where you get a fairly intense breakup of neighborhoods when you compare to other northern cities of the time who were building expressways through theirs. Detroit's postwar suburbs came calling for all of those automobile-owning middle-classers back in the D.
Also, most Detroit housing was quickly-built wooden construction, which are a lot more vulnerable to breaks in maintenance. While brick buildings can wait "on inventory" much longer, much of Detroit's wooden stock was expensive to maintain, and didn't last long waiting "on inventory" to be put into re-use. Michigan suffers dramatic freeze-thaw cycles, rain/snow/ice, and loose ground that can bust-up under-maintained buildings in no time.
Another, a perhaps seminal event, at least for people living in city, were the 1967 riots (which you could connect to all that redlining that went on). All through the central city. That was the "last straw" for most everyone who could leave and wanted to leave. Many people I know personally remember as a kid moving out not long after '67. And the race riots seemed to have made race relations worse in the region, in my unsubstantiated opinion.
I think you'd find the book valuable; it has a lot to say about the riots. Race relations were bad before them: For example, blacks moving into previously all-white neighborhoods could face angry mobs who threw things through their windows and burnt things on their front lawns.
I was going to say that in this day and age of transparency, reporting, open information and Edward Snowden, how would a large bank even risk racial profiling in loan denials?
Then I remember I got a $63 check in the mail a few months back from Chase, for a lending discrimination class action lawsuit.
That is exactly what I was thinking....they didn't even mention Dan Gilbert, even though it is clear they should have interviewed him as the driving force behind so much of the revitalization and the chairman at a mortgage company...
The way that it divides into the race deal makes this easy play for the Author to make it sound like racism at work but to be blunt, all the facts point to the lower end of the economic spectrum just not having shit for assets to put up on the mortgage. You're going to a bank, asking for $100 grand to buy a thousand dollar house and out $90k in reno into it? What is the bank borrowing against? The house won't be worth $91k all said and done, and renovation is never a sure thing especially when dealing with dilapidated houses.
Detroit has spent a very long time digging the hole their in, it's going to take an even longer time to fix it.
Also, who the hell is moving to Detroit? I've never heard a peep about this "trend."
There's been an uptick of post-college types moving in the midtown area, and professionals in the downtown area -- but it's pretty much limited to those two areas, a tiny portion of the city as a whole.
It'll be interesting to see how the midtown-downtown area might (or might not) become more a populated semi-region of it's own, compared to the rest of the city (sans a couple of nice remaining neighborhoods) which still looks very empty.
If you dig a bit on Google you'll find some press on it, mostly local. I think the some bigger papers did a bit or two about it after the bankruptcy.
It's interesting to watch what will happen given the state of the city.
Having just gone through this in the last year, I can say there is a FHA 203(k) Rehab Loan/Insurance which is designed to do what the author desires. However, it's not exactly easy to do (a full rehab doesn't qualify for the "streamline" version), but it's a thing.
I'm not an underwriter so I'm not sure if the proverbial $1,000 house + $90k in renos is something they'd cover, but since the author doesn't even mention the 203k I'm left wondering if it was researched at all.
In addition to the other comments, mortgages under $50k might be very hard to write legally. For the most part, the origination, appraisal, and closing fees for a $50k loan and a $250k loan should be very similar.
Let's assume $2000 in fees associated with these two loans. Both borrowers area offered a 4% interest rate over 30 years. On the $250k loan, the APR is 4.0662%. On the $50k loan, 4.3280%. 35k, 4.4665%.
I'm not an expert in the law, but these APRs, or the ratio of fees to loan may trigger anti-predatory lending laws.
32 comments
[ 3.4 ms ] story [ 68.1 ms ] threadThe reality is that these homes are unprofitable investments especially in the short-to-medium term. No sane banker wants to make an unprofitable investment. The only way the investment gets made is someone who gets extra intangible utility from the investment (e.g. they like the neighborhood, close to family, etc.), has a longer time horizon, and lots of extra money to support the short-to-medium term financial costs.
It's not a race thing. It's a money thing -- banks and investors will steer a wide berth around people considering clearly unprofitable investments, so those investments will frequently not get made, and when they do, they will tend to be made by people who are willing to put up their own money.
"Should someone take an interest in buying one of these homes, it might be priced as low as $500 or $1,000.... And the cost of rehabbing these cheap houses and making them livable can range from $50,000 to $90,000 for a small bungalow. Renovation will cost more than these homes will sell for."
Emphasis mine.
You simply can't mortgage a house like that, if the owner intends to renovate for living in it. There's no collateral. Of course it's a cash-only deal... what else could it be? What mortgage terms are we condemning the banks for not writing, exactly?
Should the city continue reviving, these property values will go up. Once the property values go up, the banks will be able to have collateral, and mortgages will resume flowing. But it will do all sorts of harm to try to push the banks to short circuit that process. Are we really demanding that banks write mortgages to poor minorities that they will basically have no ability to service if they experience the slightest economic disruption? Is that really helpful to anybody? Aren't we basically still in the recession we created by writing mortgages far in excess of any underlying value?
I'm all for helping the poor, but chaining them with unserviceable debt or forcing the banks to get screwed isn't "helping the poor".
As I understand it, the reason these will only sell for 90k once renovated is because that house would be an island of desolation. A large-scale developer can fix that.
I believe Detroit is a veritable no-man's land so far as this kind of risk management is concerned. Cities are usually prime targets for developers, one can assume a fairly efficient market as far as real estate development is concerned. That there's no action can reasonably indicate that there's no potential there, and not that nobody's looked at it.
To blame the government is silly, unless you want to blame them for not implementing robust safety nets. That'd be a fair argument.
Not that cars aren't still built in Detroit, but there was still a lot of supply chain that got outsourced. It's called the rust belt for a reason.
I think the only valid point this article makes is "mortgage is hard to get at the moment". Yes, any kind of (sane, i.e. no loan shark thing) credit is currently hard to get anywhere in the first world.
It may not feel like you're really doing that much to maintain your house when you live in one, but they can go downhill fast when unoccupied.
40k for a kitchen, 10k each for a couple bathrooms, another 10k for paint and flooring, some landscaping, maybe roof or siding, and there you are.
FFS, one of the most well known places in Berlin was started with not more than 12 crates of beer with a board on top to simulate a bar (Bar 25).
Detroit's recovery is hindered by government regulation at city, county, state, and federal levels. At the end they mention Detroit cannot get it MSAs redrawn until 2023!!! Really?
Throw in your concern, change is only happening because private corporations, individuals, and even the union, are losing money trying to jump start an area and having to do so because the regulatory structure is working against recovery.
Note to government, if you want to end blight you are going to have to vacate government debts against the property with regards to the new owner. Rules would have to be put in place to prevent obvious gaming of the system, but to saddle buyers with costs they didn't not incur only sabotages your stated goal.
tl;dr the regulatory structure is sabotaging Detroit's recovery, not the mortgage industry.
Through a system called Red-Lining in the mid-20th century, which the federal government actively facilitated [2], banks refused to lend to any residents of neighborhoods with even a few residents who were of 'undesireable' races, including of course, blacks. This wasn't a conspiracy theory; it was all done in the open. Consequences:
1) Even for whites happy to integrate: A few black families move in, credit dries up, nobody can sell or improve their homes, and your housing values plummet.
2) And even worse for blacks: Imagine trying to buy a house without credit. Now imagine doing that coming from the rock-bottom financial circumstances imposed on most blacks in the mid-20th century.
3) Blacks who did obtain homes couldn't get home improvement loans, resulting in deterioration of their homes and a reputation among whites for not caring about their properties.
4) The effect on supply and demand: It forced a very large and growing number of black residents into a small, artificially limited number of rentals (they could only live in certain neighorhoods, remember), driving up rental rates and driving down the quality of their residences (landlords could fill their properties without doing maintenance). Even more perversely, even if someone would sell them a house, blacks had to pay more than whites for the same house - the black bidder had far fewer options. Again, remember the people in the worst financial circumstances were the ones facing these problems.
Back then bankers said the same thing: They are bad credit risks.
----
[1] The Origins of the Urban Crisis:Race and Inequality in Postwar Detroit by Thomas J. Sugrue: A prize-winning scholarly history. Highly recommended; it changed dramatically how I understood racial issues and urban development (http://press.princeton.edu/titles/10233.html)
[2] It was called 'red-lining' because the Federal Home Loan Association (I think I have the right agency) would literally draw red lines around these neighborhoods and identify them to banks as the worst possible credit risks.
What you described is a big part of it. And being mostly a one-industry town was another part, in an age of rapid globalization, and with strong unions making Detroit the more expensive place to produce.
Moreover, the core of Detroit was sliced up by an extremely extensive network of freeways, and in patterns where you get a fairly intense breakup of neighborhoods when you compare to other northern cities of the time who were building expressways through theirs. Detroit's postwar suburbs came calling for all of those automobile-owning middle-classers back in the D.
Also, most Detroit housing was quickly-built wooden construction, which are a lot more vulnerable to breaks in maintenance. While brick buildings can wait "on inventory" much longer, much of Detroit's wooden stock was expensive to maintain, and didn't last long waiting "on inventory" to be put into re-use. Michigan suffers dramatic freeze-thaw cycles, rain/snow/ice, and loose ground that can bust-up under-maintained buildings in no time.
Another, a perhaps seminal event, at least for people living in city, were the 1967 riots (which you could connect to all that redlining that went on). All through the central city. That was the "last straw" for most everyone who could leave and wanted to leave. Many people I know personally remember as a kid moving out not long after '67. And the race riots seemed to have made race relations worse in the region, in my unsubstantiated opinion.
Then I remember I got a $63 check in the mail a few months back from Chase, for a lending discrimination class action lawsuit.
Before I read the article I assumed it was some type of criticism of that.
Detroit has spent a very long time digging the hole their in, it's going to take an even longer time to fix it.
Also, who the hell is moving to Detroit? I've never heard a peep about this "trend."
There's been an uptick of post-college types moving in the midtown area, and professionals in the downtown area -- but it's pretty much limited to those two areas, a tiny portion of the city as a whole.
It'll be interesting to see how the midtown-downtown area might (or might not) become more a populated semi-region of it's own, compared to the rest of the city (sans a couple of nice remaining neighborhoods) which still looks very empty.
If you dig a bit on Google you'll find some press on it, mostly local. I think the some bigger papers did a bit or two about it after the bankruptcy.
It's interesting to watch what will happen given the state of the city.
I'm not an underwriter so I'm not sure if the proverbial $1,000 house + $90k in renos is something they'd cover, but since the author doesn't even mention the 203k I'm left wondering if it was researched at all.
http://portal.hud.gov/hudportal/HUD?src=/program_offices/hou...
Let's assume $2000 in fees associated with these two loans. Both borrowers area offered a 4% interest rate over 30 years. On the $250k loan, the APR is 4.0662%. On the $50k loan, 4.3280%. 35k, 4.4665%.
I'm not an expert in the law, but these APRs, or the ratio of fees to loan may trigger anti-predatory lending laws.