
Threat to Detroit’s Rebound Is the Mortgage Industry - rmason
https://nextcity.org/features/view/detroit-bankruptcy-revival-crime-economy-mortgage-loans-redlining
======
csense
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.

~~~
jerf
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".

~~~
jlg23
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.

~~~
nsxwolf
Have you ever tried to rehab a house? $20k-$40k for a modest kitchen is not
out of the ordinary.

~~~
jlg23
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).

~~~
jdmichal
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.)

------
FussyZeus
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."

~~~
thesagan
Re: the moving-in "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.

------
hackuser
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](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.

~~~
thesagan
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.

~~~
hackuser
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.

~~~
thesagan
Oh you bet! And I'll probably will need to read that book, as well. Sounds
intriguing.

------
MattRogish
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.

[http://portal.hud.gov/hudportal/HUD?src=/program_offices/hou...](http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203k
--df)

------
33W
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.

------
scottaj2
This title made me laugh, because a big part of downtown Detroit's
revitalization has been driven by Quicken Loans moving jobs and offices there.

Before I read the article I assumed it was some type of criticism of that.

~~~
wesleytodd
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...

------
bluedino
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.

