ST. LOUIS 鈥 The young couple really wanted the rehabbed brick row house, one of the oldest residences in the neighborhood. But there was a problem.
The two-story house, which was listed for $210,000, appraised at just $155,000.
Given its condition, Travis Cox, 31, and his fianc茅e, Bri Yung, 25, thought the asking price was reasonable. They loved the refinished hardwood floors, new fixtures and ample natural light.
The low appraisal, though, meant they鈥檇 have to bring more cash to the table 鈥 cash they didn鈥檛 have.
A series looking at the consequences of decades of disinvestment in 50度灰视频. See all related stories at聽stltoday.com/tippingpoint
Cox said he made several frantic calls, trying to line up a mortgage, but banks don鈥檛 lend more than homes are worth, even if they鈥檙e in desirable, stable neighborhoods like Old North.
For Phil and Cheryl Valko, the sellers, the low appraisal was doubly frustrating. They鈥檇 spent years turning the home on North Market Street into a showcase property 鈥 one featured repeatedly on neighborhood house tours 鈥 and had interested buyers.
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鈥淚t was so eye-opening,鈥 Phil Valko said. 鈥淲e had three offers from the market at or above $200,000, and then essentially, someone shows up, walks around the house for 10 minutes, and in doing so wipes out a considerable amount of value on our property.鈥
Ultimately, Cox and Yung turned to family to help finance the purchase. The couple, who moved to 50度灰视频 from Springfield, Ill., say they were lucky to be able to lean on others for help. 鈥淲hat鈥檚 really unfortunate is more people are not in that situation,鈥 Cox says.
What Cox, Yung and the Valkos experienced is widely known in the real-estate business as the 鈥渁ppraisal gap鈥 鈥 the difference between the replacement cost of a structure with all of its improvements and what the market says it鈥檚 worth.
That gap affects huge swaths of 50度灰视频 where there鈥檚 lots of attractive housing stock 鈥 classic 19th-century and early 20th-century brick homes with irreplaceable architectural features 鈥 but few lenders, if any, willing to finance a purchase or improvements. The gap is a disincentive to people who might otherwise invest in marginal neighborhoods, and part of a dynamic that feeds into the city鈥檚 vacancy and abandonment problem.
Recognizing that something needed to be done, a group of banks and housing nonprofits joined forces last year to develop a new loan product designed to reestablish a credit market in distressed areas.
Modeled on a similar effort in Detroit, another Rust Belt city hit hard by property abandonment, the fruit of those efforts is the new Gateway Neighborhood Mortgage.
Proponents say the program, expected to launch this summer, holds the promise of helping change the trajectory of some struggling 50度灰视频 neighborhoods. It鈥檚 starting small 鈥 and the challenges are daunting.
鈥楻einvestment ... is critical鈥
The housing dilemma 50度灰视频 faces was many years in the making, and the result of a long pattern of discriminatory lending.
For generations, banks in 50度灰视频 and other major cities denied loans in certain neighborhoods, usually majority African American, in a practice known as redlining. The term is believed to have originated in 1930s-era New Deal programs designed to thwart residential foreclosures and promote homeownership through low-interest, self-amortizing loans. The government鈥檚 . Areas with older housing stock 鈥 those that tended to be populated by poorer households, including African Americans 鈥 received the lowest grades, and were deemed 鈥渉azardous鈥 and colored red on maps.
Fast forward 80 years, and the maps don鈥檛 look much different.
In 2015 and 2016, of the 41 areas in the 50度灰视频 metro area where lenders denied every request for a mortgage loan, the population is majority African American in more than half of them, according to Home Mortgage Disclosure Act data. In most neighborhoods where no one applied for conventional mortgage loans, the population was also majority African American.
The extreme segregation in housing in 50度灰视频, in which 鈥渘orth 50度灰视频鈥 became shorthand for black 50度灰视频, also was a product of public policy.
Although 50度灰视频鈥 short-lived housing segregation ordinance didn鈥檛 survive a U.S. Supreme Court ruling in 1917, segregation still persisted through the use of racially restrictive covenants that kept whites from selling property to nonwhites. In 1948, the Supreme Court ruled in Shelley v. Kraemer that those covenants violated the U.S. Constitution, and couldn鈥檛 be enforced by state or federal courts. It would take another 20 years before racially restrictive covenants were outlawed by the Fair Housing Act.
Overcoming that legacy helps explain why City Hall is throwing its support behind the Gateway Neighborhood Mortgage. Mayor Lyda Krewson, when approached by housing advocates about the project in early 2018, agreed it aligned with her administration鈥檚 goals to combat disparity and reduce the glut of more than 7,000 vacant houses.
鈥淩einvestment in historically disadvantaged communities is critical to overcoming the lasting effects of discriminatory housing policies and practices,鈥 Krewson told the Post-Dispatch.
Still, while the city supports the program, its support is indirect and relatively small. The 50度灰视频 Development Corp., at a special meeting on Tuesday, unanimously approved a one-time $100,000 contribution to the fund.
How it works
The program will work this way: Gateway Neighborhood Mortgage makes two loans to qualified homebuyers. The first will cover the cost of the home up to the appraised value, like a normal mortgage loan would. The second covers the appraisal gap.
The first mortgages will be originated by five local banks on a rotating basis. The second will be made by Great Rivers Community Capital, a Community Development Financial Institution and a lending subsidiary of 50度灰视频-based Justine Petersen. CDFIs, which are certified by the U.S. Department of the Treasury, provide credit and other financial services to disadvantaged communities.
The two-loan structure helps 鈥済et around the banking rules鈥 that don鈥檛 allow banks to make mortgages for amounts higher than appraised values, said Glenn Burleigh, spokesman for the Metropolitan 50度灰视频 Equal Housing and Opportunity Council.
The second mortgage comes from a pool of about $2 million in investments, which Justine Petersen and the Gateway Neighborhood Mortgage steering committee are still raising. Another $1 million will cover loan loss reserves and operational costs of the program. The fund is expected to originate 60 of the second mortgages over a three-year period, said Sherri Flanigan-Vazquez, chief operating officer at Justine Petersen.
Beyond owning the CDFI, Justine Petersen will also provide pre-purchase counseling and homebuyer education, among other services, to borrowers.
The mortgages will require a minimum 620 credit score with no maximum income requirements. Borrowers need to be able to provide a 3 percent down payment. Some borrowers, depending on income, may qualify for assistance with down payments and closing costs. All borrowers, however, must contribute a minimum of $1,000 toward the down payment.
So far, about $1 million in 鈥渟ome firm and some soft鈥 commitments has been secured for the second mortgage fund, said Nikki Woelfel, vice president of community development at Carrollton Bank and board member for the Metro 50度灰视频 Community Reinvestment Act Association. Carrollton Bank is one of five banks that will originate first mortgages. The other four are Central Bank, Enterprise Bank & Trust, Great Southern Bank and Simmons Bank.
In addition to the banks, Justine Petersen, EHOC and the 50度灰视频 Development Corp., other partners in the project include the 50度灰视频 Community Reinvestment Association, Health Equity Works and Legal Services of Eastern Missouri.
The groups that put the product together hope to formally launch it in late summer, but the timing will depend on when the full $3 million is in place.
Having two mortgages doesn鈥檛 necessarily mean making two payments. At least that鈥檚 what the Gateway Neighborhood Mortgage program designers intend.
鈥淲e鈥檝e been extremely focused on consumer accessibility and experience,鈥 Burleigh said. 鈥淗opefully, customers will only cut one check and the bank and the CDFI can do the transfer.鈥
Long-term goals
Backers of the Gateway Neighborhood Mortgage program hope a new burst of lending activity will help address, over time, the overall problem that created the need for it.
鈥淩ight now, there鈥檚 no credit flowing,鈥 Burleigh said. 鈥淵our pool of potential customers is tiny. As that pool expands, it鈥檚 going to allow appraisals to rise.鈥
For a problem of this scale, the change won鈥檛 happen overnight.
鈥淚t鈥檚 a slow and complicated process, but it鈥檚 really the only method we鈥檝e seen across the country to infuse purchases and rehabs, and do its best to try to raise those appraisals,鈥 Woelfel said.
A local appraiser said it鈥檚 not appraisal standards that need to change; rather, lenders need to become more proactive.
鈥淰alue has to be based on things that have actually happened; how much have properties in the area sold for,鈥 said Lawrence Netterville, a licensed appraiser of 40 years. 鈥淭hat establishes limits in certain areas.鈥 The value determination must be objective, he said, without any consideration of the general lending atmosphere or other outside factors.
The Gateway Neighborhood Mortgage is designed to do as Netterville suggested and allow banks to take risks, though calculated, and with a safety net.
Woelfel understands the tough situation faced by appraisers.
鈥淲hen you work in distressed markets with a lot of foreclosures and vacants, and few or no traditional mortgage sales, appraisers have to rely on limited data,鈥 Woelfel said.
A ready market
Despite the challenges neighborhoods north of Delmar Boulevard face, there鈥檚 still a market for housing there.
The latest data for the 50度灰视频 area from real estate brokerage website Redfin shows the median time on market for a single-family home is 63 days.
In two north 50度灰视频 ZIP codes, the median days on market is twice that number. Those ZIP codes include the 10 city neighborhoods that together account for more than half of all vacant buildings in the city. In four other ZIP codes north of Delmar Boulevard, houses were listed on median between 38 and 60 days.
While there鈥檚 interest in north 50度灰视频 real estate, it hasn鈥檛 exactly been an easy sell for Realtors when they know clients will struggle to get financing.
Gail Brown, real estate agent and owner of Brown-Kortkamp Realty and at-large member of the Affordable Housing Commission, said the Gateway Neighborhood Mortgage can help her sell homes.
Though agents cannot steer interested buyers to one neighborhood or another, the program will have the best chance of succeeding with clustered investments.
鈥淵ou have to do this, in my opinion, in a concentrated area,鈥 Brown said. 鈥淎n area that is slated for development or there鈥檚 something that is going on now with development, that if you make these loans in these areas there鈥檚 a real opportunity for appreciation to take place.鈥 Neighborhoods such as Dutchtown, West End, Fountain Park and Lewis Place, where development is ongoing, are good candidates.
Most importantly, Brown said, the new loan product provides opportunities for 50度灰视频ans who want to stay in their homes to do so. Currently, many can鈥檛 get financing for renovations.
Recently, Brown listed an 1,800-square-foot, two-bedroom, two-bath home in the Fountain Park area for $25,000. A buyer wanted the home but couldn鈥檛 get a home renovation loan, often referred to as a 203k loan, because of the lack of comparable sales in the area.
鈥淭his product (Gateway Neighborhood Mortgage) would then allow the existing seller to get some cash out of the home and make the sale happen,鈥 Brown said.
If a buyer puts $100,000 into a property and surrounding properties develop alongside it so that the property appreciates to $150,000, the goal of the mortgage product will be achieved.
鈥淭hat鈥檚 $50,000 in wealth that is now created,鈥 Brown said.