Dearth of Credit Starves Detroit’s Housing Market

DETROIT—Alter Road runs northwest along this city’s border. To the east is Grosse Pointe Park, an upscale suburb dotted with grand old mansions built in the auto industry’s heyday. To the west is the city of Detroit, lined with abandoned houses and empty lots.

On the east side of the street, getting a mortgage to buy a home is a breeze. On the west side, it is hardly worth trying.

Detroit is making a comeback after years of decline that led to a bankruptcy filing in 2013. But large swaths of the city are left behind, starved of the housing credit needed to revive them. No purchase mortgages were made last year in almost a third of Detroit’s census tracts, and fewer than five each in another third, according to data from LendingPatterns.com, a mortgage-data analysis tool.

The impact runs disproportionately along racial lines in the majority Black city. Detroit’s Black residents are largely shut out of access to financing, making it tougher to attain homeownership, the key to building wealth for most Americans.

Nonprofits, governments and corporations are trying to channel money back into the city’s neighborhoods. But making mortgages in Detroit is a convoluted task. The dearth of credit is largely a consequence of battered property values plus a commercial reality that depresses them further: Lenders can’t earn money on tiny mortgages, so they don’t make them.

Unfinanceable houses then go unsold, and their value sags still more. In Detroit, entire neighborhoods are trapped in this cycle of languishing property values and decay, their residents unable to access the tools needed to break it. The average home is worth roughly $400,000 in Grosse Pointe Park. Across Alter Road in Detroit, entire blocks could sell for less.

“Detroit is a hyperbolic example of the ways that systems can fail in terms of housing,” said Laura Grannemann, who oversees philanthropic work at the parent company of Quicken Loans Inc., which is the nation’s largest mortgage lender by dollar amount lent and is based in Detroit.

Less than a quarter of Detroit home sales were financed by mortgage loans last year, the smallest share in the 50 biggest U.S. cities, according to an analysis by Attom Data Solutions, a property-information provider.

For the city’s residents, it is a familiar story, now with a new dynamic. In neighborhoods where racist redlining policies once made it nearly impossible for Black Americans to get a mortgage, access to affordable credit and the wealth-building potential of homeownership remain elusive.

The mortgages that are made inside Detroit’s borders go disproportionately to white borrowers. Whites, who make up less than 10% of the city’s population but often are concentrated in areas like downtown where investment in reviving property values, obtained 39% of mortgages last year. Black people make up roughly 80% of the population and got 51% of the city’s mortgages.

A failure to revitalize the city beyond its center is an obstacle to Detroit’s ambitious comeback plans. The money flowing toward reviving Detroit misses many of its neighborhoods, residents say. As a result, the city is home to fancy condo developments in some places and dilapidated houses in others.

“You can go down one block and it’s nice. You can go down the second block and they’re all vacant,” said Linda Smith, executive director of U-Snap-Bac, a nonprofit promoting economic growth on Detroit’s east side.

The problem is worsened by lenders tightening credit to deal with the economic fallout of the coronavirus pandemic, which has hit Black Americans especially hard. The dearth of mortgage credit pushes the city’s Black residents into a parallel universe of financing options that offer fewer protections than a traditional home loan.

Alicia Lurry didn’t apply for a mortgage when she was ready to buy in 2018. Instead, she signed a seller-financed deal to purchase a three-bedroom brick house with a brown-and-yellow awning on the west side of Detroit for $35,000.

It wasn’t until she fell behind on payments that she learned she wasn’t actually buying the home. The contract she signed left her responsible for upkeep and property taxes, but she won’t get the deed until the final payment is made.

Black Americans have always struggled to access affordable credit in Detroit. Starting in the Depression era, maps of Detroit were awash in red lines singling out Black neighborhoods as risky places for lenders to make home loans.

By 1968, when the Fair Housing Act outlawed redlining, the city was highly segregated, and much of the region’s wealth had been pushed outside Detroit borders, according to Thomas Sugrue, a historian at New York University and author of “The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit.”

All the while, the auto industry, hoping to expand its business and lower costs, shifted production out of Detroit. By the time General Motors and Chrysler filed for bankruptcy reorganization during the financial crisis, many of Detroit’s blue-collar jobs were long gone. A city population once as high as 1.8 million had fallen to around 700,000.

The housing collapse in the financial crisis hit Detroit especially hard. In the years leading up to it, lenders had made subprime loans to many Detroit residents previously shut out of the mortgage market. That briefly narrowed the homeownership gap between Black and white residents in metropolitan Detroit, before a wave of foreclosures drove down property values and tore up neighborhoods.

The Black homeownership rate across metro Detroit, including suburbs, was 31 percentage points lower than the white rate in 2007, the year before the financial crisis. By 2018 it had grown to 37 percentage points, according to data from the Urban Institute, a nonpartisan policy-research group. Detroit has the second biggest such gap after St. Louis among U.S. metro areas with at least half a million Black residents.

The subprime-lending debacle left many residents hesitant to take on debt to buy property.

Vincent Orr ’s grandmother lost her home to foreclosure in 2007, when he was a teenager. Mr. Orr, a production supervisor at Fiat Chrysler Automobiles NV, has bought two houses in northwest Detroit for cash at auctions run by the Detroit Land Bank Authority, a public repository of properties that are vacant or seized through tax foreclosure.

The agency has been unloading hundreds of houses a month to the highest bidder. Prices start at $1,000, but buyers must agree to fix them up.

Mr. Orr paid $2,100 in 2017 for a house for his mother. The roof was caved in, but he liked the brick work on the outside. He spent months redoing the electrical and plumbing, replacing windows and doors and putting up drywall.

Then he did it again, buying the house next door for himself last year for $1,200. He is nearly finished fixing it up, too. He has used about $100,000 of savings, plus a good bit of elbow grease, to complete the renovations.

“Cash is king because nobody can deny you,” said Mr. Orr, who is 30. “The houses that require a mortgage, a lot of people are reluctant.”

A lot of lenders are reluctant, too. Fewer than 1,700 mortgages were extended last year in the city of 670,000 people, according to a LendingPatterns.com analysis of first-lien purchase mortgages for single-family, primary residences using Home Mortgage Disclosure Act data. That is about a sixth as many as in Oklahoma City and Las Vegas, cities with smaller populations.

The low property values are the primary culprit. Lenders can earn so little profit on small mortgages—those of around $70,000 or less—that they often find it not worth the trouble to make them. Small-dollar home lending has been on the decline across the country, a shift that housing analysts say disproportionately affects people of color.

“This is a big issue of our time,” said Alanna McCargo, co-director of the Urban Institute’s Housing Finance Policy Center. Increasing the volume of smaller mortgages “would go a long way to reducing the racial homeownership gap,” she said.

What’s more, in neighborhoods where few mortgages exist, there is a greater risk a home won’t appraise for as much as the purchase price, which typically causes a loan application to fall through.

Low or nonexistent credit scores are another hurdle. LaKesha Hancock, a housing counselor and program manager at U-Snap-Bac, said many of her clients aren’t able to develop the banking relationships needed for a qualifying credit score because there are too few financial institutions in much of the city.

In Wayne County, which includes Detroit, census tracts where more than half of the people are minorities contain 26% of the county’s bank branches while housing 45% of the county population, according to the National Community Reinvestment Coalition, a nonprofit focused on community wealth-building.

When Kelly Brown bought a fixer-upper several years ago for roughly $5,000, she went to a bank where she had an account seeking a personal loan for about $15,000. The banker told her he couldn’t approve it because of her subprime credit score, Ms. Brown said. She said she thinks it was low because she didn’t have many financial accounts in her name and hadn’t attempted to build her credit.

Instead of borrowing, she used her savings to rehabilitate the house, which she bought in an annual Wayne County auction of foreclosed homes.

She went on to buy more. Though her credit score improved, she paid with cash, completing renovations as she saved, which took as long as a year. Ms. Brown, who is 36, now owns four properties, living in one and renting out three.

“I’m not looking for the system to help, because I know it’s not going to,” she said.

Residents unable to access the mortgage market miss out on federal benefits designed to spur homeownership. Through the government-sponsored mortgage entities Fannie Mae, Freddie Mac and Ginnie Mae, the U.S. ensures that lenders are made whole on most mortgages, a policy that enables lenders to spread payments over 30 years at low interest rates. Mortgages also erect obstacles to quickly kicking out home purchasers who fall behind on payments.

Some groups are working to fix the issues that keep lenders from making more mortgages.

Quicken Loans founded a program with the Detroit Land Bank Authority to renovate some properties the Land Bank takes over. Quicken fronts money for repairs and then provides financing to interested buyers. Having one mortgaged property in a neighborhood will lead to more, the reasoning goes.

“If we were to just write more mortgages in Detroit, I think we would be setting people up for failure,” Quicken’s Ms. Grannemann said.

The project isn’t self-supporting. Mortgage lenders say revitalizing neighborhoods this way typically means putting more money into fixing up those first homes than they can eventually be sold for.

Quicken has found that 87% of homeowners in the city who are tax-delinquent self-identify as qualifying for exemption from property taxes because their income is below a poverty threshold. It is trying to teach them how to take advantage of the exemption and avoid tax foreclosure, a common pitfall in Detroit. More than a third of city properties have gone through tax foreclosure in the past 15 years, some more than once, according to Loveland Technologies, a data firm that tracks land parcels.

United Community Housing Coalition, a nonprofit, works with the city to buy some homes headed for the foreclosure auction and sells them back to their occupants, often for the few thousand dollars or so of back taxes, payable over about a year.

Real-estate investors also frequent the auction. Among them is Detroit Property Exchange, the company Ms. Lurry turned to when she was ready to buy in 2018.

It finances purchases itself, offering residents one of the less-desirable options for Detroit properties that can’t be mortgaged.

Ms. Lurry put $2,000 down on the $35,000 house and agreed to pay $700 a month for 90 months, which included 10% interest, much higher than the prevailing mortgage rate. She moved in at night, changed the locks, then shared a celebratory moment with her daughter.

She subsequently missed some payments and the company started the eviction process. Detroit Property Exchange said she was renting the house with an option to buy. Ms. Lurry thought she already owned it. “Congratulations on your recent purchase,” her paperwork from the company said. “You are now the OWNER.”

The company said in a statement provided by an attorney that Detroit Property Exchange helps customers become homeowners in a city that traditional lenders avoid.

Ms. Lurry, 52, lost her job as a pastry cook when the coronavirus shut down the casino where she worked. Her lawyer, Steve Knox at nonprofit Michigan Legal Services, spent months negotiating a new arrangement. She expects to enter into a new contract that will make it more difficult for the company to remove her from her home and will lower her interest rate. It will now be 8.5%, still roughly three times the rate of a standard 30-year mortgage.

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