ByGlenn Burleigh , Clayton Evans , Jonathan Ferry , Michelle Witthaus
The flow of capital and credit is to an economy what blood is to the body. If the flow of credit gets cut off, it will decay much like an arm or leg will turn gangrenous without proper circulation. For decades, neighborhoods in parts of St. Louis, particularly in North St. Louis City, have been cut off from the flow of credit, and this has resulted in tremendous disinvestment. Neighborhoods have witnessed business and factory relocations, school closings, residents moving away and properties falling into disrepair as a result of a lack of access to credit. This lack of credit can be traced back to a pre-civil rights era federal government policy, commonly known as redlining. This policy effectively acted as a tourniquet for credit, restricting the flow of funds into certain geographies deemed to be a poor financial risk. Most of these “poor risk” areas happened to also be areas of majority minority populations.
The impact of this policy in St. Louis is evident when you drive through many neighborhoods north of Delmar Boulevard. Red lines on a map once divided these areas from investable areas, and to this day the “Delmar Divide,” which serves as North City’s southern boundary, is a dividing line between the city’s wealthy and poor communities.
Mortgage lending is a critical component of credit access. Without mortgage lending, many who desire to reinvest in communities are unable. Where there is a will, people are left without a way. According to the Home Mortgage Disclosure Act data, only 4% of new home mortgages within the city of St. Louis were issued for homes north of Delmar Boulevard in 2017. This stark reality is a reminder of the deep divides our region faces.
While redlining is a thing of the past, the legacy it has left in its wake is the problem of depressed property values and appraisal gaps. Put simply, mortgage lenders are restricted from lending buyers more money than the appraised value of the house they want to buy. In a healthy market, this restriction makes perfect sense. Why would a bank lend you $150,000 for a $100,000 house? But in a market that has suffered under decades of credit restriction, and subsequent asset depreciation, such a policy prevents using credit to purchase and rehabilitate properties; thus, holding down property values.
A recent Brookings Institution report revealed that undervaluation of homes in communities of color is a nationwide trend that is affecting wealth accumulation for many families. To understand just how this is reflected in our region, the Metropolitan St. Louis Equal Housing and Opportunity Council (EHOC) conducted a follow up investigation in the same vein as the Brookings study. When comparing sale prices for similar-sized homes in neighborhoods with similar median incomes, the investigation found that sale prices in majority black neighborhoods were often half of those in majority white neighborhoods. Based on their findings, EHOC concluded that “This represents a significant loss of household wealth for our region’s black households. It plays a role in continuing the multi-generational cycle that drives a significant portion of the ‘wealth gap’ between black and white households.” This phenomenon has now spread into suburban areas, far beyond the originally redlined neighborhoods.
One thing is clear: The appraisal gap issue is detrimental to community reinvestment. With mortgage lending nearly nonexistent, potential homeowners can normally only purchase homes with cash. This prevents many potential homeowners with good credit from owning a home in disinvested communities. Current homeowners are also negatively affected by the appraisal gap, as accessing financing for home improvements is virtually impossible, thus leading to further degradation of existing housing stock. This vicious cycle of undervaluation, decreased mortgage lending, and home degradation are major contributors to the urban blight we see today.
A new program, the Gateway Neighborhood Mortgage, promises to bring mortgage lending back to undervalued neighborhoods by providing mortgages on properties that cannot be purchased through traditional financing. The program will remove the appraisal gap barrier by providing a second mortgage to qualified borrowers to assist with purchase and renovation of homes in undervalued communities.
Uniquely, the Gateway Neighborhood Mortgage makes available a 20-year fixed first mortgage. Under the program, a second mortgage is provided when the appraisal does not support the purchase and rehabilitation price of a home. The second mortgage will allow up to $75,000 over the appraised value for the purchase and renovation, thereby producing a feasible and worthwhile investment. Participating banks will offer the loan product, providing homebuyers with consistent terms and rates on an affordable mortgage. The sources for the second mortgage are comprised of funds from banks, the St. Louis Development Corporation, and private philanthropic foundations. Homebuyers will also receive homebuyer counseling and project management assistance for the home renovations.
Here are some thoughts on how CDFIs can intervene across the continuum:
The Gateway Neighborhood Mortgage is a distinct market intervention aimed at reinvigorating the housing market and yielding noticeable investment in undervalued neighborhoods. It is an intervention designed to equalize market forces until appraisal values increase and traditional mortgages are once again viable.
As we look to the future of the St. Louis region, we know that our future depends on reinvestment in our communities and in our people. Where St. Louisans have a will, this program will now give them a way. The Gateway Neighborhood Mortgage program aims to prove that all neighborhoods are worthy of investment.