B of A Backs Zero-Down Loan Program to Help Rebuild Detroit

A nonprofit lender is trying to revitalize Detroit by offering mortgages at 150% of a home's value so that a potential buyer would have enough money to both purchase a home and fix it up.

The loans have no down payments, closing costs or fees, and are being offered at below-market and at fixed rates with 15-year or 30-year terms — but only to buyers who plan to live in the homes.

The "Detroit Neighborhood Initiative" is the latest attempt by Bruce Marks, CEO of the nonprofit Neighborhood Assistance Corporation of America, known as Naca, to help low-income borrowers become homeowners.

Bank of America last year committed $10 billion to Naca's mission and the Boston-based nonprofit intends to use a chunk of those funds to underwrite and originate the Detroit loans. Bank of America has agreed to buy the loans and hold them on balance sheet for life, which helps the Charlotte bank meet its Community Reinvestment Act requirements.

The loan program, which has the backing of Detroit's Mayor Mike Duggan, is available for the purchase of any home in the city. On privately owned homes, buyers can receive financing for up to 110% of a home's assessed value. Homes purchased through the Detroit Land Bank — a public authority that manages tens of thousands of vacant properties — can be financed at up to 150% of the home's value.

If the program works as promised, it could provide a nationwide template for home lending in cities such as Baltimore and Ferguson, Mo., that have large swaths of vacant homes, Marks said. A recent workshop on homeownership drew 7,000 potential borrowers, he said.

Many homes in Detroit do not qualify for conventional financing because they do not appraise for the sale price. As a result, "working people in Detroit cannot get a loan," Marks said.

Craig Fahle, a spokesman for the Detroit Land Bank, said fewer than 400 homes in Detroit were sold last year in which buyers took out a traditional mortgage, though roughly 10,000 properties sold for cash.

"Property values in some surrounding neighborhoods have fallen so dramatically that you can't get the (comparable sales) to get the mortgage written," Fahle said. "A lot of people want to buy houses and restore them here but they don't know if they can do it and make any money."

The National Association of Realtors has not reported quarterly sales in Detroit since the fourth quarter of 2012 because the sample size "is too small to accurately report median sales data," said a spokesman Adam DeSanctis.

Home prices in Detroit peaked in 2003 at a median sale price of $173,000. By late 2012, the median price was $66,700, the last period for which data was available, he said.

A major problem is that Detroit has been plagued by high property taxes that are out of kilter with market values. Nearly half of Detroit's homeowners failed to pay their tax bills in 2013, according to the Detroit Free Press. Homes that are repossessed or abandoned end up at the land bank, which is now auctioning three homes a day.

Under the Naca program, a buyer who purchases a house for $5,000 that needs $55,000 in renovations would qualify for a $60,000 mortgage, even if the property assessed at $40,000, Marks said. The homebuyer would benefit because their monthly mortgage payment would be about $400, compared to average monthly rents of $600 to $800, he said.

The nonprofit fully underwrites the loans by looking at a borrower's payment history over the past two years. Borrowers' credit scores will not be considered, but potential homebuyers must be employed or have a steady income and be current on existing bills for a year.

Since 1995, Naca has originated 60,000 home loans and well below 1% have gone into foreclosure, Marks said.

Ed Pinto, a housing critic at the conservative American Enterprise Institute, said one concern with the Detroit program is that buyers will be underwater from the get-go, so it could take them a long time to build equity.

"The consumer is put in a situation where they will stay underwater a long time if house prices don't go up," he said. He added that buyers would be better off with 15- or 20-year loans because they'd start paying down the principal sooner than they would with a 30-year mortgage.

Ken Thomas, an independent bank consultant, economist and CRA expert, recently sold his uncle's home in Detroit near 8 Mile Road for $15,000. The sale to a local resident fell through and the property went to a Canadian buyer who planned to flip it.

"Detroit is like a lost city, and if ever there was a case for community reinvestment, this is it," he said.

He went so far as to say B of A should be given double CRA credit for investing in a loan program that is "innovative, creative and flexible."

On the 150% loan-to-value loans, B of A would hold the first lien of up to 110% and the remainder would be held by a certified community development financial institution, according to B of A spokesman Terry Francisco. He added that it has been company practice to keep Naca loans on its balance sheet.