ST. LOUIS • 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 fiancée, 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’d have to bring more cash to the table — cash they didn’t have.
Cox said he made several frantic calls, trying to line up a mortgage, but banks don’t lend more than homes are worth, even if they’re in desirable, stable neighborhoods like Old North.
For Phil and Cheryl Valko, the sellers, the low appraisal was doubly frustrating. They’d spent years turning the home on North Market Street into a showcase property — one featured repeatedly on neighborhood house tours — and had interested buyers.
“It was so eye-opening,” Phil Valko said. “We 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.”
Ultimately, Cox and Yung turned to family to help finance the purchase. The couple, who moved to St. Louis from Springfield, Ill., say they were lucky to be able to lean on others for help. “What’s really unfortunate is more people are not in that situation,” Cox says.
What Cox, Yung and the Valkos experienced is widely known in the real-estate business as the “appraisal gap” — the difference between the replacement cost of a structure with all of its improvements and what the market says it’s worth.
That gap affects huge swaths of St. Louis where there’s lots of attractive housing stock — classic 19th-century and early 20th-century brick homes with irreplaceable architectural features — 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’s 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 St. Louis neighborhoods. It’s starting small — and the challenges are daunting.
‘Reinvestment ... is critical’
The housing dilemma St. Louis faces was many years in the making, and the result of a long pattern of discriminatory lending.
For generations, banks in St. Louis 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’s Home Owners Loan Corp. assigned grades to neighborhoods based on risk. Areas with older housing stock — those that tended to be populated by poorer households, including African Americans — received the lowest grades, and were deemed “hazardous” and colored red on maps.
Fast forward 80 years, and the maps don’t look much different.
In 2015 and 2016, of the 41 areas in the St. Louis 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 St. Louis, in which “north St. Louis” became shorthand for black St. Louis, also was a product of public policy.
Although St. Louis’ short-lived housing segregation ordinance didn’t 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’t 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’s goals to combat disparity and reduce the glut of more than 7,000 vacant houses.
“Reinvestment in historically disadvantaged communities is critical to overcoming the lasting effects of discriminatory housing policies and practices,” Krewson told the Post-Dispatch.
Still, while the city supports the program, its support is indirect and relatively small. The St. Louis 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 St. Louis-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 “get around the banking rules” that don’t allow banks to make mortgages for amounts higher than appraised values, said Glenn Burleigh, spokesman for the Metropolitan St. Louis 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 “some firm and some soft” 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 St. Louis 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 St. Louis Development Corp., other partners in the project include the St. Louis 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’t necessarily mean making two payments. At least that’s what the Gateway Neighborhood Mortgage program designers intend.
“We’ve been extremely focused on consumer accessibility and experience,” Burleigh said. “Hopefully, customers will only cut one check and the bank and the CDFI can do the transfer.”
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.
“Right now, there’s no credit flowing,” Burleigh said. “Your pool of potential customers is tiny. As that pool expands, it’s going to allow appraisals to rise.”
For a problem of this scale, the change won’t happen overnight.
“It’s a slow and complicated process, but it’s really the only method we’ve seen across the country to infuse purchases and rehabs, and do its best to try to raise those appraisals,” Woelfel said.
A local appraiser said it’s not appraisal standards that need to change; rather, lenders need to become more proactive.
“Value has to be based on things that have actually happened; how much have properties in the area sold for,” said Lawrence Netterville, a licensed appraiser of 40 years. “That establishes limits in certain areas.” 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.
“When 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,” Woelfel said.
A ready market
Despite the challenges neighborhoods north of Delmar Boulevard face, there’s still a market for housing there.
The latest data for the St. Louis area from real estate brokerage website Redfin shows the median time on market for a single-family home is 63 days.
In two north St. Louis 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’s interest in north St. Louis real estate, it hasn’t 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.
“You have to do this, in my opinion, in a concentrated area,” Brown said. “An area that is slated for development or there’s something that is going on now with development, that if you make these loans in these areas there’s a real opportunity for appreciation to take place.” 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 St. Louisans who want to stay in their homes to do so. Currently, many can’t 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’t get a home renovation loan, often referred to as a 203k loan, because of the lack of comparable sales in the area.
“This product (Gateway Neighborhood Mortgage) would then allow the existing seller to get some cash out of the home and make the sale happen,” 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.
“That’s $50,000 in wealth that is now created,” Brown said.