3 creative ways financial institutions are addressing Detroit homeownership disparities

When Darius Jones and his fiancée, Aleja Reed, learned they were going to have a child late last year, they started looking to move out of their small apartment in Taylor. The couple were eager to find a bigger space to raise their new child but felt their options were limited. 

Jones is a 26-year-old musician and audio engineer who works at a Detroit-area music store. Although he and Reed had discussed the idea of purchasing a home, itDarius Jones (Steve Koss) wasn't something they believed they would be able to do anytime soon. Even with the more affordable homes Jones and Reed had scoped out, securing the finances for a down payment in a few months' time looked to be a big obstacle.

Then the couple heard that First Merchants Bank, a regional lending institution, offered mortgages through a special program designed to help first-time homeowners with issues just like they were experiencing. Known as the Next Horizon Mortgage program, it allows eligible new homeowners who meet certain geographical and income requirements to sign mortgages with terms designed to be more accessible than those typically found in the industry. Prospective homeowners involved with the program can qualify for grants to help cover costs. As a member institution of Federal Home Loan Bank of Indianapolis (FHLBank Indianapolis), First Merchants Bank can also offer eligible homebuyers an additional $5,000 in down payment assistance through the federal home loan bank's Homeownership Opportunity Program. 

Jones got in touch with First Merchants Bank after being referred by U-SNAP-BAC, a Detroit-based nonprofit he'd gone to for home counseling advice. Through the Next Horizon program, he and his fiancée were able to sign a mortgage on a $100,000 home in Northwest Detroit.

"Darius had a very high credit score, so that wasn't an issue," says Tonjola Cole, the First Merchants Bank community home loan officer who worked with Jones and Reed. "We were able to give Darius 100% financing (no down payment) with no mortgage insurance."

The couple signed the papers for their new home, a three-bedroom ranch near Seven Mile Road and Evergreen Road, this May. In the end, Jones and Reed didn't have to pay any down payment for their new home due to grants — a $5,000 Next Horizon grant and an additional $5,000 grant from FHLBank Indianapolis — and even got $500 back due to a reassessment after inspection. Instead of putting that money in the home, they used it to purchase home security equipment and items for their new child.

Jones loves the new place, which he calls "perfect for its price range." As a musician, he's excited to have room for a home studio where he and his friends, who he says are mostly singers and musicians, can “come over and jam” without having to worry about noise complaints.

"It is incredible. I'm used to living in my apartment," he says. "Now I have a spot to actually store my equipment, test my equipment, without it being a hassle." 

Reducing the homeownership gap

Headquartered in Muncie, Indiana, First Merchants Bank has been expanding into Michigan for the last few years and recently merged with Level One Bank. After offering Next Horizon mortgages in Indiana for some time, it introduced the program around a year-and-a-half ago in Southeast Michigan. It's now available to eligible first-time home buyers of any income level in numerous locations in the region. Detroiters can get connected through a variety of local nonprofits that partner with First Merchants Bank, including Wayne Metro, Bridging Communities, U-SNAP-BAC, National Faith, and Southwest Housing Solutions.

Next Horizon is more flexible with its requirements than traditional mortgage programs. It considers applicants with credit scores of 600 and higher and supports non-traditional methods of credit history like rent and utility payments. Eligible borrowers can qualify for up to 100% financing and low monthly payments and are not required to purchase private mortgage insurance. 

Next Horizon also offers up to $7,500 in payment assistance grants to help borrowers cover down payment and closing costs. Prospective homeowners can also stack these funds with other grants, including a down payment grant of up to $5,000 — the one Jones and Reed took advantage of — that's available through FHLBank Indianapolis.

First Merchants Bank established Next Horizon to make homeownership more accessible to those who may have difficulty buying a home through more conventional routes. 

"We understand that, no matter what income, you may have had things happen," says Jadira Hoptry, a Senior Vice President and Director of Community Lending and Development for First Merchants Bank. "We want to build responsible lending. We're not just trying to close a mortgage. We're really looking for sustainable long-term homeownership."

The program is also aimed at reducing the homeownership gap, a term that refers to racial disparities in homeownership. According to Hoptry, the homeownership gap is "one of the main challenges, not only in Detroit but in the majority of communities First Merchants Bank serves.”

Although the federal Fair Housing Act of 1968 forbids race-based discrimination in housing, inequalities persist in real estate markets across the country. According to U.S. Census figures, African American homeownership at all income levels stood at 44.1% nationally in December 2020, as opposed to 74.5% for whites. Closer to home, an Urban Institute report released last September found prospective Black homeowners in Metro Detroit were rejected at a rate of approximately 40%, compared to a rate of 18% for white applicants.

Homeowners in Detroit have also had to deal with the impact of the housing market collapse of the mid-aughts. Between 2005 and 2015, there were more than 65,000 mortgage foreclosures in the city. Over the last year, the market has shown some improvement, however, with homeowners edging out renters by a slim majority. According to a recent U.S. Census estimate, a majority 51.3% of Detroit housing units are now owner-occupied after a decade of dominance by rental units. That's a meaningful jump from 47.8% in 2019, but still down from the 55% share homeowners held in 2000. And while the percentage of Black homeowners increased in Detroit from 47% to 50% between 2019 and 2021, it's worth noting that white and Hispanic homeownership rose at 6%, double that rate, during that same period. 

Hoptry believes addressing the equity issues raised by statistics like these to be both a smart business move and a good thing for the communities her bank serves.

"Closing the homeownership gap is something that aligns with our goals in terms of revenue generation," she says. "And all the statistics show that homeownership is one of the key factors for gathering [family] wealth. If we are the institution helping individuals become homeowners, everybody wins." 

Darius Jones and Aleja Reed bought their home with the help of First Merchants Bank's Next Horizon program. (Steve Koss)Helping renters become homeowners

First Merchants isn't the only organization using innovative tactics to increase homeownership in the city. Southwest Housing Solutions, a Detroit nonprofit focused primarily on affordable rental housing, has spent the last several years supporting an initiative called the Newberry Affordable Homeownership Program, which is dedicated to helping renters become owners.

The project is named for the Newberry residential community, which is part of Southwest Detroit's Chadsey-Condon neighborhood. Newberry is made up of 60 two-story colonial homes located in an eight-block area between Michigan Avenue, Buchanan Street, 28th Street and 32nd Street. 

The subdivision was originally built in 2002 by a developer that relied on Low-Income Housing Tax Credits (LIHTC) to offer rental housing at affordable prices to low- to moderate-income families. Several years ago, Newberry's original sponsoring agency went out of business, and in 2017 the homes were sold by an investor to Southwest Housing Solutions for a nominal fee. The nonprofit originally planned on working with conventional financial institutions to secure mortgages for those tenants, but it soon found the situation was more complicated than anticipated.

"What we learned very quickly was that the tenants that occupied these properties were not traditional borrowing candidates because of poor credit, lack of credit, lack of financial assets, any number of challenges to the traditional underwriting system," says Southwest Housing Solutions executive director Tim Thorland. "The other thing we found was the overwhelming majority of these tenants did not envision homeownership as a path to secure housing in their lifetimes."

Thanks to a $2.5 million grant from the Sam L. and Judith G. Yaker Fund, Southwest Housing Solutions was able to start offering mortgages directly to tenants, and developed a nontraditional plan to make homeownership a reality for them.

All homebuyers receive down payment assistance for the Newberry houses, which are currently valued at $69,000 each, and those who qualify are eligible for up toHomes in Southwest Detroit's Newberry neighborhood. (Steve Koss) $20,000 in down payment assistance through a conditional grant. That grant is forgiven after five years to discourage house flipping. Program participants sign 15-year mortgages — currently at a 4.75% interest rate — with mortgage payments, taxes and insurance often totalling less than their monthly rent payments. 

Prospective homeowners are required to take homebuying classes and to engage with credit counselors to improve their credit ratings. After signing, their mortgages are serviced by Federation of Appalachian Housing Enterprises (FAHE), a professional financial services nonprofit. 

Tiffany Johnson, who works for a local auto company, is the latest resident to sign a mortgage through the Newberry Program. She lives with her two daughters, fiancé and brother in a three-bedroom home in the residential community. A long-time renter, she signed her mortgage in late September.

"I love my home, that's why I wanted to buy it," she says. "I love the neighbors. They watch out for everybody."

Johnson is also happy to have her home as an asset that she can pass onto her children and use to build generational wealth. As for her path to becoming a homeowner, she found everything to be relatively straightforward. 

"You have to take the homeowners class first," she says. "Then after you finish the class, you have to start the process of signing the document. They're easy to deal with, as long as you pay on time. It was a real easy process."

Today, 50 of Newberry's 60 homes are now owned by the families that live in them. All of these homeowners have been people of color. And looking over how the program has fared in general since its introduction, Thorland is pleased with how everything has turned out.

"We were taking a risk in doing this," he says. "But it's been almost four years, and nobody in the program has defaulted. There have been no foreclosures." 

While there have been a few delinquencies, they've been resolved fairly quickly, Thorland says. He attributes the success of the program to good communication, trust-building between his organization and prospective homebuyers, and excellent service management by FAHE. 

For its part, FAHE has been so impressed with the Newberry initiative that they've purchased 36 of the mortgages from Southwest Housing Solutions portfolio, allowing the nonprofit to recoup $1.2 million it hopes to invest in similar projects in Detroit.

Thorland estimates there are about 1,500 rental homes in the city, similar to those in Newberry, previously supported by LIHTC subsidies that no longer exist. Southwest Housing Solutions is eager to collaborate with other parties to help some of them become permanent homes for their current tenants.

"How often do we get an opportunity to create 1,500 homeowners in the city, in the context of affordability?" asks Thorland. "We know we have renters in those homes that are desiring of homeownership. We know we have potential partnerships with other organizations who would like to see the units transition from tenancy to ownership."   

Katrina Johnson is one of many people who made the jump from renter to homeowner through Southwest Housing Solutions Newberry Program. (Southwest Housing Solutions)Opportunities for building homeownership

Lake Trust Credit Union has also been working on a similar project in Detroit. Headquartered in Brighton, Michigan, Lake Trust is a not-for-profit credit union and a designated community development financial institution (CDFI). It's also a part owner of a credit union service organization called Mortgage Center, which serves as its lending arm. 

Working in partnership with a local nonprofit agency, which has yet to publicly come forward, Lake Trust is currently developing its own initiative to help renters to become homeowners. The new program has the potential to establish up to 120 new homeowners in the Motor City. It would involve existing tenants pre-selected by the credit union's nonprofit partner. Prospective owners would need to take homeownership classes, go through an application process, and save $100 for 12 months for down payment.

The process would be similar to a conventional mortgage, but the requirements would be adjusted to make the program more accessible for prospective homebuyers who might face barriers related to income, access to resources, appraisal restrictions or other issues. 

"These are mortgages that we will hold internally. Because that's the only way we're going to get it done," says Andrea Mosher, Senior Vice President of Lending for Lake Trust Credit Union.

Although the credit union has its side of the program in place, its partner is still finalizing details on its end and has not yet determined a launch date. Beyond that specific project, Lake Trust has also been speaking to other potential partners regarding similar initiatives in Detroit and around the state.

"This program is designed to lift some of those hurdles that exist today," says Mosher. "We would welcome working with other agencies that would be willing to do some of this work, even if it's not rent-to-own but just mortgaging new properties."

Reflecting on the state of the housing market, Mosher believes more work needs to be done creating similar programs that recognize the challenges certain socioeconomic groups and geographic regions face. While that may require more out-of-the-box thinking from financial institutions, she feels it's necessary to grow homeownership in an equitable way. 

"The mortgage industry has been so regulated for so long, and there's such a focus on the ability to repay and protect the consumer that we have unintentionally kept people from becoming homeowners," says Mosher. "As great as all the development that's been going on in Detroit has been, there's still areas where there is a lot of opportunity. But you've got to get past some of those [conditions] that are traditionally required for homeownership." 

All photos by Steve Koss unless otherwise noted.

This is part of the Block by Block series supported by FHLBank Indianapolis that follows minority-driven development in Detroit.

Read more articles by David Sands.

David Sands is a Detroit-based freelance writer. He's covered the news for Huffington Post Detroit as an assistant editor and worked as a staff writer for the transportation news site Mode Shift. Follow him on Twitter @dsandsdetroit.