Community Developments Investments (February 2018)

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Barry Wides, Deputy Comptroller for Community Affairs, OCC

It takes imagination, innovation, resourcefulness, and persistence to transform a neighborhood. It also takes a huge investment of financial resources and an available supply of mortgage credit. This edition of Community Developments Investments discusses how the availability of home rehabilitation financing is critical to the success of initiatives to stabilize and revitalize older communities, particularly those that are severely distressed.

Changing demographics and market forces are driving up overall demand for rehabilitation financing, which totaled $220 billion in 2015.¹ Today's housing rehabilitation trends are fueled by strong sales of existing homes, which continue to be a more affordable option than new homes.² Older housing stock typically needs systems upgrades or accessibility improvements so elderly homeowners can age in place.

Getting the right public-private partnerships in place to finance rehabilitation of older, more affordable homes is particularly important for minority and younger home buyers. At 42.2 percent in 2016, which is slightly below the 1994 level, the homeownership rate for black households has declined sharply since 2004.³ Household formation rates for younger adults remain at post-recession lows, in large part because lower incomes and high home prices are keeping this group from taking the step to buy a home.⁴

In stronger housing markets, homeowners can rely on home equity loans or cash-out refinance mortgages to finance repairs or major renovations. Home buyers can use purchase and rehabilitation loan programs, such as the Federal Housing Administration (FHA) Section 203(k) program or Fannie Mae's HomeStyle mortgage. These financing solutions, however, may not address the need for rehabilitation financing in more highly distressed cities or blighted neighborhoods.

Many older industrial cities suffer from disinvestment, depopulation, and unemployment or underemployment. The economic downturn inflicted a devastating blow on neighborhood health as concentrations of mortgage foreclosures contributed to declining home values.⁵ Once foreclosure looks imminent, homeowners often neglect maintenance, and some abandon the property. Vacant homes deteriorate further after foreclosure. The character of some neighborhoods changed as cash purchases by investors won out over offers from potential homeowners.

A variety of market conditions frustrates revitalization in distressed communities and has combined to bring mortgage financing to a near halt in some cities. Distressed sales, including short sales and foreclosures, have negatively affected home values. Limited property sales in distressed areas make it hard for lenders to get accurate appraisals. The cost to rehabilitate a property can exceed the post-renovation market value, particularly in low-value markets. Some lenders are reluctant to make low-balance loans, even if a borrower is creditworthy.

Although this paints a somber picture, in many cities there is active interest in rehabilitating structurally sound but aging or deteriorated housing stock.⁶ Housing that is suitable for rehabilitation is a potential source of affordable housing and, as such, is a valuable community asset. Leveraging that asset, however, requires available financing.

To address some of the financing barriers just described, the Office of the Comptroller of the Currency (OCC) recently issued "OCC Bulletin 2017-28, Mortgage Lending: Risk Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization." This guidance, which aims to spur revitalization in distressed communities, describes how national banks and federal savings associations (collectively, banks) can develop mortgage programs for originating permanent first-lien mortgage loans with a loan-to-value ratio at origination that exceeds 100 percent and without mortgage insurance, readily marketable collateral, or other acceptable collateral. In addition, banks are working on innovative programs to ameliorate the impact that concentrated foreclosures have had on communities.

This newsletter highlights successful rehabilitation financing initiatives that banks have developed to revitalize and stabilize communities. Banks are devoting resources and expertise to offer refinance loan programs such as the FHA 203(k) and Fannie Mae HomeStyle programs. Partnerships with banks have enabled community-based organizations to acquire foreclosed properties to rehabilitate for sale as affordable housing. The article by TD Bank explains how the bank partnered with a community organization and used historic tax credits plus city and state funds to finance the rehabilitation of affordable housing for a mixed-income population. An article by U.S. Bank highlights one such partnership. U.S. Bank coupled a local down payment assistance program with its rehabilitation loan program and partnered with a housing counseling organization to ensure that the program's low- and moderate-income buyers were well-prepared to manage the responsibility of owning an older home.

Many of these initiatives to increase revitalization and stabilization of communities are just the types of activities that the Community Reinvestment Act encourages banks to invest in every day. There are plenty of opportunities through programs such as these for banks to rejuvenate cities, neighborhood by neighborhood, and help stabilize communities home by home, family by family.

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