Doing the undoable deal

Banks find ways to rebuild neighborhood housing stock

David Fettig | Editor

Published July 1, 1995  | July 1995 issue

Nancy Stephenson, a former Helena Fed branch director and executive director of the Great Falls, Mont., Neighborhood Housing Service (NHS), remembers one student of NHS's home financing class who was so excited and nervous about the next step in a pending loan deal, that she called her banker at home one night after 11 p.m. to ask the question: What next?

That eagerness typifies the type of client served by NHS, says Stephenson, who calls them "pretty tough souls." In many cases they are divorced mothers with good jobs, adequate credit for an FHA loan and the determination to make it on their own. "These people are good credit risks," she says, citing NHS's national default rate of just 1.7 percent.

NHS was established by Congress in 1978 to revitalize older urban neighborhoods. Currently, more than 180 organizations serve not only city neighborhoods, but also states, counties and rural communities. And one of the most important elements in the success of these local neighborhood organizations is the active involvement of a bank or other financial institution. In the Twin Cities, many financial institutions participate with NHS, either by donating cash to the executive office or by working directly with the four neighborhoods (two in Minneapolis, two in St. Paul).

The involvement of an active community group is often important for banks that hope to implement a successful special home lending plan. When Gary Beatty of First Bank System, national manager for community lending, worked on a needs assessment of First Bank's housing markets, he determined that NHS was a good fit for the bank's efforts.

When Pat Hanson, president of community development for Norwest Bank Minnesota, started the bank's Community Home Ownership Program five years ago in the Twin Cities, she enlisted the services of the Home Ownership Center's counseling agencies to help educate first-time home buyers.

NHS's Stephenson says the Great Falls banks have been very helpful in that group's efforts to revitalize the city's central neighborhood. "They have a tremendous input," she says, offering advice, technical support and, most importantly, providing financing for home improvement.

Needs assessment

The idea for Norwest's Community Home Ownership Program originated about six years ago in Des Moines, and the program has grown to include every community or region where Norwest owns a bank. No two programs are necessarily alike; for example, in Des Moines, the bank employs income limits, and when the program was started in the Twin Cities, Norwest Bank Minnesota decided not to apply income limits to applicants so as to encourage economic diversity and growth among the city's many neighborhoods, Norwest's Hanson says. (There are, however, limits on the amount of mortgage debt.)

When Hanson and her colleagues established the Community Home Ownership Program in the Twin Cities in 1990, they used 1980 Census data to determine the target areas for the program; when 1990 Census data became available, they applied the same criteria to Minneapolis and St. Paul neighborhoods and found that the target area had grown to include a large portion of both cities. At one point, the city of Minneapolis asked that the program be uniformly applied to the whole city, but Hanson says there are still many areas where the current mortgage limit of $110,200 would disqualify the available housing stock.

Many financial institutions have developed special home lending programs over the years, Hanson says, because they have done needs assessments on their market areas; also, the secondary mortgage markets have become more open in recent years to these types of mortgage products, which has made it easier for financial institutions to make higher debt/lower down payment loans. Hanson says that if the secondary markets continue to accept these types of special mortgage loans, it may someday mean that programs like Norwest's may not be necessary. "But we anticipate [it] will be continuous," Hanson says.

When Norwest announced its ownership program for the Twin Cities, it set a loan pool of $10 million for the program, but as the bank prepares for its five-year anniversary celebration of the program this fall, it has about $83 million in loans and could exceed $100 million this fall. Hanson says there may come a time when Norwest will have to consider a ceiling to the program, but she adds that a $15-billion asset bank can handle a lot of special mortgage loans. Also, she says, Minneapolis and St. Paul neighborhoods continue to benefit by the program—as does Norwest. "Really, why should we limit it?"

One of the big lessons that Norwest Bank Minnesota has learned so far is that many of its ownership program home buyers are not only first-time home owners, but first generation homeowners, meaning that they haven't grown up in a culture of property ownership and may not completely understand what such ownership entails, Hanson says. Most of Norwest's delinquency problems occur under those circumstances, she says, so the bank has recently begun to require home ownership counseling for all first-time buyers. Also, during the initial years of the program, the bank applied more lenient measures of credit acceptability—overlooking prior credit problems, bankruptcies or missed child support payments. But the bank has since begun taking a closer look at credit history when considering a new applicant.

Education of mortgage applicants is one of the most important aspects of its business, Twin Cities NHS officials say. Classes have long been required for NHS credit applicants, says the Twin Cities NHS executive director, Jim What. "They don't just walk in for a loan and leave to buy a house."

NHS's classes not only involve financial education, but also teach potential borrowers how to maintain a home. Many of the properties in the Northside NHS in Minneapolis, for example, need to be refurbished before they meet mortgage conditions. NHS fills a gap between the loan applicant and the bank, Northside executive director Rony Davis says, by providing education and getting rehab financing for properties. In Northside's early years it averaged about 10 to 20 loans annually; last year it did almost 400 loans for over $11 million. Half of those loans were for purchase, half for home improvement.

As Northside's client list grows, the improvement in the neighborhoods is clearly visible. One neighborhood, Willard Hay, is considered completely renovated, Davis says. But there is still much work to do in all four of the Twin Cities NHS areas—Northside and Southside in Minneapolis, Dayton's Bluff and West Side in St. Paul—and FBS's Beatty thinks that the local NHS organizations are in a good position to ensure that the all the neighborhoods are eventually improved to the residents' satisfaction. "They are probably the most focused organization when it comes to revitalizing neighborhoods," Beatty says.

That's why FBS chose to work with NHS in 1992, following the bank's needs assessment of its Twin Cities' markets, Beatty says. Since then, FBS's involvement with the group "has started to snowball," he says. In partnership with FBS Mortgage, Southside and Northside have had 1,400 families graduate from their home buyer education classes; of those graduates, 253 families have used FBS Mortgage's Home Advantage purchase/rehabilitation program to buy houses.

FBS, like Norwest, has extended its homeownership programs to other areas that the bank serves, but Beatty says that the Twin Cities is especially fortunate because its non-profit organizations are more sophisticated than those in many other cities across the country. Also like Norwest, Beatty says FBS will continue its involvement in such homeownership plans for the long haul. "What's the alternative, if we turn our back on the central cities?"