by Sherri Welch, reporter for Crain’s Detroit Business
March 7, 2011
Southwest Housing Solutions has created a low-profit mortgage originator that it hopes will help attract lenders back to Detroit, funders say.
Southwest launched Southwest Lending Solutions in January with $331,000 in seed grants from Detroit Local Initiatives Support Corp., Fannie Mae, NeighborWorks America and Enterprise Detroit.
In addition to its loan originator role, Southwest hopes the subsidiary will be able to attract enough investment to begin providing its own mortgages in Detroit in two years’ time.
“We’re not recruiting homeowners (for refinancing)…we’re trying to give people who want to buy a home the best investment vehicle possible so we can avoid the (predatory lending) sins of the past,” said Southwest Housing Executive Director Tim Thorland.
As with all of Southwest Housing’s programs, there’s a community development underpinning to the new subsidiary, he said.
By providing access to the most competitive loans for those interested in buying a Detroit home, “you’re stabilizing them personally and the metro Detroit community as a whole,” Thorland said.
Most loan originators are commission-based and tend to look for larger loan deals in the more affluent suburbs, said David LeClerc, Southwest’s manager of lending.
Lenders are also less inclined to give mortgages to people with lower credit scores and other financial issues, Thorland said. As an originator, Southwest can only seek financing for people with a credit score of about 620 or higher.
“If it was our own money, we could set up our own underwriting standards (and) work with people with lower credit scores (and) with people who have non-traditional credit records, who have never had a car or credit card but have been a renter and can demonstrate a repeated pattern of paying their bills on time,” he said.
That’s where a program-related investment from a foundation makes sense, Thorland said. Southwest plans to pursue such foundation investments within two years as a low-profit, limited liability company, or L3C, an entity set up to serve a socially beneficial purpose and a natural vehicle to receive foundation investments.
“You want the foundations to step up and help finance someone who has the competency to be a homeowner but can’t pass traditional credit underwriting,” Thorland said.
As defined by the Internal Revenue Service, program-related investments are foundation investments — not grants — that meet three tests: their primary purpose is to further the exempt objectives of the foundation, production of income or property appreciation is not the primary purpose for the investment, and the investment isn’t funding or supporting lobbying.
While Michigan legalized L3Cs in January 2009 through amendments to the Michigan Limited Liability Company Act, following the path of other states, the IRS has not yet given broad approval for the L3C designation.
Such approval would fast-track foundations’ non-grant investments such as loans, loan guarantees, equity purchases or other investments that further their philanthropic purposes.
Southwest Lending builds on the other services that Southwest Housing has added over the past couple of years to its affordable housing, commercial development and property management roles, LeClerc said.
“(For) clients who came to us with foreclosures or credit issues … we’re able to help them find the resources to do financial management and to re-establish credit and … to provide them with credit counseling … to position them for future home ownership,” said Leclerc. Southwest Lending plans to focus on clients in Southwest Detroit but will offer its services to all of metro Detroit’s underserved areas, Thorland said.
“This project … provides home ownership opportunities for residents to buy homes within the city limits (and) acts as a jumpstart to bring mortgage financing back into the city,” said Tahirih Ziegler, executive director of Detroit LISC, which made a $168,000 grant to Southwest.
“We’re hoping (it) can help to link and leverage other dollars from traditional lenders which will help stabilize neighborhoods.”
LISC would support Southwest’s aspirations to become a mortgage lender, as well, Ziegler said. “We think funders are looking at innovative ways to revitalize neighborhoods,” and Southwest becoming a lender could be one tool to do that.
“What brought us to the table originally with Southwest was that it is very difficult today … for the average Detroit resident to get a mortgage,” said Ray Waters, president of Enterprise Detroit, which made a $25,000 recoverable grant to Southwest that will be paid back within five years if the business is successful or forgiven if it is not.
Banks aren’t lending because the appraisal values of the homes don’t always meet the asking prices, he said.
Southwest will be able to get more creative in how it does mortgages, particularly if it’s able to raise capital from foundations, Waters said.
“There’s not a good mortgage market here today — Southwest offers an opportunity to open up that market.”
Comerica Inc. is primarily a business lender but continues to provide mortgages in Detroit, said Kathleen Pitton, vice president of communications in an e-mail.
“We support Southwest Housing Solutions as well as other organizations that help individuals who live in low-income and underserved communities, particularly with credit issues,” she said.
“We believe programs that assist people who do not meet traditional lending standards … will benefit the city of Detroit and its residents.”
Competition is good for the marketplace, said Elizabeth Dryden, director of public affairs for Charter One Bank, in an e-mail.
“We are encouraged that more entities are seeing the need to address the movement and demand in the housing market. It is a positive sign to see the addition of resources available in one of the most challenging sectors in the economy, nationally.”