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Lending a Hand: Programs promote homeownership through loan assistance

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Homeownership in Springfield has been on a steady decline over the past decade, but for first-time homebuyers, city officials and local lenders are pointing to government loan assistance programs as one way to counter the trend.

Nationwide, 10% of first-time homebuyers are utilizing home loan assistance programs from a government agency, an amount that’s doubled in recent years, according to research by the Federal Home Loan Mortgage Corp., aka Freddie Mac.

The city of Springfield’s down payment assistance program, for instance, will cover upfront costs for first-time homebuyers, while some federal loan programs require no down payment at all.

Between 2010 and 2018, the city’s homeownership rate fell from 49.2% to 44.3%, according to data from the U.S Census Bureau. It’s been felt throughout Greene County as well, as homeownership has steadily dropped by roughly 5% since 2009, according to data from the Federal Reserve Bank of St. Louis.

City officials and some mortgage lenders say these government programs can help create stronger neighborhoods and combat homeownership declines.

Government backed
Among Springfield’s top mortgage lenders, the number of government loans issued annually has remained fairly flat in recent years, though some banks have noted increased interest in these government programs.

Michael Frerking, director of residential lending for Guaranty Federal Bancshares Inc. (Nasdaq: GFED), said the government home loan assistance programs made up 39% of the bank’s mortgage portfolio with $32 million in loans issued in 2019. That’s up from 30% the year prior, according to SBJ research.

Guaranty Bank offers loans from the Federal Housing Administration, U.S. Department of Veterans Affairs and the U.S. Department of Agriculture Rural Development. An FHA loan requires at least a 3.5% down payment on the purchase price of a home and a VA loan offers zero percent down for qualifiers. The USDA Rural Development program, which incentivizes homeownership in rural areas, also requires no down payment.

Gaining popularity in recent years, Frerking said the bank issued more FHA loans in 2019 than any other government-backed loan.

“The economy is doing well; wages for the most part are up,” he said. “This is a good time to buy a home, but I think the biggest issue is that there are plenty of buyers. It’s a seller’s market right now.”

Census Bureau data support Frerking’s claim. Only 5% of housing units – both homes for sale and for rent – were vacant in Springfield in 2018, according to the data, and the majority of Springfield’s housing market is renter occupied.

But first-time homebuyers can’t turn to just any bank in town for these government-backed loans.

John Everett, president and CEO of Legacy Bank and Trust Co., said the bank hasn’t offered the government loans since 2009.

“I’m not a big believer in assistance programs that don’t require the borrower to bring any funds to the closing table,” he said. “My belief was that much of the housing crisis that created the Great Recession was due to allowing borrowers [to] receive 100% financing.”

Other local mortgage lenders that didn’t offer such government loans in 2019 were Bank of Bolivar and FCS Financial, according to SBJ research.

Everett said another problem with the assistance programs is that people aren’t building enough equity on their homes because they’re not bringing anything to the table.

“I think it’s repeating what we’ve learned in the past. If we’re artificially driving prices down by allowing people in homes that aren’t ready to buy a home, then if a recession looms, you’re putting people under water. That’s what caused massive losses 10 years ago,” Everett said.

However, Frerking said there’s less risk for lenders to offer the loans because the government will cover the costs if a borrower defaults on the mortgage.

He also said the home loans now require mortgage officers to make sure people qualify and aren’t getting into a situation that they can’t afford, which wasn’t as strict before.

“After the great mortgage meltdown, things became a little tighter for good reasons. There’s more sound underwriting now,” Frerking said, pointing to greater scrutiny of credit scores, income-to-debt ratios, job history and comparative appraisals.

Everett said Legacy Bank also has moved away from conventional loans because it wasn’t originating enough traditional 15- or 30-year fixed-rate loans.

“We found that you have to have a high volume of secondary market loans in order to provide the level of service we expect to deliver for our customers. ... We were getting less than five requests a month, and that isn’t enough to be in the business,” he said.

Down payment aid
While Springfield’s homeownership rate has been declining, it also is well below the national average of nearly 65%, according to the most recent Census Bureau data.

Bob Jones, a city grants administrator who helped start the program that launched last year, said the municipality is trying to add more homeowners to central and north Springfield. The targeted areas are north of Grand Street and between West Bypass and Glenstone Avenue.

“We work with a lot of the neighborhood associations in town, and one of the things they are pushing is they need more owners, not more renters in the neighborhoods,” Jones said. “By connecting the buyers with a strong neighborhood association, they meet their neighbors and become an asset to the community and not just a tenant that’s living paycheck-to-paycheck.”

Funded by the U.S. Department of Housing and Urban Development, the program helps first-time homebuyers cover closing costs and down payments on homes less than $130,000 by providing up to $5,000 with no interest and no repayment required, according to the city website. So far, the city’s program has placed 12 participants in their first homes, Jones said. The loan is forgiven after 10 years, if the participant remains in the home.

“They have to be qualified borrowers, because we’re only doing the down payment,” Jones said. “It’s a homeownership program, not just a handout.”

With loans averaging $4,000 in 2019, Jones said the down payment program has the budget to help roughly 20 families in 2020.

Though he doesn’t think the city program is a silver bullet to homeownership rates, Jones sees the combined efforts of the city, banks, Realtors and civic leaders as strengthening homeownership in Springfield.

City officials aren’t the only ones focused on promoting home ownership on the north side. Local developers also are working on the issue.

Titus Williams, president of Prosperiti Partners LLC, is in the process of rehabbing roughly 180 homes, primarily on the north side, once owned by embattled landlord Chris Gatley of 417 Rentals LLC. Williams has spent roughly $3 million on the renovations and previously told Springfield Business Journal he plans to partner with nonprofits that can help tenants become homeowners.

Clay Trautman, president and CEO of residential flipping company The Cast Group, has over 120 homes across Springfield in the pipeline for the next three years to build or renovate, according to past SBJ reporting.

“We’re literally bringing residents into Springfield and into Christian and Greene counties because now there are more opportunities for them to purchase a home versus just to rent,” Trautman has said. “It’s providing more opportunities for more long-term growth in the city.”

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