By the time the Fair Housing Act was passed in 1968, which ostensibly ended redlining as an explicit federal policy, it was already too late for many of the homes and buildings north of St. Louis’ Delmar Divide. After decades of being denied the capital to keep homes in a livable state or to transfer them to a new generation of owners, many homeowners simply walked away, many to the suburbs. The city of St. Louis had a peak population of nearly 860,000 in the 1950s; today it’s just 319,000 — a steeper decline than in Detroit, Cleveland, Buffalo, Pittsburgh, Flint, Dayton or any of the other former industrial powerhouses now known as “Legacy Cities.”
“It’s not a story that any of us here are proud of, but it is where we are today,” says Allan Ivie, president of community affairs and corporate banking for Simmons Bank in St. Louis.
A Bank with No Money but Lots of Land
The string of policies that ultimately resulted in hyper-vacancy continued after 1968. The deleterious effect of redlining was so pronounced in St. Louis that it became the first U.S. city to establish a city-run land bank, in 1971. The Land Reutilization Authority, or LRA, automatically assumes title over tax-foreclosed and other distressed properties that aren’t sold at sheriff’s auction. As people walked away from properties, they started to pile up in the LRA’s portfolio.
It gets worse. When St. Louis created the LRA, it decided that rather than allocating funding out of the city’s general budget revenue, it would primarily receive funds from the sales of its properties along with a few federal grants from the Department of Housing and Urban Development. That was intended to provide an incentive to sell homes more quickly back into the private market, but the assumption was that banks would be willing to make purchase and rehab loans of sufficient scale to borrowers.
Given the long history of segregation and redlining, it’s been ages since neighborhoods with a high concentration of LRA properties have seen even a small amount of mortgage activity. Appraisers already had trouble calculating valuations that would cover what potential homeowners needed to acquire and sufficiently rehab homes in the LRA’s portfolio — and the LRA typically requires purchasers to show they already have the financing to rehab homes before accepting a purchase offer.
With sales of its properties chronically slow and no general funding from the city, the LRA has consistently struggled to finance maintenance and upkeep for properties in its portfolio. So the properties keep spiraling into ruin. Dilapidated homes became magnets for crime and eyesores across entire neighborhoods, giving appraisers further reason to devalue nearby properties. All the more reason for residents north of the Delmar Divide to walk away.
“In our inventory, it’s typical to find houses with no water, no roof, no back wall, no sewer, no services, everything’s been stripped, it’s partially collapsed,” says Laura Costello, who has been running the LRA since 2006.
Today the LRA’s portfolio numbers around 12,000 properties, some acquired as far back as the mid-1980s, and they remain heavily concentrated north of the Delmar Divide. On many blocks, Costello says, the LRA owns a majority of the homes. Up until 2010, the LRA had an active strategy that once the agency owned 80 percent of the homes on a block, it would go out and purchase the remaining homes just to give a developer the chance to buy the whole block at once if they wanted.
Allen once considered taking on a second property to renovate and sell, but was discouraged when she heard, “you might get the money, but then when you go to market if you want to sell the property you won’t get the full value of what you need to get that back.”
Take a drive through north St. Louis, or even scour the LRA’s online property database, and it’s obvious (even without knowing the history) why residents still have a strong desire to acquire and rehabilitate the houses around them or to rebuild what’s already been lost. Look past the overgrown grass and boarded up windows and find many beautifully built, solid brick homes, many of them in the Victorian style of the late 19th century. Many homes north of the Delmar Divide that are valued at $2,000 are structurally identical to those south of the divide that are worth hundreds of thousands of dollars.
In July 2016, the National Community Reinvestment Coalition, a national coalition of bank watchdog and community development groups, put out a report analyzing home lending in St. Louis, Milwaukee and Minneapolis. In its analysis of St. Louis, the coalition found that having a higher proportion of African-American residents within a census tract correlated with fewer mortgage loan originations. Using data from 2012 to 2014, the report included a map of mortgage lending by census tract in St. Louis, overlayed with racial demographics, showing the stark absence of mortgage lending north of the Delmar Divide.
Burleigh printed out a blown-up version of that map, put it on poster board, and started bringing it to every meeting he went to, using it to spark discussions about the appraisal gap. He wanted everyone else to see beyond just the banks or just the real estate industry or the land bank or the city or the homeowners who had walked away after decades of being denied access to capital — everyone had inherited a system built over the course of multiple generations that still produced racist outcomes, whether anyone involved today intended to be racist or not.
The map that Glenn Burleigh carried from meeting to meeting, showing the stark lack of mortgages granted to residents north of the Delmar Divide. (Photo by Glenn Burleigh)
“When I was dragging that map around, explaining the appraisal gap, one thing I stressed repeatedly was that this is a situation today where not a single racist decision has to be made to shut down these loans,” Burleigh says. “[Because] it is a racist system.”
Even white borrowers who may want to buy north of Delmar face the appraisal gap because the appraisals are tied to recent property transactions near the property they intended to purchase. So if publicly available records show that the only recent transactions nearby have been all-cash purchases from the LRA for just a few thousand dollars each, that’s what appraisers will use in their calculations.
It became impossible to ignore the message, even for banks in St. Louis. “We’re not saying that you don’t run into credit issues in these areas,” says Ivie. “But what we’re talking about here is not a credit issue or an income issue, it’s an appraisal issue.”
The Gateway: When Banks and Bank Watchdogs Unite
In late 2017, the Federal Deposit Insurance Corporation (FDIC) organized a discussion in St. Louis, bringing in representatives from Baltimore, Memphis and Detroit, to share what they were doing in those cities to increase home lending in historically redlined neighborhoods. Burleigh was there, representing his organization as well as the St. Louis Equal Housing and Community Reinvestment Alliance (SLEHCRA), a broader coalition of nonprofit and community organizations.
“That meeting was important for us because it wasn’t SLEHCRA saying something like this needs to happen, it was the FDIC saying something like this needs to happen,” Burleigh says.
That meeting planted the seed for what became the Gateway Neighborhood Mortgage program. It’s modeled directly on the Detroit Home Mortgage program, which was presented at that meeting as a way of working around the appraisal gap. Burleigh went back with his colleagues and started promoting the idea of doing something similar in St. Louis.
It turns out Burleigh wasn’t the only one in that meeting who felt so inspired — a few bankers at the meeting took the same message to heart, and went back to their colleagues and started working up their own proposal for a program modeled on Detroit Home Mortgage. The bankers were part of the Metropolitan St. Louis Community Reinvestment Association (MSLCRA), a banking industry group. One of those bankers emailed Burleigh in March 2018 to see if he was interested in talking with them about it.
“Well, I actually just left a meeting with some of the mayor’s staff about this exact topic,” Burleigh wrote back. “[My colleague and I] were just talking about when we thought we could potentially set something up with MSLCRA, too. So you’re basically psychic.”
The bankers and the bank watchdog groups began working side-by-side on what was initially dubbed the “Greenlining Fund.” The idea made it into “Dismantling the Divide,” a major report from a research team based at Washington University in St. Louis, published in June 2018. And it made it into Mayor Lyda Krewson’s “Plan To Reduce Vacant Lots and Buildings,” unveiled in July 2018 after a year-long public drafting process.
“The term ‘greenlining’ we didn’t just pull out the air,” says Clayton Evans, who was at that FDIC meeting as senior vice president and community affairs officer at Simmons Bank. “It had real meaning. It’s placing dollars in those areas that have been redlined in the past.”
Based on the Detroit Home Mortgage program, the Gateway Neighborhood Mortgage will work by combining a first and a second mortgage into one transaction. The first mortgage will be an appraisal-based mortgage, covering up to 97 percent of the home’s appraised value, with the borrower covering the remaining three percent with their own funds along with any down payment assistance for which they might be eligible from the city or other programs. The second mortgage covers the appraisal gap, up to $75,000.
As in Detroit, a set of banks will provide the first mortgages on a rotating basis — Carrollton Bank, Central Bank, Enterprise Bank & Trust, Great Southern Bank and Simmons Bank. The second mortgages will come from a $2-million loan pool managed by a federally-certified community development financial institution (CDFI) — an organization that specializes in providing responsible loans and other financial services to low- and moderate-income borrowers. In St. Louis, the CDFI will be Justine Petersen. Based north of the Delmar Divide, Justine Petersen started off as a housing counseling agency 20 years ago, but today is more known for its small-business lending — and the vast majority of its clients in St. Louis are north of the Delmar Divide.
The Gateway Neighborhood Mortgage will require a minimum credit score of 620 — if there are any interested potential homeowners with lower credit scores, one of Justine Petersen’s other specialties as a CDFI has been providing credit building loans and counseling.
“The Gateway Neighborhood Mortgage in and of itself is something amazing, but it’s also amazingly symbolic of where we are in our CRA [Community Reinvestment Act] movement, and I want to call it a movement here in St. Louis,” says Galen Gondolfi, senior loan counselor and chief communications officer for Justine Petersen.
In contrast with Detroit, the banks will service both loans, meaning borrowers will only need to make one monthly payment to the bank instead of one to the bank and one to the CDFI.
Within the current system, appraisals are tied to recent property transactions near the property they intended to purchase. So if publicly available records show that the only recent transactions nearby have been all-cash purchases from the LRA for just a few thousand dollars each, that’s what appraisers will use in their calculations, and a buyer won’t get approved for a mortgage large enough to cover the purchase and the rehab. (Photo by Joe Rakers)
The funds for the second mortgage loan pool will come from multiple sources, including long-term loans from banks or grants if possible. Simmons Bank was one of the early investors, chalking up a $500,000 investment for the loan pool — banks making mortgages or investments into the loan pool can get credit for doing either from federal regulators on their regular Community Reinvestment Act examinations. The city also provided a $100,000 investment for the loan pool. The groups behind the Gateway Neighborhood Mortgage had hoped to launch it by this summer, but raising capital for the second mortgage pool has proven more difficult than anticipated. They’re hoping to launch by the end of 2019.
Publicizing the Program and Connecting to Buyers
In the meantime, the banks involved also have work to do, educating their own mortgage lending teams about the product, as well as reaching out to those who will help them connect with buyers — first and foremost, St. Louis’ neighborhood associations, but also the local aldermen, the few surviving local businesses in the neighborhoods, even alumni of Sumner High School, which counts Chuck Berry, Tina Turner, Dick Gregory, Robert Guillaume and Arthur Ashe among its illustrious graduates.
Neighborhood associations will play an essential role in spreading the word about Gateway Neighborhood Mortgage. These are neighborhood-based organizations in St. Louis that residents start and run, primarily on a volunteer basis, to coordinate clean up work or block parties or other events that foster a sense of community within a specific area. They also play a role in advocating for policies and programs to meet members’ needs. Many of the associations were organizing around reducing vacant homes and properties before anyone else. It was mostly their regular meetings where Burleigh heard from members about running into the appraisal gap.
In order for the Gateway Neighborhood Mortgage to live up to its potential, it needs to connect with a handful of buyers interested in the same neighborhood at around the same time, creating a set of recent mortgage transactions for appraisers to reference the next time someone wants a mortgage in that neighborhood. Lenders would then be able to make subsequent appraisal-based loans at values that meet the cost of rehab, and the product wouldn’t be needed in that particular neighborhood any longer. The program will target five initial neighborhoods, four of them north of the Delmar Divide, and once the gap is closed it will move onto other neighborhoods until the gap is closed across all of north St. Louis. If it works as well as they hope, the partners behind the mortgage plan to eventually expand the product to the county, and across the Mississippi to the east.
“You can’t quantify if you need five or ten Gateway Neighborhood Mortgage loans to close the appraisal gap, but once we have a few initial loan closings under our belt, we probably won’t need more than ten within a neighborhood,” says Ivie.
By closing the appraisal gap, the loans clear a path for other borrowers to access conventional mortgages. From 2016-2018, Detroit Home Mortgage made 228 total loans, just eight percent of all home mortgages made in Detroit over that time frame, and mortgage lending finally returned to pre-Great Recession levels in 2018.