Getting builders to build in city

$100 million program to create new homes in Baltimore, 4 others

January 30, 2000|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

Baltimore has been selected as one of five cities to participate in a $100 million Freddie Mac initiative to stimulate new homebuilding in urban areas.

The federally chartered mortgage giant plans to launch the two new programs -- one for buyers, one for builders -- within the next 45 days. Under the program, builders are permitted to cover a borrower's down payment so long as it doesn't exceed 3 percent of the purchase price of the home.

The program also allows borrowers to finance their closing costs in a variety of ways, either by cash gifts from relatives, grants from nonprofit organizations or second loans, such as a loan against a 401(k) retirement account.

The down-payment and closing-cost provisions may virtually eliminate the buyer's out-of-pocket expense for a mortgage.

The second program -- called "Homeworks" -- will underwrite a builder's financial investment should a home fail to sell.

Essentially, the program works like this: A builder would agree to build homes in a mutually agreed-upon neighborhood. A buyer would apply at a bank for a mortgage underwritten by Freddie Mac.

But if there is no buyer after a reasonable amount of time -- six months perhaps -- a third party would purchase the property from the builder for "construction-related costs and any associated fees necessary to make the builder whole," Nickerson said.

That third party, either a nonprofit or for-profit entity designated by the city, would then be able to sell the home at a lower price. If the final sales price, however, is lower than what the third party purchased the home for, the city would make up the difference.

"They [builders] shouldn't be taking an undo risk; they should be sharing the risk with all the others who have an interest in stabilizing our urban communities it is a risk-sharing notion," said Craig Nickerson, vice president of community development lending for Freddie Mac, which earns its money by buying mortgages that are sold to investors.

"In terms of a very focused neighborhood-based effort in Baltimore, this is one of the most tangible efforts we've made in this regard," Nickerson said.

"We're very excited about this because of the promise of being able to build new housing in some of these neighborhoods."

The other cities selected for the pilot program are Washington; Sacramento, Calif.; Cincinnati and San Antonio.

Idea formed

The idea of building houses for profit in urban neighborhoods was formed at meetings last fall between the National Association of Home Builders and its local affiliates, such as the Home Builders Association of Maryland.

That is where John Kortecamp, executive vice president of HBAM, and Nickerson discussed including Baltimore in the pilot program.

"If there hasn't been any new construction in the past, there is a real risk associated with the market," Nickerson said. "Can I establish a market? Can I create a new market? We wanted to answer the question of, `If I build it, will they come?' "

Said Kortecamp: "It is going to be a great way for somebody to test the water and see if they can make that market work for them."

Nickerson contacted newly elected Mayor Martin O'Malley about the initiative and received "a very positive response," even though the Homeworks program requires the city to establish a reserve fund -- drawn from federal housing dollars -- to form the safety net for the builders.

"We see Baltimore as one of the new pioneers for facilitating this kind of new development," Nickerson said, adding that if the programs are successful they will be expanded to other cities.

Unlike other housing assistance loans, the Freddie Mac programs do not have income limits, and mortgage amounts can go as high as $252,700.

"The objective of all this is to bring economic diversity to the city," Kortecamp said, adding that in the past Fannie Mae, the main competitor to Freddie Mac, was a catalyst for several urban initiatives. Now with Freddie Mac entering the picture, "this becomes a whole new source of funds," Kortecamp said.

Funding may increase

Specific details haven't been worked out and Nickerson couldn't predict exactly how much of the $100 million would go to Baltimore.

"We would rather see how things develop in each of the five pilot sites, and [if] Baltimore were to have a faster and more effective response, then it is very likely that they could get more than one-fifth of that money," Nickerson said.

"If the pilot turns out to be successful and the demand for these products exceeds the $100 million," he said, "then we will go back, reassess the level of funding and look toward increasing it."

The Homeworks program could be especially effective in Baltimore, where new market-rate housing is a rarity. The core philosophy of the program is the concept of sharing risk.

"What is preventing the builder from coming to the city? It wasn't so much coming up with construction financing, or mortgage financing [for buyers], it was more of creating a level playing field," Nickerson said.

"As long as there were more inducements to build in the suburbs than there have been to build in our urban communities, we're finding a whole lot of builders that couldn't justify the higher risk associated with that kind of [urban] construction."

Kortecamp, however, realizes that there is still great skepticism among his members about venturing into the city.

"Builders don't want to go where they don't feel the market is truly viable. There is no point sticking the toe in the water if you know it is ice cold.

"But I think there is a very strong sense of optimism with the new [city] administration that there is going to be serious attention to turning the city around with the issue of crime the attitude is right, the focus is right."

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