Readers: A few days ago, I posted on my website a Wall Street Journal article by my friend and housing expert Ed Pinto and his colleague on the potential to improve housing outcomes for minorities. That provoked a banker, Stephen Lange Ranzini, to send me a thoughtful note suggesting how the government might improve home ownership for minorities. Our nation has devoted significant resources over most of the past century to promoting affordable home ownership for working class Americans, which helped many families climb the economic ladder and create a large and vibrant middle class in our country. Ranzini’s letter suggests a potentially important way for us to return to more sensible housing policies. It’s certainly worthy of consideration:

Bill – Thanks for sending the article by Ed Pinto.

In Ann Arbor at the intersection of Maple and Pauline they are building an apartment complex that will have about 400 bedrooms. It was originally proposed as condominiums but changed to apartments after the site plan was approved. This is not an isolated instance. All the many tall buildings that have been built downtown in Ann Arbor over the past two decades are apartments, because they were built using HUD Multifamily loan programs.

Why did this 400-unit project switch from for sale condos to apartments? Probably because the funding for condos is very hard to come by but the funding for apartments is very easy to obtain. Why? Most of these loans are backed by HUD loan guarantees. HUD will back apartment loans, but not condo construction or condo permanent financing loans for projects with more than 4 units. A developer can obtain a loan from HUD up to 90% of the “as built” appraised value of the project. Condo loans come from banks and banks will lend up to 70% of the “as built” appraised value of the project. An investor needs to put triple the investment into a condo project versus an apartment project and gets 1/3rd the return on investment relative to the dollars invested.

The bigger picture problem is that apartments don’t allow the building of inter-generational wealth. Only condos and homes do. Government money is flooding into the housing market, however virtually all of these funds are targeted at building more apartments, not promoting home ownership.

HUD’s programs are warping the market supply. This problem could be fixed if Congress would just fund the HUD 234d Multifamily loan program (which is the only HUD program that could be used to build 5 or more-unit condos for sale), which is on the books but has not been funded by Congress in decades. Only Congress can fix this problem for us. If we want to do something practical, we should all call on them to fix this. I have repeatedly done so myself both in writing and in person.

Best wishes,
Stephen Lange Ranzini
President & CEO
University Bank
Ann Arbor, MI