Home Lending Among The Hollers

Strong work ethic and pride for homeownership sit in juxtaposition to few opportunities for growth and lessening federal assistance. That makes this a distinct region in which to originate home loans, which the people of Appalachia are terribly desperate for.

Watch it on The Interest: Making Appalachia Affordable

Trickling Down

“Capital behaves like water; it flows along the path of least resistance. So when you’re talking about places where the reward isn’t as obvious for capital, you have to make it go there. And that’s what we’re doing,” says Jim King, CEO of the Federation of Appalachian Housing Enterprises (FAHE), a community development financial institution with 50-plus members that serves 80,000+ people each year. “We serve individuals not served by mainstream finance. Sometimes that means that we’re the only lender or one of the few penetrating markets with a 30-year, fixed-rate product. And yet there are buyers who will qualify.”

FAHE works with the U.S. Department of Agriculture, packaging over $500 million in mortgages for the 502 Direct program in recent years. It also sells loans on the secondary market. “Anybody who’s in the mortgage business is in the same business we’re in, helping people achieve the American dream. We see ourselves as an intermediary, the go-between of the real work on the ground by our partners who live in the same communities as the families they’re trying to reach.”

Partnership Housing in Owsley County, Kentucky, builds and rehabilitates single-family homes, manages rental units, and distributes commodities. Executive Director Cassie Hudson gets frustrated when qualified home buyers check all the boxes, but red tape bars them from closing. “It costs more to build a house here than it’s going to appraise for,” Hudson says. “If I cannot find gap money unrestricted that doesn’t have to be included as part of the appraisal, I have to deny this family. And that happens on every home.”

Grant dollars are so competitive that it takes two or three years before a file reaches closing. About 35 families are on her waiting list for new construction and 120 for rehabilitation loans. “I have a partnership with my local bank, and they match really good rates and terms. On the grant side, subsidies need to increase.”

Pride is strong in Owsley, billed as the “poorest white county in the U.S.” following the 2010 Census, when median household income was lower than any county outside of Puerto Rico. Owsley ranked sixth on SmartAsset’s 2023 list of Kentucky’s poorest counties. A single bank serves 4,000 residents spread out among the county’s 198 square miles.

“It keeps you busy,” says Angela Woods, president and CEO of Farmers State Bank in Booneville. “I’m sure there are communities that have the same needs as we do. Just the cost of everyday living plus mortgage and insurance can put a great strain on everybody.”

In 35 years in banking, she’s always worked in small communities. “My employees grew up with our customers, their children go to school with customers’ children; we go to church with one another. Even though we are for-profit we are part of the community here.” Her branch processes loans and secures low down payments for Partnership Housing.

In The Hollers

A hollow, or “holler’’ is the ground space between hills in Appalachia. This topography lends itself to flooding, which devastated 10,000-plus Kentucky homes and wiped out 3,000 in 2021-22. “We’re just getting the recovery dollars,” King says. “I’m proud of what the nonprofits have been able to build with private resources in the interim, but the big work hasn’t started yet. We’re concerned about the cost of homeowners insurance and what flood insurance will do to price them out of housing when they’re already struggling. You could hand them a home and they might not be able to afford to maintain it and keep up with taxes and insurance. That’s a real problem.”

Two historic floods within 18 months have strained Hudson’s resources. “If I build eight houses a year but the flood comes and takes out 25, how am I ever making any leeway?” she says.

Travel 130 miles south into northeastern Tennessee, and Clinch Powell provides mortgage financing in another Appalachian community. There are people here who don’t read or write and have known life without electricity.

“There’s still houses with cardboard siding and no running water,” Executive Director Lindy Turner says. “But poverty is as much a state of mind as it is an economic and physical thing. We are a people of resilience who always make do.” Take the 69-year-old who worked all his life and then broke his back. On a fixed income, his rent just doubled. He has no credit history, no email address and pays most bills in cash. Turner must help him establish credit using his car insurance, phone bill, and rental history. “He doesn’t understand the internet,” she says. “But I guarantee you this man will never miss a payment.”

She meets clients like this more often since rents have skyrocketed. “People who never thought they could own a home are desperate.” A household with $52,000 in income, little debt, and good credit can qualify for a $300,000 loan at 4.5% and pay $1,200 a month. Bump up their income by $1,000, and they no longer qualify. “Now, you’ll be lucky to qualify for a $150,000 loan, but there are no livable houses on the market for $150,000, so you’re blocked out of home ownership. And you’ll have to make closer to $100,000 to qualify and buy a home.”

A $130,000 house Clinch Powell built and sold two years ago appraised at $260,000 today. “Let’s talk about equity,” Turner says. “How attractive is that customer at the bank today with collateral? If we can get folks to understand the investment piece, that’s invaluable.”

Staff often work with people on credit and budgeting before they become loan applicants, later providing loan counseling and foreclosure mitigation. The region they serve once had a strong economy based on timber, coal, and tobacco. Now those resources are gone, and so are the jobs. This is the cross much of distressed Appalachia has to bear.

“It’s hard to let go of a lot of that. Back then, if you were a person who had the giddy-up-and-go and willingness to work, you could provide for your family. Over time, that’s changed, but it’s still in the ethos of the culture. People here don’t think they are poor. If you live in the house you grew up in, it may not be in good repair … but you don’t owe anything on it.”

When Sharks Circle

In places where legitimate financial institutions are few and far between, predatory lending is rampant. “Banks are pulling out, and the predatory lenders are moving in,” Turner says. “If it’s an intersection, there’ll be one on every corner.”

They beckon people with promises to build credit but aren’t forthcoming with the terms. “It’s preying on people who are in a position of desperation … which is why it’s so important for us to have more CDFIs with reputable lending. We help people get off that hamster wheel, working on their budgeting and financial literacy so they don’t get trapped forever,” says Turner.

Loan officer Stace Karge moved to Tennessee 20 years ago from the West Coast. “It never crossed my mind that people were living in these conditions in this day and age,” she says. “There’s a definite pride in Appalachian culture. Instead of being unhappy about what you don’t have, it’s feeling incredibly blessed. My grandfather homesteaded this and now it’s mine. And that’s something you can’t take away. It’s priceless.”

Karge shows people without technological know-how how to access and upload online bank statements. “It’s not something they’ve ever had to do. To me, the biggest challenge as an LO here is that technology piece and being able to effectively communicate with clients.” The heaviest burden for her borrowers is achieving good credit and debt-to-income, as well as financial literacy.

Clinch Powell has access to great loan products, but they don’t come quickly, and the federal government has cut funding to the USDA’s rural housing programs dramatically.

Generational Homesteads

Developers tend to steer clear of the isolated communities dotting this landscape. “The economic incentive just isn’t steep enough,” King says. It’s common for several generations to live on the same property in different houses in various conditions, from disrepair to new construction. “We’re very attached to the land in our community, that’s for sure,” Turner says. “You drive through, and there’s Mamaw’s house or Great Mamaw’s house — more than likely very small, possibly built on piers in the early 1900s, tin roof. It’s always gonna have an awesome front porch ‘cause that’s where you break your beans. Then next to it, maybe a brick rancher, a little bigger but still tiny by today’s standards, and that’s where their kids are. Then maybe a bigger house for the grandkids, and next to it a trailer.” Karge was surprised to encounter this when she came here as an LO. “It’s very unique. Land is your heritage, your roots.”

The deeply-distressed parts of Central Appalachia are home to approximately 10 million people. “This is a historically high single-commodity area,” King explains. “So timber for a season, coal for a few generations. As those industries dried up, there wasn’t a strong economy left in place. Coal camp housing wasn’t designed to last multiple generations. There is some federal relief for that, but not nearly on pace with the need. The higher poverty in these coal counties just makes the flow of capital difficult.”

An area’s housing stock tends to keep pace with its economic growth. “People’s expectations about where they’re gonna live and what they can afford change. In communities where that hasn’t happened quickly, housing stock is declining in value. That makes it very hard to build because appraisals get held behind, which is where an organization like ours tends to come in.” Outsiders often ask King if he knows about this loan product or that program and how the federal low-income housing tax credit works. “As if the poverty and the housing issues are actually a reflection of some ignorance on our part. It’s just a misconception that this is the best we know how to do, when in fact the economic landscape doesn’t allow the tools to work the way that we’d like.” There are plenty of smart people in these parts, just not enough resources. “We’re financing mortgages for people that, if I were a classically trained underwriter, I would say, I’m not sure I want to make this loan. But we use our experience to tell us it might not fit in a tranche of loans we sell to the GSEs, but it might perform just fine in a portfolio we control.” Another misconception is that the federal government and donors have invested a lot of money here to no avail. “That’s just a fallacy,” King says. “CRA (Community Reinvestment Act) credit tends not to flow very well in places where you don’t have a lot of national bank presence. That’s changing in CRA reform, but we’ve gone decades of no flow of that type of capital.”

After 40 years doing loans in this region, he’s inspired by families who now own their homes outright. “Often what you find is those same people will then say, how do I make this happen for my neighbor or my family? How am I part of a solution now?”

Changing The Tone

Now in the top 1% of loan originators in the country, Newport, Kentucky’s UMortgage Managing Partner Ravi Patel started his career in Appalachia during the 2008 housing crisis. “The biggest challenges there are financial education … properties passed down from generation to generation, and wages not increasing to compete with inflation,” Patel says. He doesn’t deal with these issues as much on the outskirts, but northern Kentucky, like the rest of the country, still has affordability challenges. “The past few years, it has put a lot of people in the median household income range on the sidelines,” he adds.

Instead of offering subsidized loan products with higher interest rates, one of Patel’s back-pocket strategies is to reach a lower rate with retirement accounts or gift funds. He credits his success to business investment and self-branding. “Create the reputation so you’re known for doing the right thing for your clients all the time. We don’t want to create a habit of individuals going underwater. Our goal is to help them purchase a home and create generational wealth for their families.”

Patel encourages LOs in Appalachia to develop relationships outside of their community. “With social media and technology, loan officers have a wider net to cast. Do lunch and learns, events at churches, schools … help people set up a plan to meet their goals.”

FAHE is working closely with the Commonwealth of Kentucky and county judges to build new homes on higher ground following the floods. “The capacity of a county in some of these rural communities is really held back by the tax base,” King says. “Traditionally, people think about jobs first, and then the houses will just show up. I don’t know any community in our country right now that feels like that’s working for them.”

Before FAHE built a 100-unit subdivision, Lee County, Kentucky officials feared extending fire suppression to the property would be too expensive. Since making it happen, the tax base has grown, and they’re welcoming new factories and, with them, jobs. “Let the cities and counties make an investment so you can build amenities in a community that people want to be part of, and then that changes their ability to recruit employers,” adds King.

FAHE and members like Clinch Powell seek partnerships to lift all parties. “Appalachia is the place to invest,” Turner says. “It’s an untapped frontier, and it’s ripe for smart investment in the people who are already here doing business. We don’t have a lot of big banks in these communities. They need CRA credit, but they won’t work with us because they’re not in our footprint. Isn’t that an untapped resource? It’s the way to lift not only our region up but our country up as well.”

FAHE Communications Officer Lina Page urges LOs in wealthier parts of America to get to know their local CDFIs. “Mortgage loan officers out there who see wonderful people they can’t serve because they don’t fit the credit box that mainstream finance applies … there’s referral potential. As these individuals succeed, they may end up as one of their clients down the road.”

When that starter home family has a 20% down payment saved up for their dream home, who do they call? Their original LO.

“We’re creating a pipeline of future qualified homeowners. It feeds itself,” Karge says. “One house feeds this whole community. That community feeds that region, that region feeds that state, and that state feeds our nation.”

An outsider making nice just for profit won’t fare well here, and a knight in shining armor can’t rescue a community they know very little about. “It’s a different language, a different way of life,” Karge says. “These people aren’t going anywhere. They are a community already. But for an LO to come in and say, ‘I’ve got some really cool banks that are going to invest,’ that’s a win for everyone. We just need the investment to provide the opportunity.”

Successful LOs are committed even at the expense of their own convenience, and that rings true here, too. “I don’t close my computer without making sure every email has been answered and every phone call has been answered. I treat my customers how I want to be treated. They’re people, not documents,” Karge says.

Farmers State Bank invests capital back into Owsley County. “Whenever you can do a kindness for someone, it makes you feel good,” Woods says. “We have opportunities to help our customers by donating to local charities. It just works for us.”

For those who lost their homes in the floods, only time will tell. “I don’t think we’ve yet seen the worst of rate increases that are coming to our area,” says the banker.

To the LOs doing $100 million or more a year in loan volume, Turner says, “Good job!” urging them to ask themselves, “Who did I lift up today because I’m successful? Who’s being left behind? That’s how we lift all ships, all of us, together.”