By Joe Light 

Flint, Mich., residents have a new concern on top of lead in their drinking water: Some mortgage lenders say home buyers must prove there is no contamination at a property or they won't make a loan for its purchase.

Local real-estate agents and lenders worry the new restriction could be another punch in the gut to the city's housing market, which has long suffered from economic distress after the departure of major auto industry employers.

"The tragedy is an already depressed community is now likely to see housing values plummet not only because of the hazardous water, but because folks cannot obtain financing," said Daniel Jacobs, an executive with Michigan Mutual, which recently issued a notice to its employees requiring that homes pass a water test before it will make a loan.

Similar notices have been sent out by other lenders, while some major banks, including Wells Fargo & Co. and Bank of America Corp., said obtaining a loan could be difficult if a home doesn't have potable water.

Flint's water troubles began when the city began using the Flint River as a water source in April 2014. The river water corroded a protective coating in pipes, which caused some pipes to release lead. In October, residents were told not to drink tap water, and the city has embarked on several efforts to improve the water quality.

Doug Wolfe, a 67-year-old retiree, said he had a buyer pull out of purchasing his Flint house last month. Mr. Wolfe, who has moved from the area, had cut the listing price a couple of times after putting up for sale in September. "I hope that when this clears up we'll get back to where we were before the lead problem appeared," said Mr. Wolfe.

Chris Theodoroff, Mr. Wolfe's agent, said that the buyer pulled out in part on the advice of his lawyer, who questioned why the buyer would want to purchase a home while the water issues were outstanding.

As a condition for making a mortgage against a property, lenders often require that a home meet certain minimum standards of livability, including potable water. Government agencies, which back most U.S. home loans, also have such requirements.

As a result, several mortgage lenders over the past few weeks notified loan officers that borrowers in Flint need either to prove the home isn't on the city water supply or have a test done to prove the water meets Environmental Protection Agency standards.

The area's Realtors' association this week plans to meet with local lenders to see how Flint's water troubles are affecting mortgage availability.

"This thing is changing so quickly that honestly we're just hanging on and trying to figure out how we are going to operate," said Mr. Theodoroff, president of the East Central Association of Realtors in Michigan.

A Wells Fargo & Co. spokeswoman said it is reviewing government lending guidelines. "Until [water] testing and potability is affirmed, it will be difficult to lend," said the spokeswoman, who said such difficulties would apply to all lenders.

A Bank of America Corp. spokesman said it sometimes requires appraisers in Flint and elsewhere to verify a property has potable water. A J.P. Morgan spokeswoman said the bank is assessing the situation to determine whether new requirements are needed.

At issue, lenders say, is how to interpret government mortgage guidelines. The Federal Housing Administration, which backs loans to less-creditworthy borrowers, states that a home must have "a continuing and sufficient supply of safe and potable water."

An FHA spokesman said the agency plans to put out a document soon to address lenders questions on the situation.

So far, Fannie Mae and Freddie Mac, the largest backers of mortgages, haven't changed their loan requirements in Flint.

"As we learn more and as this situation evolves, we will work with lenders to determine what policy changes, if any, may be warranted," Fannie Mae said in a statement. "We feel for the community impacted by the unfolding issues related to Flint, Michigan-area water quality."

"This isn't a question of the lenders arbitrarily choosing not to do loans in Flint," said David Stevens, president of the Mortgage Bankers Association, a trade group. "It's a question of whether lenders are allowed to originate those loans based on government requirements."

It isn't uncommon for lenders to adjust requirements during or after disasters such as fires, earthquakes or hurricanes. Some advisories sent by lenders for the Flint crisis cited the president's emergency declaration for Genesee County, Mich., as the impetus for the change, although they stated the restrictions are limited to Flint.

"There's no doubt this will have an impact" on the city's housing market, said Marc Reneau, president of the Michigan Mortgage Lenders Association. Mr. Reneau said the new restrictions were the main topic of conversation on a monthly call with Michigan mortgage lenders this week.

Write to Joe Light at joe.light@wsj.com

 

(END) Dow Jones Newswires

February 03, 2016 19:40 ET (00:40 GMT)

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