East Cleveland, Ohio, isn't used to getting real-estate investment.
The federal government in the 1930s marked much of the city as "definitely declining" and warned banks that lending there was risky. For decades, its neighborhoods languished.
Now a new kind of mortgage for landlords is flooding the area, helping real-estate investors buy, renovate and rent out vacant and dilapidated homes.
"On every street, there's somebody working on a house," said Ashleigh Wilson, an investor from Florida who fixes and flips properties in East Cleveland.
Lenders have often been wary of offering mortgages in struggling neighborhoods where income levels and property values are low. The approval process for a traditional mortgage evaluates how likely the borrower as an individual is to pay back the loan, looking at credit score, debt-to-income ratio and assets.
In the new model, a private lender approves the loan based on the property's value and potential rental income rather than the income of the borrower. Often, proof of personal income isn't even a requirement.
The new loan product, together with the increasing lure of cheap neighborhoods as housing costs have risen sharply elsewhere, has helped inject capital across American cities that could use the boost, including Indianapolis, Baltimore, Detroit and Memphis.
The new mortgages, launched in the mid-2010s and called debt-service coverage ratio loans, are part of a private lending industry that has exploded, drawing borrowers with its flexible underwriting, simplicity and speed.
Tabitha Giddens was shocked to learn how easy it was to get one of the loans to rent out a house she fixed up in her native West Philadelphia, Pa. The loan "was way less paperwork," she said.
Many small-time investors buy and rehab a property using a short-term construction financing loan, then sell the property within 18 months. Before, if an investor couldn't sell a house -- a real risk given how little demand existed for properties in distressed neighborhoods -- the investor wouldn't be able to pay back the loan and lenders would foreclose.
Now, if flippers can't get the price they want, they can refinance into this new kind of 30-year loan and become landlords. In many distressed neighborhoods, rental demand is much higher than home-buyer demand, partially because households with limited income are locked into renting.
The new kind of mortgage has served as a safety net for many flippers, encouraging them to take on projects they otherwise wouldn't have.
And as housing costs have soared elsewhere, investors have found opportunity in blighted neighborhoods.
"I don't mind investing in the worst part of the city, because that's where I get the cheapest deals," said Wilson, the Cleveland-area investor. She had wanted to invest in her native Florida, but prices had risen too high. Around Cleveland, the most she has ever paid for a property is $24,000.
In many neighborhoods with the most vacancies, the number of homes being flipped has jumped, outpacing such activity in wealthier areas since the new mortgage began gaining popularity.
That has helped cities cut down on vacancy, which has long been an impediment to urban development. Baltimore has reduced its number of vacants by 30% since 2019. Detroit and Cleveland have also seen declines.
Baltimore's "reduction in vacant buildings has been led almost entirely by private money," said Michael Braverman, the city's former housing commissioner. The new mortgage product has allowed billions of dollars to flow into long-disinvested Baltimore communities, he said.
But the mortgage does come with its own risks. The easier underwriting requirements and the rush of lenders to drum up new loans has attracted fraud, leading to foreclosures that have threatened to drag rising neighborhoods back down.
Members of the industry say that some lenders became too lax and failed to do basic due diligence.
In Baltimore last year, a group of investors from New York were alleged to have committed fraud in receiving loans to acquire and hold hundreds of Baltimore vacant properties. The alleged scheme involved taking out these new 30-year loans at inflated property values and pulling out cash -- despite making little to no improvements on the properties. Many of the mortgages defaulted, creating a foreclosure crisis. A similar scheme unraveled in Philadelphia earlier this year.
Some lenders fled from the Baltimore and Philadelphia markets fearing widespread fraud. According to private lending data provider Forecasa, total private lending so far this year in Baltimore has fallen 40% compared with the year prior. In Philadelphia, over the 90 days ended Sept. 11, lending was down 19% year-over-year.
"Because there's a few bad apples in the industry, [lenders] are now correcting and making it more difficult for the rest of us," said Ken Weinstein, founder of Jumpstart Philly, a real-estate investor training and financing program.
Still, there are successes. Orange Mound, a Memphis, Tenn., neighborhood thought to be the first in the country to be built for and by formerly enslaved people, has become a hot spot for investors buying dilapidated properties and renting them out.
Memphis investor Raymond Porter bought an abandoned home in Orange Mound late last year for $79,000. He said young people had been using the house as a place to do drugs, turning it into "a blight on the neighborhood."
He spent $20,000 swapping the dark red exterior paint job for a bright white, cleaning off the moss climbing the brick siding, replacing the copper wires that had been stolen, and installing blue tile backsplash in the kitchen. By the end, he had almost doubled the value of the home, according to Zillow.
Then, he rented it out to a family for $1,400 a month and took out one of the new mortgages for $110,000, which allowed him to pull out money to replace his rehab and acquisition costs and invest in more properties.
Orange Mound has struggled for decades with crime, vacancy and disinvestment, said Kayla Smith-Hardy, a neighborhood organizer whose family has lived in the area for five generations. She is wary of investors profiting off the neighborhood if they don't provide meaningful revitalization, but has noticed vacant homes getting renovated. Meanwhile, community organizations have cleaned up informal dumps, and former residents are moving back.
It is "this kind of beautiful resurgence, renaissance," she said.