New mortgages are a boon for poor neighborhoods -- and a tool for fraud

The Wall Street Journal reported this week that “a new type of mortgage is reviving long abandoned neighborhoods.”

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.

Planet Money led with a different angle last month, reporting that the new loan “is at the heart of a new foreclosure crisis.”