Urban Institute: New Detroit mortgage program breaks vicious appraisal spiral
Is this a game changer?
Detroit’s Mayor Mike Duggan unveiled the Detroit Home Mortgage Initiative, a new program that could be a potential game-changer, according to an article by housing expert Laurie Goodman at the Urban Institute. The new program, designed to address the appraisal gap, holds valuable consumer protection features and already earned widespread support from financial and government institutions.
In the city, there is an appraisal "gap" that exists because there are few comparable properties to base the appraisal off of, according to Goodman. Although people are putting money into their homes, the poor appraisal values are preventing buyers from obtaining a mortgage for it. This creates a cycle in which sellers do not see it as profitable to invest in their home, which creates a shortage of homes in good condition, and when they are sold, they do not help the appraisal market.
The Home Mortgage Initiative was created to allow home buyers to get another mortgage if the home they are buying does not appraise as well as hoped.
Laurie Goodman is the director of the Housing Finance Policy Center at the Urban Institute. The center is dedicated to providing policymakers with data-driven analysis of housing finance policy issues.
From Goodman's article:
While the concept of a soft second mortgage sounds simple, it is not. To succeed, this program requires institutions willing to provide funds for loans with a combined loan-to-value ratio of over 100%. Success also requires a program to educate borrowers on the risks they are taking. If an expensive rehabilitation is involved, the consumer also needs to ensure that the repairs are being done properly.
The Detroit Home Mortgage Initiative could have a huge impact on the city’s housing market. By allowing for mortgages with loan-to-value ratios over 100%, it could break the vicious appraisal spiral, which has systematically undervalued rehabbed homes. We’ll be closely watching the program’s implementation and hoping for its success, which could be a major turning point for Detroit.