Thursday, February 12, 2004

Home, Sweet Home

I haven't seen much in the blogosphere about Bush's new proposal to make more FHA mortgage loans available with zero money down.

There are already no-down-payment mortgage programs available for people with exemplary credit. The FHA program would extend that to people with lower incomes, higher household debt ratios, and shakier credit. The down payment and closing costs would be rolled into the overall price of the loan, and the extra risk would be covered by 0.75% higher interest rates - making the program pay for itself.

At first glance, this new program looks like the American Dream Downpayment Act, Part II. The ADDA was unrolled with great fanfare last December, with Bush promising that "this legislation will authorize $200 million per year in down payment assistance to at least 40,000 low-income families." In a now-familiar pattern, though, the actual budget only called for $87.5 million, and the estimate of the number of families that would be helped by $200 million was based on the lowball expectation that each would need only a $5,000 down payment.

But trimmed though it was, the ADDA was essentially a good idea. Families who receive down payment grants have actual cash money invested in their houses, and are on their way to building equity - whereas families who are allowed to roll their down payment and closing fees into the mortgage just have greater debts.

Foreclosure rates are already climbing fast, and FHA loans are more likely to be foreclosed upon than traditional mortgages. It's hard to see how low-income homebuyers are helped by encouraging them to buy homes they ultimately can't afford. (I'm trying to avoid making the black-helicopter-theory point that the "FHA's insurance operations turn a substantial annual profit that flows into the federal treasury." Oops, I made it anyway.)

The National Consumer Law Center points out that, although homeownership is a powerful tool in the fight against poverty, it's not sufficient to just put low- or moderate-income people into houses:
Maintaining a home presents special challenges for a low-income household. Limited savings and low equity render low-income homeowners vulnerable if income or expense fluctuations lead to mortgage delinquencies. High maintenance and energy costs drive housing costs upward for low-income homeowners because they tend to live in older or less sound homes.

Low-income homeowners are often targets of consumer scams. Predatory home equity lenders drain assets from low-income neighborhoods by foreclosing on high-rate loans, made primarily to elderly and minority borrowers. [...] As more low-income people buy homes through first-time homebuyer programs, housing advocates need to learn strategies for sustaining their clients’ homeownership over the long-term.
Increasing homeownership for low-to-moderate income Americans is a laudable goal. But when Americans are already drowning in debt, it's hard to see the long-term benefits of a program that encourages people with shaky finances to take out larger and larger loans. We need to be looking at programs to encourage wealth creation for the poor, so that they can legitimately afford to buy homes. We need to offer people greater assistance in avoiding foreclosure, including stricter protections against predatory lending in low-income communities. And we need to do a vastly better job of providing affordable low-income rental housing, nationwide.