Analytical Wealth

Before I say anything on the topic of Government and Non-Profit programs that provide potential home buyers with down payments, discuss the default rates and the potentially positive or negative impact on the current housing crisis; let’s first review some quotes and graphics.

First the quotes:

(From the WSJ) “Dick Whitmore, a 47-year-old construction superintendent in Phoenix, put up just $250 to move into a three-bedroom home that he purchased in March for $189,000. He says the down payment and closing costs, which came to about $12,000, were paid by the family selling the home via AmeriDream Inc., a down-payment-assistance program based in Gaithersburg, Md. "My wife and I are hardworking people, but to come up with five or six grand, that's next to impossible," he said.

Gloria Harris, a 57-year-old human-resources consultant, says she couldn't have bought her $216,000 two-bedroom condo in McLean, Va., in January without the $16,000 contributed by the seller to cover the down payment and closing costs. "I was having a hard time just trying to save because I was spending from week to week trying to live," she says.”

Key Graphics:

% of Consumers who received down payments from various sources, the default rates of the people participating in the program:

Graphic Courtesy of the WSJ

Here is another graphic that looks at default rates for mortgages in general:

Graphic Courtesy of The New York Times

So based on the information we have what conclusions can we draw?

Home Owners receiving down payment assistance have a default rate that is higher than the default rate for subprime fixed rate mortgages, and only lags the default rate for subprime ARMs by a couple of percentage points. In fact subprime ARMs are the only types of mortgages that have a default rate that’s higher than that for FHA loans with down payment assistance.
I don’t know if the people highlighted in the article are typical or not but they’re not exactly good candidates for homeownership. People who are living paycheck to paycheck aren’t financially stable enough to buy a home, nor are individuals who are unable to come up with barely 1-3 expenses for most households. The FHA is basically sponsoring future foreclosures if these people suffer any economic shocks at worse and a household living paycheck to paycheck at worse, I don’t think its sound public policy for the government to be in the business of encouraging either situation.

The nation’s economy (if not the global one) is already suffering from people trying to enable home ownership at all costs, the last thing the government should be doing right now is perpetuating such nonsense. From a public policy perspective our government needs to abandon the idea that homeownership is a god given right, and instead take a more sensible and measured approach that seeks to enable homeownership for those that can genuinely afford it. The down payment assistance programs in place now must be curtailed (if not abolished), lets they extend the housing crisis by creating a future rash of foreclosures.

To be clear I’m not against the program provided it’s putting people into a strong, stable financial situation, and if the default rates are only slightly higher than those for regular FHA loans. The key is to set higher standards and aim to help people get ahead financially, instead of having them fiscally limp into homeownership. For example: instead of providing down payment assistance for people who can barely afford to make ends meet, provide it for those who will have enough savings for 3-6 months expenses (after they buy the house) if they receive help with the down payment.

Supporting homeownership is a great idea from a public policy perspective but there is a big difference between supporting financially stable home ownership and enabling homeownership at any cost. Our efforts in this arena should be directed towards helping those that can genuinely afford it, and helping the rest shore-up their finances so they can afford to buy a home in the future. The only way to create a stable nation of homeowners in addition to facilitating stable housing markets is to work to ensure that every home owner is being put into an affordable, sustainable housing situation.

Sources:

The Wall St. Journal: “U.S.-Backed Mortgage Program Fuels Risks” -- NICK TIMIRAOS, June 24, 2008.