No Money Down Mortgages Continue (Unfortunately)

It seems many people are taking advantage of two major programs at the low end of the housing bubble: the FHA is aggressively promoting lending with only 3.5% down, and the $8k tax credit for buying a house less than $200k. A good realtor can apply the tax credit to last year's taxes, making sure that the buyer actually gets the money right away, and the HUD is actually OK with using the $8k to make buying a home a no-money-down proposition. Remember horror stories of sellers who would pay make the slim downpayment, and leave the stupid investors with losses? Well, today that game is over, except for the government, which proves that stupidity in the private sector actually loses people money, causing them to change their ways. For the government, it's just more incentive to double down.

A person who can't afford a down payment should not be in a home. One needs capital to pay for routine maintenance, and most importantly, if something major happens, like if a heater breaks. A renter is someone who does not have the wherewithall to handle these large, unanticipated expenses. It is better for everyone if these people are renters, because otherwise a bad break leaves the property in poor shape, leading to a 'broken windows' problem.

No private bank would lend in such a manner, but FHA wants to take the risk, because unlike the greedy bank, it sees the 'bigger picture', presumably.

The government's program reminds me of the technique children independently discover to make it look like they've eaten up hated peas or carrots: spread them around the plate. Thus, the recent economic debacle is primarily centered on housing, especially lower-end housing financed by overeager lenders. The unavoidable endgame to this problem is fewer houses, and lower prices for those houses; demand was artificially high. But, we wouldn't want people to adjust, because every good Keynesian knows that all misallocations of resources in a complex economy can be solved via top down injections o fiat money, or "G"--they have the multipliers to prove it!

To the government every hangover needs a little more hair of the dog. A friend of mine says his rental real estate business is slow at the top end, because those renters are attracted to the FHA loan/$8k tax credit. Those kind of effects are basically unmeasurable, and what can't be measured is not counted. What about the complex dynamics implicated by the finite nature of the $8k tax credit? Preventing the pain with a temporary subsidy merely prolongs the amount of time spent in the doldrums (eg, 1933-39 was a period of very high unemployment).

Bad governments prioritize the seen over the unseen, the direct over the indirect. The sad fact is popular policies usually have highly concentrated benefits and highly distributed costs, and the politicians act like little children, hoping those watching do not notice stuff that's spread around.

Comments

[Gary A:]

Of course this madness is continuing. It drives up asset prices and continues to impoverish the consumer. High asset prices and no money down high debt payments are a toxic mix. You would have thought that the United States would have learned something with the bubble collapse in housing, but these jokers have learned nothing. NOTHING. hubpages.com/hub/The-R...

Nov 03 01:27 PM

[Smalltownba...:]

Today I find myself in an unfamiliar position, which is defending a "government" program. FHA has been a solvent and self supporting program requiring no tax dollars to fund it for decades. It has been used as a tool by the current and former administration as a tool to address the crisis and this has led to financial stresses that are unrelated to the Agency.

Your commentary is not only inaccurate it is without substance. First of all the $8,000 tax credit is not received prior to the sale so it is not replacing down payment. FHA down payment requirements were increased from 3.00% to 3.5% and the ability to finance part of closing costs was eliminated at the same time. One must file for the tax credit after closing on a home so the funds are not used for down payment unless a loan is made against that anticipated tax credit. That is a very uncommon practice.

FHA loan performance has been primarily impacted by the government's use of the program to try and keep people in homes they were about to lose. If you take out these factors FHA loan performance has not really faltered more than would be expected in this economic environment.

FHA / VA & USDA low and $0.00 down payment mortgage programs DID NOT CAUSE or Contribute greatly to this crisis other than the private sector exploitation of a tax loophole that was finally closed last year through the same reform measure that increased FHA down payment requirements.

The FHA program has historically performed well and its insurance fund has adequately covered its losses. The same goes for VA and USDA Rural Housing programs. Comparing these to the programs that led to failure in the marketplace is ridiculous and unsubstantiated.

Nov 04 09:33 AM

[EastCoastCr...:]

I find your comments to be both arrogant and ill informed. You completley ignore the millions of homes that have been financed over the years through these programs with little or no down payment that have NOT gone into foreclosure and have been well maintained. Simply walk through any moderate priced neighborhood and look at the number of homes that were financed with very small downpayments. The vast majority of theses homes are well maintained becasue there is a pride of ownership.

I also find your comments about renters to be condescending. Many renters don't want the responsbility of home maintenance that has nothing to do with money, but is their lifestyle choice.

Nov 04 09:59 AM

[Dave T:]

How moronic!

Nov 04 11:55 AM

[John Doe2:]

1. "The government's program reminds me of the technique children independently discover to make it look like they've eaten up hated peas or carrots: spread them around the plate...The sad fact is popular policies usually have highly concentrated benefits and highly distributed costs, and the politicians act like little children, hoping those watching do not notice stuff that's spread around."

2. "But, we wouldn't want people to adjust, because every good Keynesian knows that all misallocations of resources in a complex economy can be solved via top down injections o fiat money, or "G"--they have the multipliers to prove it!"

Two gems of comments.

Nov 04 02:24 PM

[MiamiCondoShop:]

Hard to believe, no? 8k back and 3.5% down. I'm a realtor in Florida and I'm overwhelmed with people looking for FHA loans. One thing you forgot to mention are seller concessions where a buyer can get up to 6% back towards their closing costs, and literally have no money come out of their pocket. I've written about that here (bit.ly/4oPfjg)

Nov 04 02:49 PM

[surferdude808:]

smalltown banker you need to do your homework. your comment "Your commentary is not only inaccurate it is without substance. First of all the $8,000 tax credit is not received prior to the sale so it is not replacing down payment. FHA down payment requirements were increased from 3.00% to 3.5% and the ability to finance part of closing costs was eliminated at the same time. One must file for the tax credit after closing on a home so the funds are not used for down payment unless a loan is made against that anticipated tax credit. That is a very uncommon practice."

guess what, the use of the tax credit as the downpayment is a very common practice. go to fha website FAQs (federalhousingtaxcredi...) see question #19.
"...some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment..."

this mechanism of using a 2nd to fund the downpayment via a housing agency is why the adminstration recently provided $35 billion to housing authorities and allowed fannie and freddie to buy up to $20 billion in housing agency bonds.

fha is taking substantially risks with taxpayer monies, which are fully endorsed by the chairman frank of the house financial services committee as quoted in the NY Times on october 9th:

Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it. “I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

smalltownbanker, you may live long enough to regret this quote
"The FHA program has historically performed well and its insurance fund has adequately covered its losses. The same goes for VA and USDA Rural Housing programs. Comparing these to the programs that led to failure in the marketplace is ridiculous and unsubstantiated."

the best thing about this is that time will tell if your view is correct.

Nov 05 04:02 PM

[scotty1560:]

the point of the author is that high leverage will eventually haunt the
debtor... unable to withstand a blow to income or a price correction..
What the author is saying is that government is encouraging people
to take on massive debt that makes no sense and places the borrower in jeopardy of losing the home, losing his credit, and
possible IRS and judgments. Leverage is a cancer.

Nov 09 10:17 AM