From Forbes 01.10.05
No Money Down
Worthy goal: foster homeownership. Unworthy side effect: foster deadbeats.
By Ira Carnahan
What can you say about a bill, introduced by a Realtor turned congressman, that requires the Federal Housing Administration to insure tens of billions of dollars' worth of mortgages taken out by first-time home buyers who put nothing down? Normally, you wouldn't need to say much, because it would go nowhere. But this curious idea has been embraced by President Bush as part of his ambitious push to build a nation of home and investment-account owners.
It was just a year ago that Congress unanimously passed the President's American Dream Downpayment Act, which gives low-income home buyers grants to make their down payments. But that requires government spending. By contrast the Zero Downpayment Act, which authorizes the mortgage insurance, is being touted as a free lunch by the Bush Administration and Representative Patrick Tiberi (R-Ohio), the bill's chief sponsor.
John Weicher, an assistant secretary at Housing & Urban Development, told a congressional subcommittee in 2004 that the no-money-down insurance won't cost the government's insurance fund anything and will actually raise $184 million in the first year because borrowers will be charged higher premiums, including a 2.25% upfront fee, compared with the FHA's normal 1.5% fee. And how will borrowers pay that fee? They'll be able to fold it into--and increase the size of--their no-money-down loans, of course, meaning they'll start out in an even bigger equity hole.
By the Numbers
10% Share of mortgages insured by the FHA.
3.7 million Number of new FHA mortgages, 2001-03.
12.2% Delinquency rate of FHA-insured mortgages.
2.3% Delinquency rate of non-FHA prime mortgages.
Sources: Mortgage Bankers Association; Government Accountability Office.
Right now the FHA typically requires a down payment of at least 3%. That's far below the traditional 20%, but is evidence that a borrower has at least some ability to budget and save (or relatives who will help out). As Ronald Utt of the Heritage Foundation points out, "With today's median-price existing home selling for $183,600, half the homes for sale in America can be purchased with standard FHA financing for a down payment of $5,500 or less."
Is anyone shocked that a home buyer who can't manage to come up with 3% of the house price might be a bad credit risk? The Congressional Budget Office predicts that at least 30% of no-money-down borrowers will be foreclosed on, about twice the rate HUD predicts. As a result, by CBO's figuring, the zero-down program will end up costing taxpayers a half-billion dollars over four years.
Even some boosters for government-subsidized housing have questioned whether down-payment giveaways are a better use of tax money than other housing programs. Sheila Crowley, president of the National Low Income Housing Coalition, told a House hearing: "The problem with this legislation is not what it does but how far off the mark it is in addressing the most serious housing problem--that is, the shortage of rental housing stock that is affordable and available to the lowest-income families."
The one redeeming feature of the Zero Downpayment Act is that it could cut into a racket in which home builders funnel money into nonprofits such as the Nehemiah Corp. and AmeriDream, which "donate" the money, minus a fee, as a down payment on behalf of the builders' customers. The losers in this game are taxpayers, who end up footing the bill when marginal home buyers with FHA insurance--folks who never put up any genuine equity--are later foreclosed on. The bill still promotes equity-free ownership, but at least it cuts out the middlemen |
