Economics
Doomed to repeat history
Aug 5th 2010, 16:18 by R.A. | WASHINGTON
THERE really is no justifying this:
Now, qualified homebuyers in the three states pioneering Affordable Advantage do not need to put down the 3.5 percent minimum down payment required by the Federal Housing Administration, or much of a down payment at all. They can get 100 percent financing "” a loan as big as the purchase price of the house "” for a 30-year, fixed-rate mortgage "” a vanilla mortgage. The deal includes a program to help homebuyers if they become unemployed, lowered fees and there is no requirement that the homebuyer purchase mortgage insurance.
Wisconsin started the program first, in March, offering 100 percent loan-to-value mortgages for borrowers with a minimum credit score of 680. "It's a good credit score," explains Kate Venne, the spokesperson for the Wisconsin HFA. "In addition, we want to see what other lines of credit people have, and their performance. We look at their work history. We call their employers." Thus far, Wisconsin's HFA has offered $52 million in mortgages to 450 buyers.
The HFAs are state programmes to encourage homeownership that ran aground during the crisis and which are now being supported by Fannie Mae. There are attempts to defend the return of the 100% loan-to-value loan:
"That is clearly a worry," says Barry Zigas, the director of housing policy for the Consumer Federation of America. "But for people who are buying a home first and foremost as a place to live, the fact there might not be much equity, or the equity might go negative "” that's not the most important feature."
Yes, yes it is! It's true that negative equity isn't a problem for people aiming to live in a home for a while, so long as they reside in a world where unexpected bad news never hits. In reality, 100% LTV loans practically guarantee that any household misfortune will be substantially magnified, either because the household will be forced into default or because it will be stuck in a bad situation by its inability to sell at a profit. In the real world, people lose their jobs, medical emergencies hit, local economies deteriorate, neighbourhoods change, and so on. Homeowners with zero equity and little in the way of cash reserves are leaving themselves completely exposed to these events, unable to take the simplest steps"”temporary downsizing or relocation"”to weather bad times.
This is really unfortunate. If you can't afford a substantial downpayment, then you don't need to be buying a home. And you certainly don't need the government urging you on.
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Wow. There are screwy government programs out there but I can't say I've ever heard of one more screwed up than this. Just wow.
Is the default rate on zero down loans much worse than loans with say 20% down? I imagine it might be twice as bad, even as high as 10%. But by denying all zero down loans, you punish the 90% who don't default in order to avoid the 10% who do. Do we endorse group punishment?
If "old-fashioned" lending requirements were put back into play (20% down, DTI of 28/36) the market would crater. The recent activity driven by the Fed and state tax credits was overwhelmingly first time homebuyers, many with FHA financing of 3.5% down and DTI ratios of up to 31/43.
I really don't understand the focus on promoting home ownership. I know it's a very popular notion with my parent's generation, I've given up on trying to convince them that there is little empirical support for the notion. What people really need to do is learn to save and be financially literate. It is much better to support asset development programs that include home ownership with other objectives if you think it is so important. The money that goes into supporting home ownership, and the regulations that allow for it, represent a lot of wasted resources. For more coherent alternatives check out individual development accounts, it's a much better strategy to promote home ownership while teaching people basic finances (yeah, yeah, I know it's really unfair that the government is favoring people that didn't independently learn to do the right thing and save. But for most people that are going to qualify for this it isn't like they have good role models to teach them if it weren't for these programs, government's there for those that find it hard to learn how to help themselves when the negative consequences of their actions aren't enough. Programs like this are cheaper in the long run than having these people completely dependent on public largess, at least they're having to provide some matching funds. It's really hard to save money without something like this if you're near the poverty line and living expenses leave you with little left over).
http://www.idaresources.org/page?pageid=a047000000ArRQO
Fundamentalist - You assume that it's actually better for all those who don't default to have a home and a giant mortgage than not.
They become much less able to move if they do this - so maybe they're stuck in a bad job but can't afford to move because they owe 100% of the value of the house. 20% down cushions them somewhat against this.
This perpetuates the myth that owning is so much better than renting. It can be, but the main benefit is that it forces you to save money, so it can help people who don't have the fiscal discipline to save. So the people it helps most are those with weak fiscal discipline - exactly the people to whom I don't want to give a 0% down loan.
+1 A.D.
Plus, I don't know how I feel seeing fundy so strenuously defend a government program
As an American economist teaching in Europe, I have often been guilty of bragging to my European students about how much more mobility there is in the US labor market compared with the EU. Historically, more than 10 times as many people change US state of residence each year than change EU country of residence. Now this is changing--Americans are becoming immobile, and the housing equity problem is a prime culprit. It would be going too far to put the blame for record long-term unemployment solely on US housing policy, but it is certainly a contributing factor. Some relevant research by William Frey of Brookings can be found at this link: http://www.brookings.edu/reports/2009/1209_migration_frey.aspx
fundy,
People are choosing a "strategic default". They can afford to make thier payments.
They are no better than the people you read about at mortgagefraud.org.
PBS Newshour's Paul Solman Report
http://www.youtube.com/watch?v=zjrpEUh-OVc
note the nice furniture in the guy's condo. He's been living there and not making ANY payment for 2.5 years.
Regards
The clue meter's reading zero (to borrow a line from Dilbert).
Artificially propping up the market is NOT going to make the market clear! Nor is it going to make the market function normally. All it's going to do is try to prop up a fairy tale that houses really are worth that much.
fundamentalist:
It's moral hazard. We've been learning about that lately, and what we've learned is, it's bad. It causes damage that spills over from those involved into the wider financial system.
msgkings:
Instead of saying "+1", hit the "Recommend" link at the bottom of AD's post.
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