Matthew Yglesias: No Downpayment? No Problem.

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No Downpayment? No Problem.

George P. is up bragging about some bill that made it easier for people who can't afford a downpayment to buy a home. This sounds like the sort of thing that would attract strong bipartisan support. It also seems like a pretty bad idea. How many initiatives do we need to encourage bad credit risks to buy homes with borrowed money in an already-overheated property market? How many people's finances will be ruined by even a localized declined in key coastal areas?

August 31, 2004 | Permalink

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Comments

What, Bush Worry?

Posted by: Matt Davis | Aug 31, 2004 8:43:39 PM

Yeah, I saw Mother Jones carping on about this a few days ago. Not much the Democrats can do to speak out against it, though.

Posted by: florentino ariza | Aug 31, 2004 9:01:58 PM

Please keep carping on about this Matt. You, and Mother Jones apparently, are right. I should know. I'm one of those poor saps who've bought a place with nothing down.

Posted by: fnook | Aug 31, 2004 9:24:07 PM

*sigh* You are totally out of touch with the lower classes (like me) who desperately could use a hand up every once in a while. But it's always in style to pick on the poor, so keep on doing what you do so well.

Posted by: robin | Aug 31, 2004 9:27:29 PM

Dude, (y)our class is showing.

Seriously, these programs help a lot of people. If someone has no assets, and then they buy a home, there isn't a lot of risk for those people; if financial reversals force them out of their homes, they're no worse off than when they'd started, and the majority (probably the vast majority) will be just fine.

People like you and me are liberals out of conviction -- our lives are comfortable enough that we've arrived at our political beliefs through a certain amount of introspection. What this means is that we sometimes miss the brutal realities of limited means, simply because neither of us has truly lived through them. It's cool, but you're gonna keep getting smacked down the way I was when I first got seriously involved in politics -- until you apply the same depth of thought to social programs that you've obviously applied to things like civil liberties and freedom of religion/association/speect.

Posted by: Kimmitt | Aug 31, 2004 9:31:36 PM

I suspect this program wouldn't affect the overall market very much. People who get this type of assistance probably aren't buying into overheated neighborhoods like North Arlington or Columbia Heights. A $450K house means a dual income household making, say $90K and $60K. Couples like that can afford to save for a down payment. It is households earning in the $30-60K range that get this kind of help in major markets, but even with no down payment they can't buy in the neighborhoods that are bubblish.

Posted by: Tom DC/VA | Aug 31, 2004 10:16:31 PM

Matt,
Let me clue you in: Not having enough money for a down payment is not the same as being a bad credit risk. My wife & have a very good credit rating. However, if my parents hadn't helped us out with the downpayment for the house we bought last year (practically all of it) we wouldn't have bought it. And wouldn't be buying a house for several years. We live on Long Island, NY where the price of a starter home begins at around $300,000. That results in minimum downpayments of $30,000.

We can afford the mortgage payments, but we needed help with the downpayment. The 2 most important things to look for in someone's financial picture are: 1. Income - What is it & how long has it been like that. 2. Do they pay their bills on time? The rest is garnish.

Posted by: John M. | Aug 31, 2004 10:22:34 PM

So I'd like to hear somebody bring up the fact that this program negates one of the Veterans benefits, the VA loan. Kinda a pisser to do two years in Iraq, when you could've gotten the milk without buying the cow.

Posted by: S Brennan | Aug 31, 2004 10:53:52 PM

If Tom DC/VA is correct and these programs don't have much effect on the market, then Matt's worry about the impact these programs might have in exacerabting an impending housing bubble is probably overstated. Regardless, the concerns about the over-heated housing market is legitimate.

Kimmitt: I'm well acquainted with the brutal realities of limited means and by no means meant to suggest that these programs are not important and useful in a general sense. But if the market goes down the shitter the whole premise of the program goes down with it.

Posted by: fnook | Aug 31, 2004 10:56:54 PM

The other side to this is that overheated housing markets are a phenomenon that don't affect a lot of Americans. Since a lot of Americans who don't live in New York, Boston, San Francisco, or Seattle have a chance to buy a home at a low interest rate now, their money can be spent building equity and taking advantage of the mortgage interest tax deduction now rather than paying rent. If the housing bubble bursts, they won't lose a lot of equity because their areas aren't overheated and they'll have locked in a low interest rate. Presumably interest rates will be higher when the bubble bursts, making them glad that they had a mortgage now, rather than later.

Posted by: Constantine | Aug 31, 2004 11:40:17 PM

Didn't it look like Mary...errr... I mean Laura Bush was standing behind Stain Glass....? Religious overtones anyone...?

Posted by: Carleton | Sep 1, 2004 12:12:07 AM

Hey dudes ... buying with nothing down sounds good, but just wait till you have to sell because your corporate overlord abandons the division you work for, or decides that transmissions are cheaper to make overseas, or that they can increase pi by outsourcing your tech job. With a private mortgage insurance premium added to your monthly payment (since you have no equity to cover the lender's risk), and total selling costs at 10% or more if you have to sell, well, it takes a red hot market to come out ahead, in the short run anyway. In many markets it might take three or four years just to break even on the investment. Maybe you'll win, but maybe not. It depends on what your masters decide to do with your job. Welcome to feudalism, or indentured servitude, however you want to look at it.

Posted by: poputonian | Sep 1, 2004 12:14:36 AM

Anyone who can barely afford to own a home, needs help with the down payment and can barely handle the monthly payments, probably has had to take Greenspan's wonderful advice and get an ARM. When the real estate bubble bursts -- and there's pretty general agreement that it will, and soon -- those mortgage rates are going to adjust right out of the reach of a fair number of such people. Pop, a lot of people out of their homes and a lot of cheap real estate on the market. That's pretty much the definition of the bubble bursting.

Posted by: Bob Munck | Sep 1, 2004 1:00:54 AM

If you are good credit risk, there are a wide array of existing programs under which you can get a second, usually shorter-term, higher-interest loan in place of most or all the usually required downpayment.

When I was looking into buying a house, there were, IIRC, 97/3, 95/5, and 80/20 loans available. As it turns out, our credit wasn't adequate for the home we wanted to buy, so we're waiting for a while.

Also, note that "P" gave the total number of new hispanic homeowners since Bush *announced* the plan. Pretty hard to credit the plan with those, since it wasn't implemented.

Posted by: cmdicely | Sep 1, 2004 1:50:44 AM

I'm with Matt. And repeal the mortgage interest deduction and get rid of VA loans while you're at it. Goldurn nanny state!

How many people's finances will be ruined by even a localized declined in key coastal areas?

Actually when you think about it, if you do happen to live in one of those overheathed markets, and there is a sharp correction, not having made a down payment makes it a lot easier to walk away from an upside down equity situation if you're so inclined. It's the lenders, and quite likely (ultimately) the taxpayers, who will end up being the suckers.

Posted by: P.B. Almeida | Sep 1, 2004 2:20:24 AM

In fact, the more I think about it, I believe I'd advise anybody with sufficiently strong credit who's buying for the first time in one of the hot markets to try and get a non downpayment mortgage if the interest rate is competitive. Why put one's own money at risk in a market overdue for a correction? It's the well-to-do who ought to be lining up to get into these kinds of loans (my guess is many are, though I don't work in the mortgage industry and can't say definitively).

Posted by: P.B. Almeida | Sep 1, 2004 2:25:47 AM

Matthew,

Katherine Harris introduced this bill. Bush's mentioning it is part of the payback for 2000. Please recall that on Sept 11th, 2001, Bush was in Harris' district, helping her get elected.

The American Dream act is actually a terrible bill from an economics standpoint. Interest rates are at historic lows, down payments demanded (I suspect) are also quite low, and homebuying is incredibly strong. Adding incentives at this stage is what economists call "pro-cyclical" and will result in a harder time when the winds change.

'Twould be better to hold off on this proposal entirely (it's poorly formulated) but to at least delay it until we've definitely rounded the bend in the housing market.

Ciao,
Josh

Posted by: Josh Narins | Sep 1, 2004 4:24:32 AM

Matthew,

Katherine Harris introduced this bill. Bush's mentioning it is part of the payback for 2000. Please recall that on Sept 11th, 2001, Bush was in Harris' district, helping her get elected.

'Twould be better to hold off on this proposal entirely (it's poorly formulated) but to at least delay it until we've definitely rounded the bend in the housing market.

Ciao,
Josh

Posted by: Josh Narins | Sep 1, 2004 4:26:06 AM

At least George P didn't say this:

He will always trust his own vision
Could be a dangerous man
He's guided by no one
Attracted to the sound
Of the interior voices
He will not listen hard enough
To any other man

Chorus:
He gets a big warm sweet interior glowing
He gets a grand elitist superior knowing
This convinces us he's infallible - yeah

By sheer force of will
He leaves a deep impression
Self-confidence persuades us that he is a saint
Then we watch him tear apart another city
Turns it to dust and ash
A mighty nation's falling

(Chorus)

He downs another coffee
And the feeling grows
He's building monuments so high
In his expanding mind
He eats a six course dinner
And hears the voice of the spirit
This voice says
"Well done my very good and faithful servant"

(Chorus)

Posted by: Jon | Sep 1, 2004 7:49:17 AM

Matt,
Here's an article I wrote about the zero-down proposal a couple of weeks ago. It's not a terrible idea to have the FHA insure zero-down loans, but HUD needs to keep a close eye on the claim rate.

http://www.bankrate.com/brm/news/mortgages/20040819a1.asp

Posted by: Holden Lewis | Sep 1, 2004 9:35:19 AM

> *sigh* You are totally out of touch with the
> lower classes (like me) who desperately
> could use a hand up every once in a while.

Sorry - have to disagree. I don't know if MYG is out of touch with the lower classes or not, but speaking as a person who had to scratch and scrape for the first 10 years out of college (and who bought his first house at the 8 year point), MYG is dead on target with his point.

If a person or couple hasn't saved enough cash for the down payment, and for the first year's expenses (which will include a lot more purchases and repairs than they expect), then they aren't ready to buy a house. Period.

Cranky

Posted by: Cranky Observer | Sep 1, 2004 10:18:13 AM

Just shows the blue/red divide, that NE urban apartment dwellers don't get what the rest of America is going through. Nice work exposing yourself, again, as you have on the subject of homeownership previously.--s

Posted by: j.scott barnard | Sep 1, 2004 11:07:05 AM

Having analyzed Home Mortgage Disclosure Act data for newspaper articles, I can tell you that even now, 15 years after Bill Dedman's Pulitzer Prize-winning package, "The Color of Money," for the Atlanta Journal-Constitution, a lot of people who could swing home ownership are still being denied mortgages.

The question becomes: How low can you make the financial barriers to home ownership (as long as the home's value isn't more than, say, 3x annual household income) without significantly increasing the default rate?

Posted by: Lex | Sep 1, 2004 12:10:06 PM

I have to disagree. Even in a moderate housing market, by the time an average person could save the value of a down payment, there's a good chance that the price of a house could go up by that much or more. Getting in earlier and paying a modest interest rate on a home equity loan can pay off in the long run.

Also, there's a big difference between saving enough money to fix a roof and saving 20% of the price of a house.

Posted by: chilly | Sep 1, 2004 12:14:17 PM

Holden's article was very interesting. The thing about these FHA loans is they have a fairly strict top limit on house price, so these are not loans for McMansions or anything like that. The current requirement for the loan is that the buyers come up with 3% of the down payment, so this bill would basically remove that requirement. There is currently disagreement over whether this would end up costing the taxpayers more money in lender bailouts - it sounds to me like this could be mitigated by increasing the required mortgage insurance premiums. Honestly, though, the projected costs didn't seem that high to me ... the bigger concern is how the increased default rate would hurt these marginal homebuyers. Is a higher rate of attrition worth the benefit of homeownership to folks of more limited means? Good question ... personally, unless you got a lot of equity, home ownership is more for the stability and freedom than for the financial benefit, because interest, insurance, and maintenance suck up a big chunk of change.

Posted by: Timothy | Sep 1, 2004 1:39:36 PM

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