Wednesday, August 4, 2010

Seller-Funded Down Payment Assistance Program

The home buyer tax credit program is history, and no one is really sure if the $12.6 billion investment was worth it. I myself have not seen any decline in home buying, probably because of the incredibly low 4.5% fixed mortgage rates combined with house values that in some cases are half what they were three years ago.

These guys at ThinkBigWorkSmall make a good point. Just a few years ago, we had programs that allowed sellers to contribute to the buyer's down payment. The down payment had to be laundered through a non-profit that skimmed some of the money for handling the paper work, but a lot of houses were sold to people who had no savings.

HUD decided that because the default rate on these loans was considerably higher than average, they had to put a stop to seller-funded down payment assistance programs. They concluded that when people don't have much "skin in the game", meaning their own savings invested in a houses, they are more likely to walk away from the house when they get into financial trouble.

But is this the reason for high rate of defaults on these loans? Maybe partially, but HUD needs to remember that many of these loans were made to people with no income and bad credit. Additionally, the unemployment rate has soared, and the glut of foreclosures had depresed property values, making houses impossible to sell or refinance. The defaults should surprise no one.

Almost immediately after the seller-funded down payment programs were eliminated, HUD came up with a new idea: $6,500 to $8,000 tax credits for home buyers. The problem with this is that instead of the home buyer having their skin in the game, now they have the tax payers' skin in the game. $12.6 billion of it. This doesn't seem like an improvement to me.

HR 600 is a bill that will restore seller-funded down payment assistance programs. These programs could help keep the housing recovery chugging along, and they don't cost tax payers a dime.

For the most part, lenders are no longer making loans to people who have no business buying a house. In fact, lenders have swung so far in the other direction, that I am now having trouble getting loans closed for people with perfect credit, savings and secure jobs. If the down payment assistance program could be used to help people who are actually qualified to buy houses, we would all benefit.

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