Wednesday, April 29, 2009

Don’t Blame the Housing Crisis on Poor People

Whether you are a gardener or a physician or an auto mechanic or whatever, you have probably had people share their uninformed but strongly held opinions about your area of expertise. A lot of people have strong opinions about things they know little about.

I am a housing counselor and have helped many low-income people become homeowners. I routinely hear people assert that the reason we have a housing foreclosure crisis is because the government had programs that helped low income people become homeowners. I have heard Rush Limbaugh make this assertion and our local Rush-want-a-be and lot of other people say this.

It is true that a large part of the housing crisis was caused by lenders making loans to people who should not have gotten loans. It is true that there were many irresponsible borrowers. There were a lot of people who bought houses with no money down. Some of these people were low-income but many of them were not. These people who were low income did not get these bad loans due to government assistance programs.

Those low-income people who got government assistance for down payment probably were less risky borrowers than the typical borrower. There have been a variety of programs that helped low-income people become homeowners over the years.

In recent years the most widely available program was the Bush Administration’s program called American Dream Downpayment Initiative (ADDI). Under this program, the borrower could get into a house for an out-of-pocket cost of only 1% of the sale price and the balance of the closing cost and downpayment was provided in the form of a grant or a loan.

To take advantage of this program, the first mortgage had to be an FHA loan, or VA loan, or conforming conventional loan. This meant that the borrower could not get a “liar’s loan,” also know as a “stated income” loan. They could not get a negative amortization mortgage or an interest only mortgage or the really bad adjustable rate mortgages. The borrowers had to have decent credit and could not have excessive debt and their housing cost, including escrowed taxes and insurance, could not be over 32% of their gross monthly income.

ADDI is but one of a number of similar programs that I have been familiar with over the years that were designed to help low income people become homeowners, but almost all of them had these same requirements. Most of these programs also required that the borrower attend homebuyer education programs. These borrowers were better informed homebuyers than the average buyers.

Another reason that low-income people who become homeowner using down payment assistance programs are not likely to default on their mortgage is because the agency that assisted them usually ends up holding a second mortgage on the property. The second may be in the form of a “due-on-sale” mortgage, which means the assistance will be paid back if the property is ever sold. It may be a “forgivable loan,” where for example, 20% of the downpayment assistance is forgiven each year for a period of five years. The assistance could simply be a low-interest, long-term second mortgage.

If one wishes to refinance a first mortgage, one cannot do so without paying off the second mortgage, unless the second agrees to subordinate. When the non-profit agency holds the second mortgage, they can prevent the homeowner from refinancing into a bad loan or persuade the borrower that it is not wise to do so. Many borrowers end up refinancing when it is not in their best interest to do so, but borrowers who got downpayment assistance usually can’t do this.

I think that programs that help low-income people become homeowners is money well spent. It helps lift people out of poverty rather than subsidizing their life in poverty. These programs have genrally been sucessful.

While it may be popular to blame the housing crisis on government programs that helped poor people become homeowners it is simply not the truth.

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1 comment:

  1. Wow, what a great article!!! Are you sure you are still a Republican?

    You certainly don't sound like any I am aware of. I know that I wouldn't have said anything like that before our Heavenly Father started changing me, and as a result, I no longer consider myself to really be a Republican.

    In all fairness, however, I am certainly not comfortable with calling myself a Democrat, and Libertarians generally take many things way too far. So, I suppose that would make me an Independent, which is kinda like being without a country in a political sense.