3% altruistic
It sounds like a misprint — a non-profit that gives low-income borrowers money for the down payment on their first home, and HUD wants to shut it down — indeed, to shut down a whole industry? Have they got something against charity?
Are you questioning my motives, young man?
As reported on Bloomberg:
May 8 (Bloomberg) — The U.S. Department of Housing and Urban Development plans to seek a ban on down payment assistance programs that have grown sevenfold this decade and contributed to a surge in foreclosures of government-backed mortgages.
How could a charity contribute to a surge in foreclosures?
Nonprofit groups including Nehemiah Corp. of America and AmeriDream Inc. provide the down payment help.
Want some down payment help?
They are quite proud of having done so, as AmeriDream’s site counter shows:
Since 1999, AmeriDream has helped
individuals and families reach the American Dream of homeownership.
On average, every 22 minutes
there is a new homeowner
because of AmeriDream.
Where do they get the money from?
Under the program that HUD will try to ban, groups including Sacramento, California-based Nehemiah and AmeriDream Inc. in
Up goes the red flag — a donation that is reimbursed by the seller?
Something’s worrying me about that arrangement!
Why isn’t the seller just making the down payment?
The arrangement was designed to circumvent
Why would the government ban seller down payment donations?
Enough already with the rhetorical questions!
Start with some economic theory. As housing-finance consulting detective Sherlock Holmes explained, a buyer acquiring a home with no hard equity invested violates fundamental market principles:
“Putting up hard cash is proof that you have hard cash to put up?” Watson concluded dubiously.
“Have it, earned it, risked it,” replied Holmes. “Equity is the evidence of a demonstrated capacity for saving. It also secures the borrower’s undivided attention.”
“When you’ve got them by the wallets, their hearts and minds will follow.”
– with apologies to John Wayne.
“Who you apologizin’ to, pilgrim?”
No matter how much economists wish people were rational calculating machines, we are more complex than that. (It is a weighty economic conundrum why some people walk up escalators.) Not all money is emotionally equal — psychologists have demonstrated that people will work harder to recoup losses than they will to increase gains. “Having skin in the game” is more than a metaphor, it’s an apt expression of the human subconscious expressing anxiety at having an integral organ hostage to fortune. Developers will go to the ends of the earth to recover their invested simoleons.
“The realization that one is filing Chapter 11 in the morning concentrates the mind wonderfully.”
– with apologies to Dr. Samuel Johnson.
Hard equity demonstrates a capacity for saving, and creates a psychological investment. A no-money-down purchase achieves neither objective.
HUD ruled the arrangements legal in 1998 in response to a request from Nehemiah. They have become increasingly popular with the growing awareness that nonprofit assistance eliminates the buyer’s responsibility for the 3% down payment required under FHA loans.
An FHA-insured loan, and a free down payment, may create in the buyer’s mind the presumption that the home is in some sense ‘free,’ and therefore that it may be considered more frivolously.
Most home buyers who received nonprofit assistance were happy with their houses and ignorant about how they were financed, a HUD-sponsored survey found.
“Universally, borrowers expressed joy in becoming homeowners but wished they were given more information about the process,’ Concentrance Consulting Group of Washington said in a 2005 survey of 95 home buyers in 10 U.S. cities.
Hard equity also serves a third purpose: it validates the reality of the purchase price. A borrower putting down hard-earned cash, repayable only after the hard debt is repaid, believes the price to be fair. Truthful valuations are the essence of arm’s-length dealing. As the Cluetrain Manifesto put it, “Markets are a conversation between people who are telling each other the truth.” That declaration of veracity is falsified if in fact the buyer is merely the seller’s puppet — and a buyer who pays nothing down is economically a puppet.
If the seller’s paying everything, then the seller’s pulling the strings
Sellers who reimburse [the non-profits] also pay [the non-profits] a service fee.
Gosh, it’s sounding more and more like the buyer is merely a patsy, and the non-profits are acting as the sellers’ paid agent.
Come on in and buy a house!
Do the non-profits act as surrogates for the buyer, making sure prices are held down?
Sellers have tried to recover the cost of the fee they pay nonprofits by raising the price of the house an average of 3%, a 2005 study [text version here — Ed.] by Congress’s nonpartisan Government Accountability Office found [also referenced here — Ed.].
So let’s keep score here:
· Buyers use FHA-insured financing for 97% of the purchase price.
· Even though there is a 3% down payment, buyers do not pay it themselves. Independent non-profits give them the money.
· Non-profits get the money from property sellers.
· Sellers also pay the non-profits a processing fee.
· Property sellers raise prices by 3%.
In a cruder world, what the non-profits are doing might be called ‘procuring.’ In such a procurement, two entities get screwed:
What happens to those receiving a procurement
1. The buyers get screwed.
The higher prices contribute to the increase in foreclosures by buyers who have no equity in the homes, the GAO found. Buyers’ settlement costs also rise in some counties with rising housing prices.
2. The Federal government (that’s us taxpayers) gets screwed.
The programs are “a contributing factor of increased risk in our portfolio’ of loans, HUD spokesman Lemar Wooley said in an e-mail.
More than 100,000 low- and moderate-income consumers bought homes using such programs last year. The percentage of foreclosures on these homes is more than double that on other loans sponsored by the Federal Housing Administration, according to agency audits.
More than twice the foreclosure rate of other FHA-insured products. That sounds like conclusive evidence.
“It’s painted to be helping homeowners get into houses,’ HUD Inspector General Kenneth Donohue said in an interview. “But it is circumventing good business practices, and you bet it has resulted in foreclosures.’
What does the industry say?
Once HUD issues its rule proposal, industry and consumer groups will have 60 days to submit comments.
“Clearly there have been some problems, but we’d hate to see the whole thing eliminated out-of-hand,’ said David Ledford, a vice president of the National Association of Home Builders. “It’s been a key ingredient to helping people achieve home ownership.’
As I’ve documented in other contexts, a homeowner who lacks genuine equity is really a deluded renter vulnerable to having her credit ruined.
Since its introduction, the program has mushroomed:
The number of FHA-backed homes purchased with non-profit assistance has risen to 102,921 in 2006 from 14,603 in 2000, HUD data shows.
A sevenfold increase
While these payments accounted for only 2% of all FHA loans in 2000, they soared to 33% of the loans last year.
Even as the program ballooned, some parts of government have been persistently trying to kill it:
In 1999, HUD proposed a similar ban and withdrew it in 2001 following industry opposition.
HUD has likewise drawn a distinction between seller-funded non-profits and those truly independent:
Some nonprofit aid is provided to buyers without reimbursement from sellers. This type of assistance will not be forbidden under the upcoming proposal, Wooley said.
The program’s defenders express nothing but the noblest, most altruistic motives:
“Anything that would limit and hurt the potential for homebuyers who have been locked out of homeownership, and that would decrease the potential in the economy, would not be good, no matter what action it would be’ said AmeriDream Chief Executive Officer Ann Ashburn, who has testified before Congress about the program.
Ms. Ashburn offers a motherhood-and-apple-pie argument, but her reasoning has no logical stopping point. She would apparently support anything, no matter how expensive or risky, that increases homeownership, however temporarily.
A year ago, the Internal Revenue Service held that groups providing down payment assistance did not qualify for tax exemptions. It said it was examining the practices of 185 nonprofits that provide this type of assistance to see if they merit tax-exempt status.
Among the lucky auditees are the two large firms:
AmeriDream and Nehemiah, two of the leading non-profits providing down payment aid, both said they are in talks with the IRS.
“I firmly believe our tax-exempt status is not in jeopardy,’ AmeriDream’s Ashburn said. Nehemiah “is in full compliance with IRS rules,’ said CEO Scott Syphax.
It’s easy to see why Mr. Syphax and Ms. Ashburn so fervently defend their companies and their status. They go to closings, from which emerge happy customers who are now titularly homeowners. For doing this good, the two companies evidently do well, with their costs plus (a fee) covered by home sellers. It’s all a terrific business model — except for that skyrocketing default rate, and the damage that it does to aspirant homeowners and the Treasury cost.
Happier days: Celestine and Scott Syphax,
at the Kennedy Center Honors Gala White House reception,
Donohue, who oversees internal HUD audits and investigations, said he has been trying for years to get HUD to ban nonprofit assistance. The agency acted only after the IRS issued its ruling a year ago, he said.
