Thursday, June 04, 2009

Zero Down! I Wish I Were Making This Up

I feel like I'm stuck in the movie "Groundhog Day." A few weeks ago I read a piece about some state - I think it may have been Arkansas - working on a plan to increase home affordability by instituting a lending program so that first time home buyers who lacked funds could borrow against the $8,000 tax credit they'd be eligible for. This was so ridiculous that I ignored it, out of fear of smashing my head through my monitor.

Today, however, I read that this plan is back - and it's going national: from Business Week via Clusterstock:

"Buyers who haven't owned a home for three years or longer are eligible for an $8,000 tax credit, thanks to a provision in this winter's stimulus package. Now, under a little-noticed program announced May 29, the Federal Housing Administration will steer the funds to cover closing costs directly—in some cases even offsetting the 3.5% minimum down payment FHA loans require. That's enough to cover most or all of the down payment and fees for homes up to the U.S. median price, now about $169,000.

Officials hope "monetizing" the tax credit will help revive the housing market, because meeting closing costs is one of the biggest hurdles for new home buyers. The National Association of Home Builders predicts it will add 40,000 to the 160,000 sales originally expected to be spurred by the tax credit. Supporters say the move avoids the worst effects of seller financing, in that the credit is essentially the buyer's money, and government assistance doesn't give sellers a perverse incentive to inflate prices in an unsustainable manner."

Let's take this back to third grade level: the problem is that people can't afford to buy homes. So what's our solution? Give them a tax credit to make it more affordable. Ok - good idea. But wait - many people STILL can't afford to buy homes, because they STILL don't have money for a down payment. Solution? (beware - I'm about to turn on my sarcasm meter) Easy - just advance them the tax credit so that they can cover the 3.5% down payment and closing costs, and the FHA will then cover the other 96.5% with a mortgage! We've now let them buy a house with little or no money down! (sound familiar?) As Clusterstock asked sarcastically in their writeup: "What could go wrong?"

It's simply remarkable to me that we're addressing a bubble caused by people buying homes they couldn't afford by... wait for it... THINKING UP NEW WAYS TO PUT PEOPLE IN HOMES THEY CANNOT AFFORD! Folks, here's a simple, bi-partisan fact of home ownership: if you don't have the 3.5% down payment, you cannot afford the home. Fact. Never mind that first time home buyers are probably the most likely to under estimate the costs of owning a home - and that the $8k tax credit would probably come in quite handy when they get plugged with a bunch of unexpected bills in the first few years - with this new program, that credit is already spent, and we can only assume that the home buyer is financially tapped out already.

unreal. Hopefully Barney Frank will put a stop to this plan - since he claims to be against increased home ownership.


full disclosure: I do not own a home I cannot afford

1 comment:

StB said...

I would find this mind boggling except I find those in charge so totally inept that it is now what should be expected from a group of idiots.