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Down Payment Assistance: The Road to Hell Is Paved with Good Intentions

It should have been great. One of those human-interest, touchy-feely, warm fuzzy stories that takes the edge off all the human misery that opens a normal news broadcast. It’s a tear-jerker: hard-working Americans economizing, working overtime, and dreaming of the day they can buy their family a home. FHA was created to help these mostly worthy families accomplish just that, and it worked for decades. People could use an FHA loan to buy a modestly-priced home with about 3% down instead of the conventional 20% – the major obstacle for most first-timers. But this tale from the Wall Street Journal is no tear-jerker.

Some homebuyers apparently found 3% too much to save, and community groups decided that these people deserved help with that final hurdle. And many of them were in fact “deserving.” So the community groups created “down payment assistance” programs designed to either lend or give certain qualifying home loan applicants that last few percent so they could get their homes. Even home sellers and lenders got into the act — “helping” borrowers with their down payments in order to get the property sold and the loan approved.

The problem is that these well-intentioned actions really changed the risk profile of the borrowers – recent data compiled by HUD demonstrates that borrowers who have nothing of their own invested in their homes are far more likely to walk away from their mortgages than those with similar socio-economic profiles who put even 2 or 3 percent into their house purchase. These guys either weren’t qualified to become homeowners in the first place or were less inclined to continue to make their payments if it wasn’t going to cost them to walk away. So they walked and let the lender foreclose. And their neighborhoods suffered. And FHA got stuck with the tab. For the first time since the agency’s inception it’s insurance premiums will be insufficient to cover its losses.

So those looking for down payment assistance may have to look harder, and it may soon be gone altogether for the purposes of FHA lending. And taxpayers, get ready: Kentucky Senator Jim Bunning warns, “As soon as we finish this bailout for banks and borrowers, the next taxpayer bailout will be of the FHA.”

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