Lennox's Real Estate Blog

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Archive for the ‘Housing Sustainability’ Category

The Homebuyer Myth of “Skin in the Game”

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Last week, I posted a link to a proposal about a national first time homebuyer down payment assistance program. I’ve received many responses – including those who originally questioned it, but have since taken a further look and acknowledged its merits. And there are others who are still undecided. Ultimately, my goal is to stimulate conversation about ways that housing can support the U.S. economy while giving people the opportunity to realize the dream of homeownership.

Homeownership is historically an instrumental part of the U.S. economic engine, so it’s critical that we take measures to ensure that the housing market has a strong foundation for sustainability. What I would like to address today is some of the feedback that I’ve received from those who question the national down payment assistance program and suggest that it will put us right back where we were with the mortgage crisis.

There is a misconception that first time buyers who have “skin in the game”, meaning cash for a down payment, are less likely to default on a home loan than those without. The truth of the matter is that for decades the USDA has offered programs with 100% financing and the default rate on those loans is only 1.7%. The VA has a similar zero-down program and their default rate is 2.5%. FHA loans require a 3.5% down payment and their default rate is under 4%. According to the National Association of REALTORS, conventional loans, which require a 20% down payment, have between a 2% and 5% default rate depending on the specific loan type. The foreclosure rates tied to the subprime meltdown are nearly 15%.

Some first time homebuyers have saved the money needed for a down payment; others are fortunate enough to have family that is willing to gift them the funds. In both cases, most buyers are left with little savings following their home purchase; thus the emphasis on ensuring that buyers are well qualified. First time buyers that need down payment assistance are no different with the exception that over a 15 year period they will repay the DPA along with their mortgage. As such, those using down payment assistance typically purchase slightly less home than their counterparts in order to compensate for the DPA effect on financial ratios. The moral of the story is that we need to focus on the qualifications of first time homebuyers, not the source of their down payment.

The moral of the story is that we need to focus on the qualifications of first time homebuyers, not the source of their down payment.

One of the main arguments that I have heard in opposition to a national down payment assistance program is that it will lead to higher foreclosures because it does not require “skin in the game,” as mentioned earlier. I think that the USDA program alone proves that even with 100% financing, responsible, qualified homebuyers who use down payment assistance are no more likely to default on their mortgage than those who use conventional loan products. In fact, according to national statistics, in some cases they are less likely to do so.

It’s important for people to enter into homeownership with a clear understanding of the financial responsibilities that accompany this kind of purchase. Unlike the time of subprime mortgages, buyers need to be responsible, have stable employment, good credit, and a healthy debt-to-income ratio. Foreclosure rates go down even more if first time homebuyers have taken a course that educates them about the responsibilities of home ownership.

As I’ve said before, my proposal for a national down payment assistance program is not about getting people into homeownership at any cost. It’s about providing opportunities and educating people about the possibilities that exist for those who are qualified and considering buying a home for the first time.

As always, thanks for reading,

Lennox

Written by Lennox

July 8, 2010 at 2:21 pm

The Key To Housing Sustainability

with one comment

With the expiration of the Federal Housing Tax Credit we must ensure a continual stabilization of the housing and building industries, the engine that has pulled the U.S. economy out of every recession over the last 60 years. The benefits of a strong housing market are many, but unless we ensure that responsible first time homebuyers have access to the American Dream, we will continue to see a slowdown in this sector. In order to avoid a downturn, and the subsequent economic fallout, we must establish a responsible Federal Down Payment Assistance program.

Click here to read a White Paper that outlines the benefits of an effective DPA Program.

Thanks for reading,

Lennox

Written by Lennox

June 30, 2010 at 10:57 am

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