They should begin by completely phasing out the FHA over some clearly defined period (for example, three to five years) and replacing it with a new subsidy program that would help the two types of households the agency is meant to serve. The new program would help prospective homebuyers amass a 10% down payment that would then allow them to obtain financing at market rates from private lenders. This could be done through a simple system in which qualified households pay into a special savings vehicle and receive some type of match from the government. These funds would accumulate on a tax-free basis until they were large enough to provide a 10% down payment on a home.
On the civilization vs. barbarism axis, this would encourage saving and responsible behavior. If you read the whole article, you will see reinforcement for this. Of course, along the oppressor-oppressed axis, the only thing holding back people from owning homes is oppression, so there is no need for requiring a down payment.
Of course, what matters here is a different axis entirely. The real estate lobby vs. everybody else. And from that perspective, Gyourko’s sensible proposal does not stand a chance. Another indication of the political impossibility of this approach is that it is one that I have long advocated.
I’m not sure OvsO types despise down payments. It seems like as long as there is one socially accepted downpayment standard their ire moves elsewhere. I am pretty sure they don’t view them as keeping defaulters from oppressing non-defaulters.
The British government has just introduced a scheme that sounds very similar to what you’ve summarized here.
https://www.gov.uk/government/publications/help-to-buy-isa-factsheet
Do you think the British government is less subject to the real estate lobby than Congress?
On the other hand, the “Help to Buy ISA” is being criticized because without an increase in housing construction, this policy will only raise house prices by allowing first-time buyers to bid up the price of houses even more, while not alleviating the housing shortage or the inaffordability of housing. One could say this serves the interest of existing homeowners at the expense of renters.
Why wouldn’t the real-estate lobby like a program that provided government-matched savings that could be used only to buy housing?
Because not as many people would have the discipline to use such as program as there are who are willing to buy with no money down.
Right. It’s not the savings program the lobby doesn’t like. It’s the joint requirement to have X% down payment. As Dr. Kling said, the combined effect will be to reduce the total number of home buyers.
I could maybe go along with a tax-advantaged home-buying savings account (although does our tax code REALLY need one more complication?), but why does there need to be a government contribution over and above the tax advantage? Is that not simply an indirect subsidy for the residential real estate industry?
If buying a home is valued by the prospective purchaser, then he would save without the extra contribution. As our parents and grandparents did. And as I did.
By the way, recall that, with certain restrictions and limitations, an individual may already withdraw funds from his IRA (traditional/Roth) for the purchase of his first principal residence. Rather than invent a new tax-advantaged savings method, why not simply liberalize the contribution and/or withdrawal terms of what already exists?
“But why does there need to be a government contribution over and above the tax advantage”
To ensure access. 😉
Long term options on houses for tenants would be much better.
I would suggest that we look at removing barriers to the supply of housing, and be very careful about subsidizing demand.
It’s clear now that most of the poor people who need help with housing live in blue cities where there are tremendous barriers to infill and multi family development. So the price of housing is an order of magnitude higher than construction costs. Look at the price of condos in tall towers in SF vs. Dallas. In SF, the condos costs millions, in Dallas, $200k. That’s not a difference in absolute land scarcity, that’s mostly a difference in how hard it is to build tall buildings.
I think the down payment is a red herring (though I’m all in favor). Suppose you have a down payment requirement. What’s to prevent homeowners from using home equity loans to remain perpetually highly levered.
I would rather see a system whereby the mortgage loan increases over time as equity increases, e.g., for a $200,000 house, there is a $10,000 down payment, $90,000 loan, and the bank owns 50% of the house. I realize this is messy, and complications arise such as, how does the bank charge rent on half of a house? But the idea is that leverage should be lower in the early years and that means either a much larger down payment, or a smaller loan (hence a loan for only part of the house value).
Lenders will not take on that risk. Home equity loans are junior liens, and for all practical purposes the housing collateral is useless. It is more of a consumer loan, and the lender is going to focus much more carefully on income and credit history than with a first mortgage. Note, also, that there is no government program offering subsidized home equity loans to high-risk borrowers, the way FHA offers subsidized first mortgages.
The way for a borrower to stay levered is to do a cash-out refinance, but assuming that the same loan-to-value rules apply to those as first purchase mortgages, that is not an avenue for borrowers to drive their equity to near zero.
Watch for the SCOTUS decision in this case, that was argued just two days ago — as it may change some of the weight and balance calcs for first & second secured housing loans.
http://www.scotusblog.com/2015/03/argument-analysis-navigating-between-scylla-and-charybdis-on-underwater-mortgages/#more-226396
On the one hand, it seems crazy that the court is deciding such things. On the other hand, shouldn’t this have been worked out 200 years ago?
I too think it’s odd that this has come up only now, when real estate law stating that paying “first in time, first in line” liens goes back to the beginnings of recorded liens. (I think, don’t know for sure….)
As most know, in typical bankruptcy (most emphatically NOT like GM/Chrysler), the secured creditors bargain amongst themselves on how to divvy up the collateral if there’s less than 100% coverage. In real estate, the first gets paid in full before the second gets anything.
But if the court allows the bankrupt to completely avoid a second mortgage, it’s gonna be really, really hard to convince a bank to give you one, without jacking up the interest rate to reflect that additional risk, or without having sufficient equity to absorb some reasonably-foreseen market value decrease without going under.
OTOH, would that be such a bad thing? Why should home loans be more forgiving in their economics than any other business loan?