Washington Post: Congress set to Limit Down-Payment Assistance
Before we get started here, let me state this clearly: I am a rotten bastard, and do not believe that everyone should (or can) be a homeowner.
Oh, sure, in a perfect and risk-free world then perhaps down payments would be unnecessary. But our world isn't perfect, and it certainly isn't risk-free. (As recent news so clearly suggests.)
Anyhow, in the above article, I was nearly ushered into full-rant mode by a few of the quotes used in the story.
Warrior and her husband, Jimmy Hicks, suffered housing sticker shock when they moved to the Washington area from Arkansas a few years ago.
The couple, recent college graduates, had depleted their savings on tuition and care for their newborn son. But they had steady jobs and did not want to keep sinking money into rent, Warrior said. They also did not want to put off buying a home because they were not convinced that their finances would be stronger in a few years.
"We don't want to throw money in a hole," said Warrior, 24, a federal patent examiner. "My thing is, we pay our rent every month and we've never been late, not once in five years. If we can pay our rent every month, we can pay our mortgage every month."
Yeah, see, what this college grad and recent dad doesn't yet grasp is a thing called risk. As a guy who's been rabidly watching the housing bubble go bye-bye these last few years, I will state here that "paying rent" and "paying the mortgage" are alike only insofar as they both involve forking over money to someone else on a regular basis.
That's where the similarities stop.
Let's pretend Mr. Hicks stops paying his rent. What happens? Give it a few weeks, or months, and his landlord comes along and plays the eviction card. Mr. Hicks takes the proverbial hike. Mr. Landlord (who already owned the place) cleans the place up, maybe, puts an ad in the paper, and soon (probably) finds a new tenant to shack up and take on the rent.
Landlord's Risk: Probably not too much, in terms of time and/or income. If the renter scoots one day, well, hopefully Mr. Landlord was wise enough to collect a month's rent or more upfront. Just in case.
Renter's Risk: Little to none. When something breaks or repairs are needed, he calls the landlord. When it's time to ditch the place, he loses his initial deposit. Maybe.
Now let's say Mr. Hicks stops paying the mortgage on the Dream Home he and his wife so luckily qualified for thanks to scams like "down-payment assistance." There really is no down payment (read: borrower "skin in the game") in such cases, mind you; the money simply comes from the seller via an inflated sales price and a circuitous money-laundering route. Think high appraisals and dodgy "non-profit" assistance companies, for starters.
Lender's Risk: High. When things go bad, the lender must resort to foreclosure (costly), property upkeep (costly) on a place he never wanted to own anyway, and (oh yeah) risk the loss of tens or hundreds of thousands of dollars of value (watch the news much?) when he finally unloads the property on the market.
Buyer's Risk: Significant to high. For starters, who ya gonna call when the roof springs a leak? That's right: MasterCard. Whose credit rating hangs in the balance when the Buyer's checking account runs short? Who's on the hook for property taxes, upkeep and maintenance, and dodging annoying neighbors? If you answered "buyer," you're a winner. Of course, if housing prices ever went a direction other than UP, then you could throw "price risk" in here, too. But since we know THAT never happens...
Anyway, what Mr. Hicks is missing entirely is this: From the "buyer side" of the transaction, "paying rent" and "paying the mortgage" don't look all that different. Both require the obligatory once-a-month check. From the landlord/lender side of the table, though, there's this thing called risk. And it's a huge consideration. Or should be. (It wasn't the last few years, thanks to bubbledom. Which is why words like "subprime," "Alt-A," "walking away," and "billions in write-offs" splatter so many headlines these days.)
There's a reason the standard mortgage down payment used to be twenty percent. Twenty percent means the borrower has significant "skin in the game" and won't take her responsibility as homeowner lightly. Twenty percent means the lender has significant cushion against falling home values should the borrower default at some point.
Additionally, "twenty percent down" means that borrowers don't go buying homes that are light-years above their means. In contrast, the Washington Post gives us the Shermans:
But yesterday, he said he felt lucky that he bought his seven-bedroom house in Clinton this month. Without seller assistance, he and his wife would not have been able to close the deal. They have six children, two of them grown.
"I do not see myself as any risk at all because I'm not stretching with this house," Sherman said. "We can afford the monthly payments. . .. We're staying put, right in this house."
Hmmm. Let's see:
Six kids, including two grown.
Decked-out kitchen (note the article's slideshow).
And not enough savings for a minimum down payment on any of it.
Not stretching, huh? Someone — anyone — please show me where requiring "seller assistance" to purchase a seven-bedroom McMansion equals "not stretching."
Call me crazy, but no matter how bulletproof Mr. Sherman believes his American Dream is right now, something tells me the dreaminess of it all will quickly dissipate the minute ol' Murphy strikes. And Murphy will strike.
We're told that Mr. Sherman's been "affording the payment" in this "first home" all of one month — if that. And since he apparently couldn't come to the table with a requisite down payment of his own, we can be fairly assured that his household's ability to actually save cash is ... well, iffy. At best. (And with six kids, who's surprised?)
From where I sit, it takes more than one month of living in a place to have any idea of what it's really gonna take to "stay put."
But Who Has 20% of $400k to Put Down?
Yeah, I know. Realistically, what Joe Sixpack can come up with $80k as a down payment on, say, a $400k house?
One who can truly afford that house. That's who.
Note that this Joe Sixpack probably isn't a first-time homebuyer, nor is he a single dad with three live-in kids and a Yorkie.
Which is exactly as it should be.
But $400k Won't Even Get Me a Shanty Where I Live!
Then prices need to come down. Way down. Which, I've heard, is happening as we speak. Lucky you. Of course, you could also move.
But that would be hard.
Just like saving.
So You Want to See Minimum 20% Down Again?
Nope, though who knows how lending will evolve from this point. When my wife and I bought our home, it was our first, and we had to put only 3 percent down. At the time, that was something just over $2k. If I recall, our household income was in the low- to mid-$20s. We saved the $2k and made it happen. (I reiterate here that it's awfully nice to reside in a low-cost-of-living state.)
Unlike some folks, apparently, I don't believe that banks' requiring minimum down payments WITHOUT some sort of DAP involvement is just another way for "The Man" to "Keep You Down." That's crap, and I'm tired of the implication of it from various outlets.
Having some sort of significant down payment — and yes, that can be as little as 3 percent of the purchase price, provided the funds are the borrower's — shows that you have at least some control of your money, and at least some capacity for thinking ahead and saving. I like to think of having good credit and a stable work- and bill-paying history as "being qualified" to enter the American Homeownership Ball. But just being "qualified" doesn't get you in the door.
For that, you also need a decent down payment. Somehow, some way, you have to prove that you can control your money, and having a savings stash is as good as any.
As a 12-year homeowner, I can assure you: That ability to save will come in real handy when homeownership risk rears its ugly head.