Zero-down payment loans too good to be true

Just when home foreclosure rates started to decline a bit in Chicago, some crafty lenders began touting amazing new shortcuts to homeownership.

The latest financing gimmick designed to add more froth to the dangerously bubbly market for first-time home buyers is the proposal for a federally insured zero-down payment mortgage program that would be available through the Federal Housing Administration.

Fortunately, the consumer watchdogs are hard at work blowing away smoke so borrowers can read the fine print.

The National Multi Housing Council and National Apartment Association recently told Congress that a zero-down FHA loan program would likely hurt the very people the government is trying to aid and would further divert limited housing resources away from solving the nation’s most pressing problems.

With FHA foreclosures at an all-time high and talk of a housing bubble increasing, the NMHC and NAA told the House Subcommittee on Housing and Community Opportunity, that now is not the time to place more hard-working families in jeopardy.

“Most policy makers at all levels of government operate under the mistaken notion that when it comes to homeownership, more is always better,” said Doug Bibby, president of the NMHC, an advocate of boosting the nation’s rental housing supply. “But the time has come to ask whether our single-minded pursuit of homeownership is doing more harm than good, especially when it comes to households with limited financial resources and / or weak credit histories.”

“Every dollar allocated to home-ownership incentives is a dollar taken away from other housing programs,” Bibby said. “And homeownership, while worthy, is not the best tool to solve our most pressing housing needs, including the affordable housing shortage, suburban sprawl and the need to house our aging population.”

Bibby also cited the following evidence that suggests the homeownership envelope has already been pushed too far:

Although home foreclosure starts have declined in Chicago for two consecutive years, nationwide foreclosures of conventional loans are near record-level. FHA foreclosures are at their highest level ever and are still climbing.

“Some housing advocates say now is the worst time for foreclosures in some parts of the nation since the Great Depression,” Bibby said.

In Indianapolis, clusters of foreclosed homes are emerging. One block of older rowhouses has 20 vacant homes. FHA repossessions in Indianapolis are growing and are depressing prices in neighborhoods where they are concentrated. The sheriff responsible for Indianapolis reported 5,500 foreclosures in 2002 compared to about 1,000 a year in the mid-1990s.

“Many people assume that households with severe cost burdens, such as paying more than 50 percent of their income on housing, are renters,” Bibby said. “But our aggressive homeownership policies are pushing more and more owners into unaffordable situations.”

According to the U.S. Department of Housing and Urban Development, the only group whose housing conditions worsened between 1999 and 2001 were low- and moderate-income owners, not renters.

A Harvard University study reported that twice as many owners as renters pay half of their income for housing. From 2000 to 2003, the number of lower and lower-middle income homeowners with severe cost burdens grew by more than 1 million.

Homeownership is more expensive for the very households less able to handle it, Bibby said.

“Lower-income and moderate-income households purchase a disproportionately larger share of older housing that depreciates faster and requires more frequent and costly maintenance,” Bibby said. “Too many people naively think that the ‘gift’ of a down payment is enough to make successful homeowners. But they fail to consider the true carrying costs of ownership.”

Experts estimate that it takes another 40 percent of a homeowner’s principal and interest to cover property taxes, property insurance and routine maintenance and repairs.

Bibby said low- and moderate-income home purchasers are also more likely to buy in neighborhoods with declining house prices.

“One study of housing appreciation in Miami showed that appreciation rates are far more volatile over time in low-income and high-minority tracts,” he said. “As a result of our aggressive policies, many families find themselves with no cash reserves and just one paycheck away from financial disaster if their incomes decline, their house values fall or expensive repairs are required.”

While homeownership can play a role in stabilizing neighborhoods, Bibby said it could only do so if new homeowners are successful. “If families default and abandon their houses, then cities, counties, towns and school districts also lose tax revenue and incur higher costs associated with vandalism and other social problems,” Bibby said.

Real estate columnist and media consultant Don DeBat has written about Chicago-area housing and mortgage markets since 1968. He is chief executive officer of DeBat Media, Inc., www.dondebat.net.

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