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Zero-down FHA mortgages may bring more foreclosures -- Page 2

By Holden Lewis
The FHA doesn't allow home sellers to give down-payment money directly to buyers. But a loophole allows sellers to donate money to nonprofits, which then turn around and give the money to buyers. Down-payment-assistance nonprofits have given grants to hundreds of thousands of home buyers.

Zero-down borrowers may overpay

The resulting mortgages aren't technically zero-down loans, but they bear a strong resemblance. The buyer walks into the home with a 3-percent equity stake, albeit without having saved the money and writing a down-payment check. HUD officials have complained that the buyers often overpay for their homes because the sellers don't negotiate on price, so the buyers frequently owe as much as, or more than, the house is truly worth. The same would be true for borrowers who get zero-down loans.

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Ann Ashburn, president of AmeriDream, based in Gaithersburg, Md., disputes the assertion that zero-down loans are essentially the same as loans where the buyer gets down-payment assistance. With the zero-down program, the FHA would be putting people into homes that are worth less than the loan if they roll the closing costs into the mortgage, she says. That doesn't happen with down-payment-assistance programs if the appraiser does a good job, she adds.

Critics of down-payment-assistance programs say that this is exactly the problem: that appraisers are bullied or deceived into overvaluing houses.

Ashburn acknowledges that the default and foreclosure rates on low- and no-down home loans might be higher, although she's not sure the FHA relies on accurate data. She has proposed that the FHA enter into a partnership with down-payment-assistance programs to provide mortgage-payment insurance.

At least two down-payment-assistance programs -- Neighborhood Gold and AmeriDream -- offer insurance that makes a limited number of mortgage payments if the homeowner loses a job or is temporarily disabled. AmeriDream's program, called DreamKeeper, offers mortgage insurance coverage for the first five years. That's smart, Ashburn says, because mortgage defaults tend to peak in the third year of the loan.

Probing the limits of the homeownership dream

The debate over down payments has two fronts. First, there's the issue of whether people deserve to own homes if they haven't saved up at least 3 percent. Second, there's the question over whether it's good policy. The two arguments get intertwined.

Retsinas, the former FHA commissioner and current Harvard scholar, wants to know more before answering either question. "I think experimenting -- considering how we can make loans that do not involve down payments -- is an important exercise," he says. The notion of zero-down-payment loans "is a worthwhile one" if it increases the homeownership rate without resulting in too many foreclosures, he says.

Ronald Utt, a research fellow with the conservative Heritage Foundation, believes zero-down loans are bad policy because people don't deserve to own homes if they aren't willing to defer gratification and save money.

"I don't think there's much social value there," Utt says. "In fact, there might be antisocial value in teaching people that they can get something for nothing."

Most home buyers, he says, "got a job, saved up money and paid off debts and became a homeowner. It was that way for eons, and now we're saying you don't have to save up."

Another tradition went on for eons: Discrimination against minorities in housing, lending and employment. Advocates of low- and no-down mortgages believe that it's good policy to help minorities whose ancestors were oppressed for generations and allowed few opportunities to build wealth.

Helping an underserved audience

"There are a lot of people out there who are still underserved," says David Ahrens, vice president of marketing for Neighborhood Gold of Provo, Utah. Among them, he says, are Hispanics and African-Americans, along with working families with children.

That's the position of the Bush administration, which conceived the zero-down program primarily as a way to promote homeownership among minorities and immigrants. HUD Secretary Alphonso Jackson has pointed out that the homeownership rate among whites is about 70 percent, while the black homeownership rate is barely 50 percent.

Not everyone can or should own a home. Are we approaching the country's natural homeownership limit? Syphax, of Nehemiah, despises that question. Usually, he says, it's asked by people who don't need financial help to buy a home, talking about people who do need help.

Worrying about high foreclosure rates on zero-down loans "is like having starving people for decades and finally allowing them to enter the hall with the buffet table and saying, 'Oh, geez, is the food going to spoil?'" Syphax says. "You have a bunch of people who have been held back for decades because of antiquated notions of who is worthy and who is not worthy, because of historical prejudice-based decision-making in terms of who is able to access capital for homeownership.

"Now," Syphax continues, "we're already asking the question, 'Well, geez, isn't this enough?' You tell that to the young family that all they want is to be able to give their kids a backyard to play in, and a decent school."

There's no question, in Syphax's mind, that low- and no-down payment mortgages are a net benefit to society, even if foreclosure rates rise. Nehemiah commissioned a study this year that concluded that recipients of down-payment assistance increase their net wealth by an average of $18,000.


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-- Posted: Aug. 19, 2004

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