| 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.
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
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
"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.