December 5, 2003 | WebMemo on Federal Budget
Early next week, the House of Representatives has one last opportunity to demonstrate that the first session of the 108th Congress was not marked exclusively by wanton profligacy and wasteful spending.
That chance will arise when the House is asked to approve by unanimous consent the American Dream Downpayment Act -- a bill that would require the U. S. taxpayers to provide $200 million per year to fund cash grants of as much as $10,000 to individuals and families wanting to buy a house, but without subjecting themselves to the burden of having to save for the downpayment.
Although encouraging home ownership is a useful policy goal from a variety of perspectives, policies to promote it should be ones that create opportunity and encourage individuals to save, not seek handouts.
Wasteful & Extravagant
At a time when the American homeownership rate is the highest in history, and when there already exist less costly federal programs -- operated by the Federal Housing Administration (FHA) -- to assist lower-income/savings-impaired families to buy a house, the American Dream Downpayment Act is a wasteful and counter-productive extravagance.
Moreover, if HUD's sordid history is any guide, this program could end up costing much more than the $200 million per year in outlays authorized by the bill. The last time HUD attempted an expansive no-downpayment/modest-income homeownership program was in the late 1960s and early 1970s with the infamous Section 235 program.
Among the many HUD disasters that characterize that department, the Section 235 program was one of the grandest. Exceptionally high default rates; property abandonment and costly foreclosures led to budget outlays well in excess of whatever the amount of subsidies provided buyers.
These losses were largely a consequence of diminished recoveries through foreclosure that were less than the dollar amount of the outstanding mortgage. Since FHA insured these mortgages -- as they would most likely do under the Downpayment Act -- the federal government was ultimately financially responsible for these losses as well.
Past Painful Lessons
The Section 235 program was such a disaster that a bipartisan majority in Congress canceled it in the mid-1970s. By 1979, 18 percent of the program's mortgages had been foreclosed. The painful lessons of the experience were so enduring that no President or Congress since then has seriously contemplated the creation of a similar program. Until now.
The reason these programs turn out to be so costly is that the absence of an owner-provided downpayment that required some personal sacrifice to accumulate gives such subsidized buyers little incentive to be responsible owners. With no financial or personal stake in the property or neighborhood, such owners see themselves as little different from renters, and often act accordingly.
Although the promotional materials distributed in support of the bill emphasize that it is intended to benefit low income households, implicit in the legislation is the requirement that their incomes be sufficient to qualify for a mortgage and be able to meet the monthly payment, as well as insurance, taxes, utilities and repairs.
To suggest that individuals and families capable of meeting this standard are not also capable of saving a few thousand dollars to make the downpayment seems absurd.
The standard FHA mortgage requires a downpayment equal to only 3 percent of the value of the house, and as noted above, FHA also offers a no-downpayment mortgage under certain conditions to qualified buyers. It is worth noting that as a consequence of these existing FHA downpayment concessions and less rigorous qualification standards, FHA suffers from high delinquency and default rates on the home mortgages it insures. As of the second quarter of 2003, FHA's delinquency rate was 12.59 percent of loans compared to 3.14 percent for conventional mortgages.
Although the encouragement of homeownership is a useful policy goal from a variety of perspectives, policies to promote it should be ones that create opportunity and encourage individuals to save, not seek handouts. By contrast, the American Dream Downpayment Act rejects these approaches, and instead fosters the kind of dependency that characterized the failed programs of President Lyndon Johnson's Great Society, of which Section 235 was one.
For this reason, Congress should be skeptical of the proposal. A better course would be to hold comprehensive hearings on the issue that focus on the growing obstacles being imposed by some of the more extreme land use restrictions that are now becoming common in many communities.
As studies by researchers at Heritage, Harvard and Tufts reveal, minorities and others with moderate incomes are increasingly being excluded from homeownership by these restrictions and regulations, some of which are imposed for the explicit purpose of excluding such households from the community.