Should People Be Able to Buy a House With Zero Money Down?

In the wake of the housing meltdown, it sounds outrageous. The Wisconsin Housing and Economic Development Authority (WHEDA) has a program that allows private banks to give people mortgages with (supposedly) zero money down.

Superficially, this sounds like the outrages that caused an epidemic of foreclosures and a crash in the housing market. Banks, knowing that they could sell mortgages in the secondary market (typically to Fannie Mae or Freddy Mac) lent promiscuously, not bothering about credit-worthiness, not bothering to seriously ask whether the borrower had an income to make the payments, and not even worrying whether the borrower already had multiple mortgages on multiple properties and was thus leveraged up to his eyeballs.

They were also none too scrupulous about whether the house was worth the purchase price. Appraisers were given a wink and a nudge and encouraged to come up with an appraised value that would allow the loan to go through.

But superficial appearances are often at odds with substance.

WHEDA has sent a defense of the program to Charlie Sykes (who questioned the program yesterday morning on his talk show), and we have a copy of that.

The Ownership Society

Before we talk about the specifics of this program, we should ask whether home ownership is something that conservatives and libertarians should favor.

The answer is obviously “yes.”

Once a family buys a home, property taxes cease to be hidden in their rent payment. They have to write a check (or at least see explicitly how much extra the mortgage company is demanding so that their property taxes can be paid). Ronald Reagan famously said “taxes should hurt.” Property taxes hurt.

In normal times (and admittedly, the last few years haven’t been “normal times”) housing appreciates. The owner begins to have equity. The owner comes to be among the “propertied” rather than the “propertyless.” The owner begins to think more about increasing the value of his property, and less about political schemes that victimize property owners to benefit the propertyless.

The owner now has a much greater stake in the quality of public services, in what goes on in the schools, and in any proposal that would compromise the value of his or her property. If the neighborhood goes to hell, renters can easily move on.

Social engineering schemes that hurt the qualify of life in the neighborhood – and thus property values – won’t have much appeal.

Thus President George Bush’s touting of the “ownership society” made perfect sense. Unfortunately, when he was doing that the foundations (like foundations of liberals’ claimed concern for home ownership among the working poor) were built on sand.

The WHEDA Program

In this context, reasonable concessions to allow people with modest assets to buy a home make good public policy sense.

But what concessions are reasonable?

Letting people with poor credit get a mortgage? Certainly not. But the WHEDA program requires a 680 credit score to qualify, and the average credit score of people who get mortgages is 732. That’s credit worthy.

How about employment and income? Under the WHEDA program, employment and income are checked. Too low an income or a spotty employment record can get you rejected.

And the program is not a real “zero money down” deal. The buyer has to put in at least $1,000 of his or her own money. The money can’t be a gift, and it can’t be borrowed (at least theoretically it can’t). It has to be hard cash. For a low income family, saving even a thousand dollars requires a bit of discipline.

Another thing to consider: giving people a mortgage with little or no down payment makes a lot more sense after the market has experienced a major correction. We aren’t on a bubble now. We can’t be sure where the “true bottom” of the market is, but it’s unlikely to be much lower than it is now.

Further, the whole system of property appraisal has been reformed. Appraisers are now at considerable risk if they assign too high a value to a property.

This particular program is too new to have meaningful statistics on default rates, but WHEDA claims that historically its default rates have been low. From their letter to Sykes:

WHEDA and other Housing Finance Agencies around the country were never part of the sub prime mortgage problem that plagued the housing industry in recent years. Quite the opposite - our 35-year track record of safe, responsible lending is what has resulted in a foreclosure rate of only 1.25% - far lower than the state’s average of 1.82% for similar “prime” fixed-rate loans, according to the latest data reported by the Mortgage Bankers Association. During the height of the foreclosure epidemic, WHEDA’s rate remained at less than one percent for several months. Moreover, the WHEDA foreclosure rate is minuscule when compared with the Wisconsin foreclosure rates for FHA and subprime loans, which are 4.30% and 11.31% respectively.

The bottom line: the default rate under the WHEDA program is very low: about 1%. This is well below the 3-5% that prevails in the industry generally.

Issuing mortgages with a small down payment has been going on for a long time. When we bought a house in 1982, we did so with an FHA loan that required only 3% down. They most certainly checked our credit. They most certainly checked our income.

WHEDA claims they are doing the same thing now:

. . . our current denial rate is higher than a few years ago. The top five reasons we deny loans today are: The borrower’s debt ratio is too high (in other words, they already owe too much on other lines of credit); The borrower’s credit score is insufficient; The property is somehow ineligible, often due to value; The borrower doesn’t have enough of their own seasoned and verified funds to close; or we do not believe their income or employment is stable enough to support a monthly mortgage payment over the long term.

The program, of course, deserves continued scrutiny. A further drop in housing prices (which we think unlikely) could leave a lot of borrowers “under water.” And we want to see what the default rate is in this program.

Still . . . on a public policy landscape littered with outrages, this falls far short of being an outrage. In fact, it’s probably an outright good thing.