Are we encouraging people to buy homes who shouldn’t?

“One of the reasons we got into this situation is that we were pressing people, urging people, encouraging people to buy homes who shouldn’t buy homes," says Congressman Barney Frank

House Financial Services Committee Chair Barney Frank, commenting on the current foreclosure crisis and the importance of the passage of the National Housing Trust Fund, told the Washington Post that, “One of the reasons we got into this situation is that we were pressing people, urging people, encouraging people to buy homes who shouldn’t buy homes. There are people who can’t afford it. There are people who aren’t socially organized enough. You know, owning a home is a hard job. Part of it is that they were driven to that because there isn’t adequate rental housing.”

There is no disputing Mr. Frank’s observation.

One of the ways local governments encourage people to buy houses is by giving them money for the down payment.  Down payment assistance programs are some of the most popular uses of federal housing funds by local governments in Texas.  City housing programs provide grants of $10,000, $20.000, $30,000 and more to first time home buyers in down payment money.  Yet, there is little data collected or research done on the effectiveness of these programs.

It is a fact that research shows providing funds for down payments (equity reduction) is usually the most efficient form of assistance to home buyers.  But little consideration goes into deciding between funding down payment grants and rental housing.  Most down payment grant programs are established because political leaders prefer home ownership programs over rental housing because rental housing programs often produce a backlash from homeowners associations.  That is short sighted because these funds are very limited and should be spent to help the people most in need to get housing.

Some well thought out research on the down payment grant programs would be very useful.  Among the questions that need to be answered are:

1)  What are the foreclosure rates of households provided down payment grants?

2)  What percentage of the down payment funds are lost by governments upon sale of the homes?

3)  How long do recipients of down payment grants live in the homes bought with the funds?  What is the yearly cost of the government home buyer grants based on the length of residency?

4)  Do home builders, lenders and mortgage brokers, who often work with local governments to market these down payment grants to eligible home buyers, inflate home mortgage rates and sales prices to capture the government funds for themselves?

The current home foreclosure crisis taught us a hard (and expensive) lesson.  Many home buyers do not make good decisions when they buy a house and select the mortgage financing.  The guidelines and criteria for down payment grant programs should be carefully reviewed to ensure the buyers can afford the home, the financing the down payment is being used to support is appropriate and, in the words of Mr. Frank, the buyers are “socially organized” enough to be a successful home owner.

If government is going to continue to devote a large share of limited housing subsidies for down payment grants, then the public deserves to know exactly what their tax dollars are buying.