The great free weekly tabloid The Long Island Press can be picked up at supermarkets and other retailers. On page 5 of the July 14, 2010 issue sits the following innocuous (ie: innocent looking) quarter-page ad:
It appears that the State of New York is spending its citizens’ taxes (advertisements aren’t free) trying to find people to lend money to. A long time ago, someone decided that it was not fair that some people could afford to own a home while others couldn’t.
One of the missions of government became to promote home ownership for all. Homeowners keep their places looking nice, look after the neighborhood, and are in a more stable situation. And, they build up wealth as they pay down the home loan. These may be true, but homes aren’t free. And not everyone can afford one. Apparently, this doesn’t stop a government on a mission. What exactly is New York offering to those who can’t get a regular loan from a regular bank?
First, it will provide a very long term loan. Mortgages (ie: loans to buy homes) usually last a maximum of 30 years. New York will go 40! The longer the number of years a person has to pay, the lower each payment is. Second, it will offer an interest rate on the mortgage that is lower than that of local banks (ie: market rates). This is another way of saying that New York is giving a gift of a lower rate than the average person can get because it’s so important to get the last group of non-homeowners into homes.
The third component of help has to do with the down payment. This is literally the amount of the purchase price of the home that the home buyer will be putting down on the table when the home is bought. The bank loans the rest of the price. Normally, the amount of this payment is 10%. Anything less starts to become dangerous. For one, a 10% down payment shows that a home buyer must be doing something right. Consider that to purchase a $250,000 home would require a $25,000 down payment. People who don’t have their act together don’t just have 25 large lying around.
Also, the amount the home buyer puts down represents a cushion or buffer, if you will, for the bank. The value of the home can drop by 10% and it will still be worth the amount the bank loaned. As a last resort, if the homeowner doesn’t pay, the bank can kick him out by foreclosing on the home and pay itself back in full by selling the home. Note that since housing prices peaked in 2007, values have dropped anywhere from 20% to as much as 50% in hard-hit areas like Las Vegas. So, while a 10% down payment is reasonable, it is not excessive. Enter New York State and its offer to require a measly 3% down payment. How do we know from the ad? Because whatever isn’t financed by the bank (or in this case New York) has to be put down. If the State is financing 97%, that means the down payment is 3%! Notice that a drop in the home’s value exceeding just 3% will cause it to be “upside down”. The amount the bank loaned to buy the home will be bigger than what the home is worth!
Ok, so you say that certain buyers need a break and if 3% is all they can scrape up, then that’s what the State ought to accept. Well, we’re not done. The State is also going to provide “assistance” with the down payment. A visit to State’s housing web site reveals that the required down payment will be loaned to the buyer! Kind of defeats the purpose of requiring a down payment, don’t you think? The down payment loan has 0% interest and is forgiven (ie: forgotten) in 10 years if the buyer is still in the home at that time.
The fourth part of the program requires some translation. The ad says the State will use “flexible underwriting standards”. Underwriting is the process of checking the buyer’s records and documents to assess his or her fitness for getting a loan. If a person with a $50,000 a year job wants to purchase a $5 million mansion, the underwriters will kindly point out that the person cannot afford the payments. If a person who makes a reasonable amount of money is behind on his car payments because he has no discipline and spends most of his money on big weekends in the city, the underwriters will focus on his poor history of paying his bills. Perhaps another applicant for a mortgage works for himself, but business is unsteady. Some months he does really well, but at other times, business is slow and he has to eat mac-and-cheese for days on end. Again, while the underwriters may be sympathetic to the man’s problems, they wouldn’t approve him for a loan. Want to take a guess what “flexible underwriting standards” means? “No job”, you say? We’re flexible! Inconsistent income? We’re flexible. Behind on your bills? We’re flexible!
This kind of irresponsible lending can occur because it’s the government doing the lending. Governments don’t have shareholder owners to answer to. No state employee is going to be fired if a large number of borrowers don’t pay. Whatever losses that occur will be simply placed on the backs of the citizens of the State of New York.
The ironies here are just too obvious. It was this kind of lending activity going on for years throughout the country that caused the great housing and credit crisis we are still suffering from. Also, consider that this program is being offered at a time when New York State is in serious financial trouble. Its $9 billion deficit (ie: the amount that State spending will exceed the amount of taxes the State collects) this year is so scary that lawmakers can’t bring themselves to close the gap.
As if on cue, the Wall Street Journal chimed in with its Money & Investing section leading article Signs of Risky Lending Emerge in U.S. on July 15, 2010. It discusses how companies, in their never-ending quest to increase profits, are starting to lend to risky borrowers again. It mentions how Fannie Mae, a kind of national version of the New York State Mortgage Agency, began in January offering to give some borrowers a mortgage with a down payment of the larger of $1,000 or 1% of the loan! Another telling statistic is that credit card companies mailed subprime (ie: risky) borrowers 84.8 million offers in the first half of the year, as compared to 43.7 million offers during the first half of 2009.
Here we go again.
Riddle me this:
- What are a few reasons why governments promote home ownership?
- What does a down payment represent?
- What percentage is a reasonable down payment?
- What are two reasons why a substantial down payment should be required of all home buyers?
- What special name do we give to loans that are made to buy a home?
- What do underwriters do?
- In what ways is New York State’s home buying program better for home buyers than if they got a loan from a bank?
- Why is it ironic that New York State is offering this program at this time?
- What is another term for a risky borrower?
- How do we know credit card companies are turning their attention again to risky borrowers?
- What is your opinion on the issue of home ownership? Why should or shouldn’t governments strive to achieve “homeownership for all”?