The down payment assistance debate

Acquiring a mortgage loan

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Tess Vigeland: As we heard earlier in the show, Utah's economy often lags behind the rest of the nation, and according to local real estate broker Randall Wall, Salt Lake City isn't such a bad place to buy or sell a home right now.

Randall Wall: For $250,000 and below, we're about a six-month average sales time and I was talking to some friends of mine back in the Midwest and they said properties in that range are looking at an average sales time of two to three years.

Meanwhile amid all the news from Washington this week, a new Federal Housing Act took effect this Wednesday. It's supposed to provide relief to homeowners, incentives to buyers and add more oversight to the mortgage industry.

As Rachel Dornhelm reports, one of the practices being eliminated is something called down payment assistance.


Rachel Dornhelm: This was your last week to buy a home for zero money down with one popular program. As the clocked ticked, there was a huge online move for a reversal.

Russell Simmons: Hi, I'm Russell Simmons. Homeownership is very important to fulfill the American Dream...

Even a hip hop mega star got in on the act.

Simmons: Let's support equal housing opportunities for all. I support down payment assistance.

Here's an example of down payment assistance: say you want to get into a new development. You go to the bank for a loan, but the loan officer tells you in these days of tight credit, you need a down payment, but you don't have that cash on hand. So you go to the developer for help. The developer sends you to a nonprofit, which the builder may actually operate or fund. The nonprofit gives you the down payment you need. Now that you have that money for a down payment, the bank gives you a loan. The deal closes. You get your house. The developer gets his money back on the sale, minus a small transaction fee to the nonprofit.

Jerry Howard is president of the National Association of Home Builders. He says everyone ends up happy.

Jerry Howard: We're being told by many of our builders that it is the single most valuable tool in getting some of these recalcitrant buyers to come into the game.

Howard says until this week 30 percent of new home sales were being financed with some kind of down payment assistance. As the credit markets froze up, buyers looked for a way around banks new lending restrictions.

The Nehemiah Corporation is just one of a number of nonprofits that ran down payment assistance programs for FHA-approved buyers. They helped with new and existing home sales. Kevin Koenig is national director of outreach. He says doing away with seller down payment assistance risks throttling one of the engines of this country's growth.

Kevin Koenig: It doesn't make sense that we're spending all this money to generate more activity in the economy and yet we're cutting out something that won't cost the taxpayers anything and yet will generate $150 billion.

But allowing Americans to own homes with no money on deposit is dangerous, says Howard Glaser. He was general counsel at the Department of Housing and Urban Development during the Clinton administration. Now he's a mortgage industry consultant.

Howard Glaser: In a market that's now flat and declining, putting nothing into a home is risky not only for the government that's backing the loan and the taxpayer, but also for the borrower because they can very quickly find themselves underwater in the house the day after they move in.

Aware of those risks, the National Association of Home Builders' Howard is backing a bill that would reinstate the program but add some hurdles. Howard says some buyers would have to pay higher mortgage insurance, for example, and get homebuyer's counseling.

Howard: I think the housing industry, like the financial industry right now, is very cognizant of our responsibility as citizens and that's why we're in favor of some of these much tighter underwriting criteria for these types of homebuyers.

Down payment assistance can help low and moderate income Americans buy homes. Consultant Howard Glaser supports that aim but says Congress should wait until the housing market stabilizes before considering the new program.

I'm Rachel Dornhelm for Marketplace Money.

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