By J. LENNOX SCOTT
The federal homebuyer tax credit program provided the shot in the arm that the housing market needed to help stimulate the U.S. economy. But in the absence of a tax credit, and with increasingly stringent lending standards that require sizable downpayments, many would-be first-time homebuyers are getting squeezed out of the market.
First-time buyers are critical to the overall health of the U.S. economy because their purchases stimulate a chain reaction of home sales across all price points.
Furthermore, every time someone buys a home it helps strengthen the economy through associated purchases, such as furnishings, home improvement projects, and the like. It also results in thousands of dollars of state and local tax dollars.
Many first-time buyers are in a strong position to buy but lack the necessary 3.5 percent downpayment (required for FHA financing). In talking to my agents, I would estimate that at least 30 percent of all first-time buyers are in need of some form of downpayment assistance.
These are buyers who have stable employment, healthy credit scores, and mortgage-debt-service-to-household-income ratios that are in alignment. Some of those who lack a downpayment are fortunate enough to be gifted funds from family or other private means, but many look to state financing agencies for support.
Unfortunately, our state’s financing agencies are facing funding problems of their own because of the challenges in the private capital markets. One possible solution is a "national downpayment assistance program" that would provide state housing financing agencies with direct funding or a guarantee of funding support from the federal government.
The funds would in turn be used to provide repayable downpayment assistance to qualified first-time homebuyers at the closing table.
Similarly, in 2009 the U.S. Department of Agriculture enacted changes that provided assistance to millions of homebuyers who did not have the downpayment funds required by conventional loan programs.
USDA loans currently stand alone as the only zero-money-down program available to borrowers who have not served in the military. And like their conventional counterparts, the USDA program adheres to strict underwriting standards, assessing each borrower’s credit, income and cash flow. As a result, the agency’s portfolio of loans has a low default and delinquency rate.
The motivation behind a national downpayment assistance program is not about getting buyers into homes by any means; it’s about providing support to responsible parties who are in a position to buy but lack the current downpayment requirements.
Under the proposed plan, funds provided to buyers would be repaid through a monthly payment that is wrapped together with the cost of their first mortgage. This type of program has the potential to bring in an additional 400,000 homebuyers annually, resulting in $4.3 billion in state and local taxes every year as well as higher federal income tax revenue.
The need for and benefits of a National Downpayment Assistance Program is outlined below and detailed in this paper.
The proposal: Federal government help for state downpayment assistance programs
State housing finance agencies are heavily reliant upon the private capital markets for downpayment assistance funding. As a result, state agencies are facing funding problems because of the economic challenges in these markets.
One possible solution is a "National Downpayment Assistance Program" that would provide direct funding or a guarantee of funding support from the federal government. This would help ensure that our state housing finance agencies have access to a stable source of funding for first-time homebuyers.
Why this funding is important:
1. A first-time homebuyer downpayment assistance program will benefit first-time buyers while providing local, state and federal tax revenues and sustaining/creating jobs.
2. With this program an additional 250,000 first-time homebuyers will be able to purchase a home (this will generate another 150,000 subsequent sales by repeat buyers). These first-time buyers are qualified to buy but lack the funds needed for a downpayment.
They are employed, they have good credit, and their mortgage debt/household income ratio is in alignment.
3. The downpayment assistance money would be repayable in a 15-year-second mortgage. The loan would be made by state housing finance agencies so that the money could be used at the closing table for a downpayment.
4. This is not a subprime or seller-funded program. It is for qualified first-time buyers, similar to the successful VA and USDA downpayment assistance programs.
5. With the expiration of the homebuyer tax credit and in the face of rising interest rates, both of which are certain to slow home sales activity, we need a sustainable program that will create economic vitality for the U.S. economy.
6. Most states already have a first-time-buyer downpayment assistance program, but they are helping only a fraction of those who are qualified. There are many more qualified first-time buyers in need of financial support because they lack the downpayment.
7. Some first-time buyers are fortunate enough to be gifted funds for their downpayment, but those without this advantage should not be penalized.
8. First-time buyers would be required to attend a homeownership class; this has proven to lower default rates substantially.
9. Income limits for first-time-buyer eligibility is 120 percent of median.
10. Single payment would combine a downpayment assistance monthly payment with the first mortgage monthly payment.
11. The more affordable price ranges are the most secure and stable.
12. With the history of low default rates, this program would create a sustainable housing market for the future.
J. Lennox Scott is chairman and CEO for John L. Scott Real Estate.