"Zero Down Payment Plan Proposed" (bush* idea)

[leftchick]

.....ok...as with all bush* proposals, what is the catch?


http://www.suntimes.com/output/business/cst-fin-tick20.html

<snip>

The Bush administration proposed to make it easier for U.S. families to buy their first home with a ''zero down payment'' program. The down payment and closing costs for Federal Housing Administration insured loans would be wrapped into the loan amount and spread over the life of the loan under a proposal made to Congress, said John Weicher, assistant secretary for housing at the Department of Housing and Urban Development. The program will eliminate ''the single biggest obstacle'' to buying a home, which is gathering the down payment and closing costs, Weicher said. Families would still have to meet FHA qualifications and would have to accept home ownership counseling. They also may pay more than in a standard FHA loan, Weicher said in a teleconference from Las Vegas, where he was attending the National Association of Home Builders Convention. The house buyers would pay a premium of 2 1/4 percent of the amount of the loan, and the interest rate they pay would be 75 basis points annually higher than the base rate of the loan for the first five years. The rate would revert to the FHA's standard 50 basis point premium after that, Weicher said.

Note to Mods.... This is an aricle within a News brief. Please let me know if I did not post properly.

[Missy Vixen]

1. IMHO, but here's the "catch"

>.....ok...as with all bush* proposals, what is the catch?<

Most who buy a first home are not rolling in dough, especially if they are in an area with inflated home prices.

By going "double zero," they're paying more for the same home, including a higher payment than they would have if they could have put even a pittance down and had some seller-paid closing costs that didn't get tacked onto the loan. Those closing costs will inflate the amount of interest paid as well.

By paying more than the "standard" costs for a home, there's a much higher chance of default due to the size of the mortgage payment. We had the opportunity to go double zero when we bought our first home due to DH's military service, we chose not to.

Don't kid yourselves, someone's cleaning up on this, and it certainly isn't the new homeowners...For example, who's getting the 2 1/4 points that are being paid on this loan, in addition to the points required by the financer?

IMHO, IMHO, IMHO
Julie

[trogdor]

38. This is more or less in line with VA loans.

Origination fees for those are 2% for active duty, 2.75% for reservists. The fees are tax-deductable as discount points.

I agree with your point about the target market for these loans. How many of them can afford to pay morgages in the first place, even if they don't have to come up with downpayment money? I know of some houses in Utica, NY, that might be within their price range, but Utica is somewhat of a special case, where the population has declined since the 1950's and there's a lot of surplus housing - just not many decent jobs.

[LeftHander]

2. Strap people with a mortgage payment

And suck them dry with interest payments on a loan on top of a loan.

There is a reason why down payments are needed in buying a house...

It lowers the monthly payment!!! DUH!

COunt of home forclosures going up drastically under this proposal. But the repukes only want to see the % of Americans who own homes go up. So they can say "See look...see look more Merikans...live in house now..."

On Edit:

If they want more people to be able to afford a home then get them some decent wage paying jobs instead of a McConomy...shutdown NAFTA and withdraw from the WTO...stop giving corps free reign to leave the country for tax shelters...lets start making world class products again that the rest of the world wants....who fucking wants a Lincoln Navigator !!!

[On the Road]

46. Not Exactlty

There is a reason why down payments are needed in buying a house...
It lowers the monthly payment!!! DUH!

Mortgage providers want to protect themselves against losses due to default. Because home prices fluctuate and appraisals are often inaccurate, lenders want a safety margin. That why you're required to insure the lender if you own less than 20% of your house (PMI).

It's true that buying a home with zero down results in a slightly larger mortgage payment. But the extra 5.2% is less likely to cause default than missing the whole payment due to a layoff or some other reason. Keeping that down payment in the bank can provide a measure of protection against default. And the down payment is a big obstacle for a lot of working-class people.

I'm sure this proposal is just as political as everything this administration comes out with. But I'm not sure the idea is all bad.

[ewagner]

3. They aren't worried about defaults

the FHA will "hold harmless" the investors to whom the mortgage is sold.

The investors (or mortgage companies) will benefit from the higher payments and have virtually no risk.

[displacedtexan]

4. Yes, Virginia, there is a catch.

The goal of homeowners is to pay off the principal of the loan, not just the interest. By adding the 'down payment' to the whole loan, it will take much longer to begin to pay down the principal. Another catch, not even mentioned in the plan, is the probability of a variable interest rate. I can't imagine banks and mortgage companies not protecting their investment by offering low fixed-rate interest terms with zero down (I hope I'm wrong).

So, enthusiastic home buyers will pay more in the first place, and their monthly payments will probably increase as interest rates creep up.

Also, mortgage contracts always include a nifty little clause that says if your financial situation changes (like your annual income dropping or your spouse loses a job), they can terminate your mortgage, foreclose, and/or increase your loan obligation. You have to file annual statements concerning your financial status, which loan officers can use against you. (However, if you are lucky enough to make all of your payments on time and actually get a raise at work, you could benefit.)

As usual, what people don't know will hurt them if they trust the freak monkey and his minions.

[BenFranklinUSA]

37. "No, Virginia, not everyone is as wise as you..."

"The goal of homeowners is to pay off the principal of the loan, not just the interest."

It SHOULD be the goal, but for a lot of folks, they just want a house.
(just like they want a big screen TV).

:)

[Frodo]

41. Good point

I've got an interest-only mortgage. I have no desire to drop more money into the house instead of somewhere else. Those dollars go into savings. A 1% rise in home prices exceeds and equity-enhancement the extra couple hundred a month would get me, and a 1% decrease eats it up just as quickly.


Also, plenty of people are just looking for a better deal than their rent. Remember that you get NO value out of renting, you pay into someone ELSE's equity.

[sendero]

5. The unpopular truth....

... of the matter is this is already happening. And it is a singularly bad idea.

People who cannot muster the discipline (or have the income) to save a few thousand dollars for a home down payment have little business owning a home.

When you own you home, you will be hit with unexpected and unpredictable expenses for repairs and maintenance. If you move in with $10 in the bank, you are ill prepared to deal with your new life.

I firmly believe that the lax standards for home loans are contributing greatly to the high foreclosure rates we are currently experiencing. Of course, the job market has plenty to do with it also. But a person without a down payment is least likely to be able to weather a period of unemployment. Foreclosures are bad for everyone, they are essentially like unpaid credit card debt, everyone else picks up the slack.

This is another lame-ass attempt by the Bush* administration to do something, anything to jump start the economy. Anything, except the obvious things that would actually work.

[Scottie72]

18. What a great point!

When you own you home, you will be hit with unexpected and unpredictable expenses for repairs and maintenance. If you move in with $10 in the bank, you are ill prepared to deal with your new life.

This is one of the great benefits about renting. If something breaks in your home the landlord (rental company etc) is repsonsible for fixing it. My hot water heater went last year. I was so thankful that I was renting because I had no idea how I would be able to pay for a new one. There are so many other expenses involved in owning a home than just your mortage payment. This idea is very hard to get through to so many people. I don't have to worry about my lawn care, my yard work (though if I did own a home I would most likely enjoy making my yard look so spiffy)...

[dansolo]

36. They want to stave off the bursting housing bubble

The demand for housing is going to plummet as interest rates go up and unemplyment continues to increase. This is merely a mechanism to prolong the housing bubble through the election, resulting in an even bigger crash when it pops. In addition, his buddies will be able to clean up with the record number of defaulted mortgages that will inevitably result from this.

[alfredo]

64. the banks get the money paid, and the house which they can sell again.

All the while the value of the property goes up.

[Ilsa]

99. This is very true.

we saw it all the time in banking inthe eighties: people bought more house than they could afford, expecting their incomes to keep climbing, but they didn't. They were always cash-tight and if anything went wrong, it made it that much easier for them to walk away from their investment, because they had none.

This smacks of the Bush Family's lousy banking skills (hey George, just ask Neil!)

[LEW]

6. I'm a realtor and I try to really explain

to the Buyer what they are doing when they use a program like this. You are starting out in a hole and unless you plan on staying in the home for many years, it does not pay off. I have gone to homes when they want to sell many times and the owner owes what the home is worth or more. The 2 1/4 percent goes to FHA, (ummm way out of current financial problems). Right now a FHA insured loan is 1% of the purchase price and so are VA loans. This is also a copy of VA, they have been doing this type of loan for a long time, and not charging near as much.

There are so many programs available for buyers who need help with the down payment, and they do not have to be 1st time buyers. This problem was addressed a long time ago by the Democrates, the single best thing that happened was when Clinton repealed capital gains on home sale gains. This is what spurred the house boom of the last several years.

[havocmom]

7. Yep, this is a gift to lenders

they get the interest, and if the economy gets worse (and it will) and more folks default, a few large lenders end up owning a bigger cut of the American dream via foreclosure. Once again, a wolf in sheep's clothing to decieve the sheep.

[Buffler]

58. The last thing

a lender wants is to foreclose on a home. They lose a lot of money on foreclosures.

[haele]

66. Depends - bank lenders seem to like VA loans with a possibility of default

around here - as soon as the interest is almost paid off and the owner starts to be able to pay on the principle they almost eagerly start forclosure on military personnel (especially called up reservists who suddenly don't have a regular paycheck of the same level they did before)- as they are forclosing on a "sure deal", they turn around and put the house up on a "reduced price" (the old principle worth) with 20% down payment that will allow the second owner to finally take the house off their hands.

This is a theory I have based on experiance and ancedote; I live in a Navy town and have heard of quite a few "no-no" (zero down) VA mortgage payers who bought at the beginning of the real estate boom and have had this happen to them - the bank seems to just string them along, helping them to set up payments when they fall behind, letting them get into "rolling thirties" or "rolling sixties" until the interest is paid - usually about 5 - 10 years after the initial purchase. Then the hammer comes down on them and when they can't pay completely up and continue regular payments, declare bankruptcy and get a small window of protection or if they can't refinance on an FHA loan within the three month window, the house quickly goes on the forclosure auction list.
Where, IME, it's usually bought by a building corporation for a minimal down, fixed up as needed, and quickly re-sold at the "going rate" requiring a downpayment that covered the corporation's costs in the whole transaction.
That's what has happened in this area.

The sad thing is that the VA will generally help buyers should they realize what's happening before they get into trouble with a loan restructuring plan based on the buyer's income rather than the bank's interest, but as it's an involved program that includes credit counciling and credit re-evaluation that makes most buyers uncomfortable, most buyers seem to want to go ahead and trust the banks and corporate lenders who push these "catch up programs" instead of contacting the VA immediatly when they start understanding they're falling behind in their payments.

If this "new home-owner's program" doesn't have some sort of default prevention associated with it at least similar to the VA's housing program (which I highly doubt, considering the costs to administer the VA's housing programs), there will be even more defaults - and lenders and contractors will continue to make out over the poor "no-no" buyers.

As one of the posters above said - if one cannot save enough money for a minimum downpayment, one usually cannot save enough money to pay for the costs of paying off a mortgage, even a "predictable" fixed mortgage with few points and low interest - as well as maintaining the house.

A house under a mortgage is a money pit. It will only truly save you money once you own it free and clear.

Haele

[Frodo]

67. I only read your first paragraph... BUT a piece of info for you.

It's ILLEGAL to foreclose on the property of a called-up reservist sent overseas if he simply informs them of the change. I'm pretty sure it's under the "Soldiers and Sailors Relief Act". There are also interest rate caps involved.

Second - Banks don't generally forclose on VA laons and sell the house. The VA owns it (and auctions it after an interminable period).

[UpInArms]

8. sounds a lot like "predatory lending" practices

and then leaves the mess to be paid by the taxpayer (because that's who stands behind the FHA loans (kind of like a co-signer).

Let's hope this lame-assed idea drops faster than a lead balloon.

[bushisanidiot]

9. Rove Has Turned The Chimp Into A Used Car Salesman

why doesn't he just complete the look and give the liar in chief a gold tooth so it will show when he smiles big for the cameras.

sorry, but I don't think most americans will fall for his tricks to steal their money.

[KoKo]

15. ROFL! Great description! n/t

[hatrack]

17. "Hi, I'm George Bush, and I'm here to tell you about Ditech!"

"We'll loan you up to 150% of the value of your home - most other lenders can't or won't!"

[sendero]

30. ROTFLOL :)

You got it there!

[DUreader]

10. Desperate to keep the Housing Bubble from Bursting

[LEW]

11. "Desperate to keep the Housing Bubble from Bursting"

Then create jobs, repeal your tax cuts, get out of Iraq, etc.... The single best thing B*sh could do would be to lose in November!

[DevilsAdvocate2]

13. Misinformation

I'm sorry, but i feel obligated to correct some misinformation contained in many of the posts related to this proposed program. First, borrowers are not required to file annual statements with a lender to keep the same interest rate. When you sign your mortgage note it specifically states the interest rate, term, and loan amount.

The reason lenders prefer a down payment when purchasing a house is not because it lowers the monthy payment, but because it decreases the chances of default because the borrower has a vested interest in the property. In addition, in the event of default the lender is more likely to recover the entire loan amount because they can sell the property at less than full market value and still recover their money. This is why you can often buy a foreclosed home cheaper than a market-priced home.

FHA does not offer variable rate loans. Once you sign the note, your rate is fixed. All costs must be disclosed per the Truth in Lending Act.

It is not wise to move into a house with $10 in the bank. However, if you have $5,000 for a down payment, it may be better to finance all closing costs and go zero down than to use all of your savings for your down payment. That way if you run into a rough spot you still have your $5,000 in the bank to fall back on.

As a mortgage lender, i feel this proposal sounds pretty good on the surface, except for the 2.25% discount points. I'll wait until i hear the specifics before i make a final determination.

[DUreader]

14. So how are those foreclosure rates these days anyway?

[damnyankee2601]

22. "As a mortgage lender..."

You stand to make a profit while I (the taxpayer) assume the risk. You want the money? YOU take the risk. That's how capitalism is SUPPOSED to work.

[Buffler]

59. While your correcting misinformation

I thought I should correct some of yours.

FHA does not offer variable rate loans.

Yes they do. FHA 1 Yr ARM is at 3.375% today (if you came to me for one)

As a mortgage lender

As a mortgage lender you should have known this.

[tkmorris]

68. You've been called

The FHA does in fact offer variable rate loans. Any mortgage lender knows this but you do not. Why is that exactly?

[Frodo]

12. This is a GREAT idea....... IF (and ONLY if)...

... Real estate prices continue to move upwards.

Lot's of people can buy houses they otherwise would be unable to purchase and the market will add equity quicker than they could save for a down payment. I know tons of friends who would be out of debt right now if they had been able to buy a house with this program four or five years ago.

Great, right???

But what happens if market values DON'T continue upwards? What if they stagnate for a couple-three years? Or worse, fall???

Then you see a bunch of people bailing on mortgages because they have no vested interest in the property. Lots of people have speculated that the purpose of a down payment is to lower your monthly mortgage payment. That's only true if you HAVE plenty of money and want to reduce your monthly cash flow. The REAL reason you put money down is to give you an ownership interest in the property. You have no incentive to default on a loan when you've got 30,000 of your hard-earned dollars tied up in that house.

But give yourself NEGATIVE EQUITY (and that's what this is), where you owe $210,000 on a house you could only sell for $200,000 minus a $12,000 commission??? If times get tough... you bail. Leaving the mortgage company (or the government - depending on how this program is designed) holding the sack. And, unlike has also been hinted at here - we (bankers) do NOT want your house. We're not in that business and hardly ever get more than 80 cents on the dollar at auction (why do you think we WANT the 20% down???).

[KoKo]

16. And, who would bet on housing prices rising? We are in the top of the

housing "Bubble." This only benefits mortgage lenders. Somewhere down the road the defaults will be paid back by ALL of us.

This is a very bad idea.

[Frodo]

23. Sorry. But I disagree on a couple points.

1) I don't believe in housing "bubbles". Certainly not in a global context. They certainly occur in individual markets, but that isn't the discussion.

2) This doesn't benefit mortgage lenders unless the government is going to gurantee those loans. It isn't a government requirement that says you put "x" money down (in most cases). It's our requirement to protect our "investment" (or really, the investment of the people who will buy the eventual package of mortgages).

In fact, almost every program requiring less than 20% down has some form of insurance to buffer that 20%. The BANK is almost always going to require one or the other because we can't sell your house for even close to what it's worth (see my previous post).

Of course there are lterally hundred of programs out there - not every one meets the rules I've described, but the Fed can't just say "ok, now you don't need 20% down OR PMI OR a government gurantee". Some investor has to BUY those mortgages from us, and there would be too much risk involved. "Bank" and "Risk" almost never go in the same sentence.


I'm not sure it's a "bad" idea. I'm not sure it's an "idea" at all. There are lots of programs that already do this. The VA Housing & Development Authority (assoc?) adds a state gurantee onto the current FHA program (lots of states do this) and basically add on second trust ammounts up to 103% of the purchase price of the home. There's little "new" here unless he's taking out some of the credit/income requirements. That's probably a bad idea.

[KoKo]

56. My reading of the proposal was that he was taking out credit/income

requirements to have the 0% downpayment. I wasn't aware that things had gotten so loose that those programs were already available for all homebuyers. I thought they just applied to some lending for people in low income categories who could get special government assistance.

My impression was he was offering this without any restrictions as to income level. Thanks for the additional information.

I strongly believe we are in a huge Real Estate Bubble, though. And, I think many people are stretched to the max in their McMansions on two incomes and if the job market doesn't pick up and one, or both, lose their salaries the mortgage payments alone (low interest rates or not) is going to cause chaos in the housing markets. If they can't sell their home because there aren't any buyers for the inflated price they bought and they can't pay the mortgage, someone gets stuck with the repossession. And, if we get a point or two pick up in interest many of those "variable rate mortgages" are going to cause stress even with those who didn't buy the McMansions but wouldn't have qualified for a mortgage at all in stricter times (only about 12 years ago were much stricter times, if anyone remembers). The loosening of restrictions on qualifying people for mortgages has led to the bubble, with many people on the edge it doesn't take much to throw them over.

Anyway thanks.

[Fovea]

19. This is very similar

to payday loans, check cashing joints, and the other
industries that exist to suck the life out of the poor.

Nice to see compassionate conservatism at work.

[DevilsAdvocate2]

20. Let's be realistic

People who participate in this program are not going to be approved for a $200,000 home. If you can afford a home of that price, you can afford to save for a down payment. The more likely scenario is a $100,000 home, and $100,000 at 7% (high estimate) for 30 years is about $665 a month, plus taxes and insurance. Add in taxes and insurance and you're looking at about $800 - $850 a month. Many people pay more than that for an apartment. It is always better to pay towards something you're buying than something you're borrowing.

[Frodo]

25. I wouldn't say so.

I've looked at hundreds (perhaps thousands) of applications and, believe me, there is little correlation between income and the ability to spend less than you make.

My wife and I have never had large incomes but have always managed to save and invest some of what we made. I have plenty of friends who may make 50-100% more than I do and still have large debts to pay off.

LOTS of people can afford the monthly payment on a $200,000 home but could never save up the $40,000 needed for an uninsured/unguaranteed 20% down payment.

[DevilsAdvocate2]

28. You misunderstand me, Frodo

I said if people can afford to make payments on a $200,000 home, they can afford to save up for a down payment. Not necessarily 20% ($40,000) down, but at least $5,000 - $10,000. Now, whether or not they CHOOSE to live within their means and save up some money is a different story entirely.

And Gasperc, why so angry? As Frodo said, the banks will only get a 1% origination fee. The rest goes to the FHA, which is a gov't agency.

[Frodo]

31. OK. A little clarification.

There is very little difference between having $5,000 - $10,000 to put down on a $200,000 property and having nothing at all. You're talking a 2.5%-5% down payment, in which case you still deal with excessive fees (by comparison to those who can get more traditional products) higher rates (same caveat) and cautious credit scoring (same caveat).

There is likely to be very little difference between this product and what I might steer you towards if you had 3% down. Closing costs alone tend to exceed that, so you're still probably borrowing more than the house is worth - or close enough that it doesn't matter.

[DevilsAdvocate2]

32. True enough

But with a 5% down payment you open up more options with lower fees, i.e. 1% origination versus 2.25%, no .5% or .75% FHA interest rate premium because you can go with someone other than FHA, etc. Just stating that with some down payment you can ease the expenses somewhat. Also, this program is meant to enable people who may not be able to save up $5,000 to purchase a home.

[abelenkpe]

39. 5000 dollar down payment?

Where? Ohio? The houses in my neighborhood start at 700,000 dollars. It's all relative, isn't it? I always thought that you weren't supposed to spend more than one quarter of your monthly paycheck on housing.

[Frodo]

43. That's the old rule (and is still a good rule of thumb)

Used to be your mortgage payment could not exceed 25% of your gross monthly income. It later moved to 28% and many programs are up to 32% now.

This is not necessarily a problem since people have changed their spending habits and different portions of the budget take up different average amounts now (food is not as expensive, for instance). But it is still a concern.

Worse still, there has always been a "back-side" ratio of total monthly debt to income of 40%. So your home payment might be 28% of income leaving you 12% for car payments, credit cards, student loans, etc. That leaves just about enough after taxes for all the "unimportant stuff" like food, clothing, heat, blah blah blah. MANY programs now just consider that back-end ratio and may go a tad over 40%.

So you COULD borrow LOTS more than you used to be able to qualify for if you have no other debts. but what happens AFTER you get that mortgage and then buy a car? Or run up a charge card? You can et yourself in a lot of trouble.


My theory is that "conservative" personal finance means sticking to that 25% ratio and putting 20% down. But if you haven't been conservative with your finances since you started... that may not be an option.

[abelenkpe]

97. good

I guess I misunderstood an early message. I thought it was said that it was better to take on a mortgage that was twice one's rent. Which seems like an unreasonable financial burden for anyone. While it would be nice to buy a home, in a perfect world I'd want my monthly payments to equal roughly what they are now so it isn't such a shock to the wallet. I guess this plan is more for those buying reasonably priced homes though, huh? In the meantime, I'll just keep saving. Nice thread though. Very informative.

[DuctapeFatwa]

65. Today it's about desperation to stay off the street

People do whatever they have to do to put off the transition to homelessness.

Budgeting a reasonable portion of your income on housing is a luxury for the wealthy.

Low income people take whatever housing they can get, and as explained in post 35, getting a mortgage loan may keep them indoors for a few more years than renting.

[Jeff in Cincinnati]

69. Moot Point?

This talk about a $200,000 reminds me that the FHA has maximum loan amounts and -- unless you live in Southern California or mid-town Manhattan -- you're not going to be buying a $200,000 home through the FHA.

If the Bush Administration is serious about promoting homebuying, they should work toward policies that stabilize employment and provide basic health insurance for every working American.

There are plenty of ways of working toward the minimal FHA downpayment requirement -- it was 3% of the total mortgage last time I checked, and the closing costs can be financed. A basic savings plan (Roth IRA's can be applied toward the down payment for a first-time homebuyer) can generate $3-4,000 in a matter of a few years, and it promotes the type of fiscal discipline that will help out a homeowner for those unexpected expenses that turn up later.

[Frodo]

70. Close.

FHA limits range from $160k to about $290k depending on where you live, but it certainly doesn't have to be Manhattan to get over $200k.

I don't know the limits here in NC, but the Northern Virginia suburb I lived in most recently was at the $290k line.


A good rule of thumb is that if someone buying a first home but having a tough time making ends meet is looking in the $200k range in this market... there's a good chance it falls under the FHA guidlines. $200k is actually a pretty small place in NOVA.

In the Triad region of NC I bet we're closer to the bottom end, but 160K buys a nice home here... VERY nice by some standards.

[DuctapeFatwa]

71. You are talking about options for the affluent, I am talking about reality

Fiscal discipline for low income people means not eating so you can pay the light bill.

I am talking about people who are struggling to stay in housing - any housing - as long as they can, and for those people, if they can get a fixed loan at a payment that is no more than their rent plus two increases, they have a better chance of staying off the street in that third year with the loan than they do if they keep renting.

I am not defending bush's program, obviously its aim is to exploit that desperation, and I agree that most of the people who gain housing in that way will end up as foreclosees, but they will have bought a couple of years before they become homeless, and when the choice is next month or 2006 most folks will take the 2006.

People who have low incomes do not have Roth IRA's. If they have anything at all, they have the regular kind of IRA which for a low hourly wage earner is more like a "Christmas club" savings account than a retirement plan, even if it could be used for a home, which it can't.

[Buffler]

72. Low income / IRAs

Even when I was a college kid working part time I had an IRA that I would put a couple of dollars in every two weeks. Compounding interest is a wonderful thing.

And yes, you can borrow against a retirement account for the purchase of a home.

[Frodo]

74. Slight correction. You can NEVER "borrow" against an IRA.

IRA assets cannot (by law) be used as collateral on a loan. Or, more specifically, can't be taken if the loan is defaulted... so nobody accepts it as collateral. You can withdraw the money. (In some cases, if you can get the funds back in within 60 days it isn't really a withdrawal and I guess you could call it a "loan"... but if you can do that you probably didn't need the IRA funds anyway)

You COULD borrow against a 401(k) in certain circumstances (and usually only up to a percentage of the account).

[Buffler]

76. The assest

isnt used as collarteral in the real estate transaction. But you can "withdraw" $X and use it as your down payment or to cover closing costs.

[Frodo]

79. Well then... you wouldn't call that "borrowing" against it, would you?

Which was my point.

[Buffler]

83. Actually

in some cases you would be borrowing it as you would be required to pay it back. Taking a loan against ones 401K is not an uncommon thing.

[Frodo]

86. Are you reading the posts you reply to?

401(k) accounts and IRAs are not the same thing and I've differentiated very carefully between them.

You would NOT need to pay back an IRA withdrawal used to purchase your first house. Not only that, but you COULD NOT legally pay back that withdrawal after a 60-day window. (OK, in some wierd cases it's 120 days)

I covered 401(k) loans pretty clearly. We're you under the impression I didn't get it?

[DuctapeFatwa]

75. OK let me explain it in simpler terms

Jane pays $700 a month rent.

She has lived there for several years.

If she rented that same apartment today, the rent would be $1100.

Jane is getting a break for seniority!

However, Jane's income is low. She cannot afford to pay any more than she is paying now.

When her rent goes up $100 at the end of two more years, she will be in the street.

If she can obtain housing, on whatever terms, for $750 she has a better chance of staying out of the street longer.

Yes, she will eventually wind up in the street, but if she has a chance to put it off for a couple of years, she will do it.

[Buffler]

77. Why was that reply

directed at me?

[DuctapeFatwa]

84. Because I think that I was not clear enough in my previous post

that I am not talking about people with the resources and/or the option of making sound fiscal decisions and practicing financial prudence and discipline, rather people who the free market is in the process of transitioning out of the housing market.

I am talking about people whose labor as valued by the free market is less than the value of their basic needs, as valued by the free market.

Are they good candidates for home ownership? No.
Are they good loan risks? No.

What they are is desperate to remain in housing under whatever conditions or circumstances they have to for as long as they can do so, and it is profitable for lenders to let them do it, foreclose, and resell the house.

[Buffler]

87. It is not profitable

and it is profitable for lenders to let them do it, foreclose, and resell the house.

It is not profitable to provide someone with 100% financing and then to forclose on the home and resell it. The holder of the note takes a huge loss on such a thing.

If memory serves me right from my years in the business, the break even point on a foreclosure is about 65%. So, if the bank forecloses on a $100,000 home, the amount owed on it needs to be $65,000 or less for the lender to break even.

[Frodo]

90. Again a small correction.

And not to pick nits, but the average break-even point on foreclosures/auctions is right around 80% (huge variability with market conditions of course - lately it's been MUCH higher).

There's a reason the underwriting criteria says "20% down payment" for conforming loans. That's how much the property is likely to be worth as collateral.

[DuctapeFatwa]

91. That depends on what the lender resells it for

Back to Jane, who does her best to pay her $750 house note, but in the end, she can't, so the bank forecloses.

In the meantime, however, her supervisor is now being priced out of the housing market, and is in the same situation Jane was a couple of years ago. She will, like Jane, do anything to put it off for a year or two, so she will snap up Jane's foreclosed house even if the price is now $170,000.

[Buffler]

92. Jane's $170,000 house

If Jane is paying $750 a month for a $170,000 house she has a decent amount of equity built up and thus would sell the home and purchase a smaller more affordable one or rent a home long before it went into foreclosure.

[DuctapeFatwa]

94. no, Jane's purchase price was $100,000. She paid the note for 2 yrs

During that time, two things happened. One, Jane's supervisor realized that a couple more rent increases were going to put HER on the street, and Two, after Jane's house was foreclosed, it was discovered that the house is now worth $170,000, which is the price that will be on Jane's supervisor's contract.

[abelenkpe]

96. Jane needs

to live in a rent controlled community. There was an 80 year old woman living down the street from me a while back who was paying 80 dollars a month for a two bedroom apartment that most others were paying 1600 dollars for. Why? Rent control, and she had been there since the 1960s. Nice, huh?

I'm glad you clarified the rate increase because I thought you were saying it would be more profitable to buy a home that had a mortgage payment that was twice her rent, not twice a 'rate increase.' You can see the very concept of rent going up is foreign to me.

[Buffler]

100. Ha!

after Jane's house was foreclosed, it was discovered that the house is now worth $170,000, which is the price that will be on Jane's supervisor's contract.

Ya, the house almost doubled in value in 2 years and Jane had no idea, nor ever explored the option of selling her home to stave off foreclosure and possibly generate some cash in the bank for her.

You are describing a scenario that does not exist. Your in fantasy land.

[DuctapeFatwa]

78. Another note about "retirement accounts" of the poor

First of all, companies who employ low wage earners frequently have them as "independent contractors" to avoid having to pay benefits or set up these accounts for them.

Second, most companies have a clause that the employee is not "vested," meaning able to actually have any of the company match for a period of years. Let's say your company "vests" you after five years.

Shortly before your fifth anniversary, there is a very good chance that you will be terminated from your employment. You have the right to "roll over" the contributions YOU put in, which are not going to amount to enough for a down payment if you have been putting in only the minimum required.

It is more profitable for the company to set up a new account for your replacement and train him for your low-level job than to match your fifty cents or whatever minimum withdrawal the plan requires.

[Buffler]

81. Look

I was responding to an inaccurate statement about the ability to 'borrow' against retirement accounts. Not on the availability of or size of 'low income' peoples retirement accounts.

You are correct about "vesting", but again incorrect. A 5 year vesting period is common. But on day 1 of year 5 you don't suddenly get 100% vested. You normally get 20% a year every year. So at the end of year 1 you are 20% vested, year 2 40%, year 3 60%, year 4 80%, and year 5 100%. And they don't "match" at time of withdrawl, they match with each deposit.

First of all, companies who employ low wage earners frequently have them as "independent contractors" to avoid having to pay benefits or set up these accounts for them.

Some companies, yes. A large %? No. For the sake of argument, lets assume that the fast food industry employs the majority of "low wage" employees. What % of people at McDonalds, BK, Wendys, etc... are "independent contractors"?

[DuctapeFatwa]

89. I said it doesn't matter if you can borrow against them or not because

the amounts of money, as you correctly point out, are not going to be big enough for a down payment anyway.

The practical and real effect of these accounts for low income people is simply an employment fee. Even if they stay in that same job for their entire adult lives, they are not going to have enough to live on when they reach retirement age, they will be lucky if they have enough to pay off their credit cards.

Some of the fast food companies you mention are independently owned franchisees, and whether the franchise owner is bound to provide W-2 employment would depend on his franchise agreement.

At this point, I am not sure that it is an accurate assumption to say that fast food is the majority employer of low wage employees.

My point is that as the number of low wage employees burgeons as the price of housing skyrockets, it is inevitable that millions of people are being priced out of the housing market, and human nature being what it is, most will do just about anything to put it off for a year or two.

[Frodo]

73. A quick reply.

An IRA CAN be used to purchase a primary residence. There is a $10,000 lifetime limit on such withdrawals, but you can take it for yourself or (essentially) an immediate family member.

You are right, however, in assuming the people you are talking about are unlikely to HAVE such savings.

[mbperrin]

45. Or you could borrow directly from a seller, especially if the

property needs some work. We bought a 3 br/1-1/2 bath 1600 sq ft brick front home in an established neighborhood for our daughter for $1,000 down, no other closing, $189/month for ten years.The older couple who lived there had passed away, and their children live in California and Illinois and so have no interest in the property. They carry the note themselves.

We spent about $1500 on renovation materials, and she and our two grandchildren are very happy there about two blocks from the school where she teaches.

[blurp]

54. You sound like the millionaire next door

I've looked at hundreds (perhaps thousands) of applications and, believe me, there is little correlation between income and the ability to spend less than you make.

My wife and I have never had large incomes but have always managed to save and invest some of what we made. I have plenty of friends who may make 50-100% more than I do and still have large debts to pay off.

LOTS of people can afford the monthly payment on a $200,000 home but could never save up the $40,000 needed for an uninsured/unguaranteed 20% down payment.

Have you read that book?

It describes the typical millionaire as being very frugal: only buying used cars instead of new, never borrowing money, a small house (for their income group), and other things.

It's something like 2/3rds of the millionaires in the US.

The other 1/3rd got theirs from their parents.

[Frodo]

57. I wish! Yes, I've read the book.

Though a better one in that vein could be Ric Edelman's "Ordinary People - Extraordinary Wealth" which is all about regular families (plumbers, junior military officers, teachers, mechanics) who manage their money correctly. Lot's of quotes from the people themselves and lotts of good advice (from same). Simple stuff - There's a whole chapter on "what did you do WRONG?" where 75% of them say things like "I wish I had started sooner" or "I didn't need to buy that Mustang in college - it took me ten years just to get out from under that debt"

Both books are an excellent look at the differences between financial stability and instability that go way outside of the issues we talk about in politics.

But no, I'm no millionaire and won't be soon. I have three small kids to raise first. Though the "only used cars" fit me until I had to buy a hybrid last year and the Civic only came new. And I like to think of myself as "frugal", but that's somethign I married in to. My wife takes care of that - I pick investments.

[blurp]

48. Don't go too far

This is similar to payday loans, check cashing joints, and the other
industries that exist to suck the life out of the poor.

Nice to see compassionate conservatism at work.

I suppose you'd rather they go to people that will break their legs?

That's a real fact of life for some people.

[damnyankee2601]

21. Legalized Loan Sharking

Another way for the "capitalists" to charge exhorbitant lending fees with no risk to themselves.

Just like Enron, the S&L debacle, and every other "pro-business" Republican boondoggle. The oligarchy makes the profits and the taxpayers assume the risk. Every pinhead who thinks their $300 from Shrub was a good tax cut needs to wake up. That $300 was a gift from a Mafia Don. The payback is going to be a bitch.

[Nashyra]

27. I have my brokers license

and specialize in Property management, IMHO it could, COULD be beneficial to those who could purchase homes for between the 100,000 to the 125,000 because in fact rents generally are not ever lower than $800.00. Rents are definetly falling where I live but there is also no where here in Lake Tahoe that falls into that price category. I have a motgage broker friend who would stongly discourage anyone from using this program unless the purchase price is very low and that they have a family that wants to help them. Secondly any house with a purchase price that low will more than likely have huge cost to bring it up to a decent home. The 2.25% cost up front is a rape.

[Frodo]

29. I think that 2.25% is in lieu of the normal FHA fees.

Which come pretty close to that on state hybrid FHA programs anyway.

What state do you work in?

[blurp]

52. Maybe you prefer that their legs be broken?

Another way for the "capitalists" to charge exhorbitant lending fees with no risk to themselves.

Just like Enron, the S&L debacle, and every other "pro-business" Republican boondoggle. The oligarchy makes the profits and the taxpayers assume the risk. Every pinhead who thinks their $300 from Shrub was a good tax cut needs to wake up. That $300 was a gift from a Mafia Don. The payback is going to be a bitch.

If people don't have these options available to them, they will get the money from people that will break their legs.

That's not a joke. It's not funny to people that are in that position.

[gasperc]

24. sticking it to the poor with 2.5 extra percent

why not offer grants asshole or at least a dollar for dollar matching bond or saving program to help with the down payment?

Nooooooooo, let's enrich the banks with legal price gouging through high interest rates, legally banks can't charge 2.5 points in the inner city as opposed to the burbs but now they can by rolling it into this bullshit 0 down scam!!!!!!!!!!!!!

[Frodo]

26. That's not quite it.

The 2.25% is an upfront fee (call it "points" if you want), and is not remarkably higher than what current state programs call for.

It looks like the actual rate on the loan would work out to .25% higher than a normal FHA loan would be... and only for the first five years.

That's not too bad, but it's also not very new. Any decent mortgage broker can work out something similar in most states.

[fob]

33. HERE is the catch...

and would have to accept home ownership counseling

Do you take Jay-zuss Kee-rist as your Savior!

Yes?

Your loan is approved, just step over to the tub and dunk your head three times. Your new name is george500.

NEXT!

[DevilsAdvocate2]

34. And counseling is a bad idea?

Is it a bad idea to inform first-time homebuyers what to expect? For instance, giving them information about filing for homestead exemption, how much to expect to pay per year for repairs and maintenance, what insurance does and does not cover, etc?

[Buffler]

63. Counseling

Homeowner counseling is nothing new and is required for some programs that are already out there.

[fob]

80. You do you know what sarcasm is, don't you?

And this is for devilsadvocate2 too.

I presented my answer as if I had discovered the "poison pill" in the bill so it would appear to be believable but with enough of a twist for the satire to be gleaned without having to explain it.

If you read my post again it reads as if those in charge were running a religious-right based homeowner counseling. See how that's funny? Homeowner counseling has nothing to do with religion, we all KNOW that. The irony comes in because it's BELIEVABLE that the bush* fundamentalist administration WOULD do something like that, I have no doubt.

So, it's all been a misunderstanding, thanks for the clue.

Perhaps next time I will use Jesus' full name to denote satire. As in; Jay-zuss H. Key-riced(Jesus H. Christ) The H is for Holy Shit, I can't believe you didn't get that!

[Buffler]

82. I knew the Jesus

part was sarcasm. But the surprise that many people have in finding out about required consueling with some programs is very common.

[DuctapeFatwa]

35. There are already programs like this, the ONLY reason to do it is

if your income is low, and you rent, you are slowly (or not so slowly) being priced out of the housing market.

If you can find a place where the monthly payment is no more than 2 rent increases than your current rent, AND get a zero down FIXED rate mortgage now when the rates are low, you have a better chance of not being homeless in year 3 if you do the loan than if you keep renting.

The trick is that the mortgagee should not think of it in the traditional sense of purchasing a home. You are not. You are purchasing a chance to remain housed longer than you would otherwise.

[leetrisck]

40. These loans are already

out there and have been for quite awhile - all over the country. People still needs jobs. People with high paying jobs have foreclosures all over the country - (did have jobs). Don't know about foreclosure rates for this type loan.

[Ramsey]

42. I bought a property under an FHA program

It's not clear to me what this program is proposing that isn't already in place. I purchased a house under and FHA loan program in 1994. In fact I got 105% financing and used the extra money to make renovations. To qualify you had to agree to live in the property for at least 3 years if I recall, and use the funds to improve the property. I don't think there was any additional premium to participate, as this article is describing. In fact I recall shopping around for the best interest rates.

I bought a 100 year old row house in an historic district of Philadelphia that had been converted to a triplex. It needed all new windows, a new roof and some interior improvements, all of which I did.

This program actually worked out really well for me. I was a resident at the time and had just finished medical school (four years with lots of bills and no income), so there was no way I could have saved the money for a down payment over that period of time. I later sold the building for about twice what I paid, and left it in better condition than when I bought it.

[Frodo]

44. That's a slightly different program.

Local governments often have something like that to refurbish the rougher areas of town. Pittsburg actually used to do something like 2% 100 year purchase money PLUS 100 year financing on improvements for certain downtown properties that were in desperate need of improvement.

Probably costs the city less than doing the work themselves and solidifies the downtown demographic. Who's going to move out of a house they only have to pay a couple hundred dollars a month on after they fix it up?

[blurp]

47. How about reducing the cost of building a house?

Anyone out there in construction?

Why does it coast so much a build a typical house?

Where I live, the land itself is only about 10-15% of the cost. Where does the rest of the money go?

[Frodo]

49. There are about 25 hands in that pot.

So many subs it's silly sometimes.


Maybe this is part of shrubs "guest laborer" program? Lower the cost of home construction by cutting the price of labor? Ain't gonna work. Though I will say (and not trying to sound like a bigot) but the best crews I've worked with have been exclusively first or second generation americans (almost all hispanic).

[blurp]

50. Can you tell me more?

So many subs it's silly sometimes.

Maybe this is part of shrubs "guest laborer" program? Lower the cost of home construction by cutting the price of labor? Ain't gonna work. Though I will say (and not trying to sound like a bigot) but the best crews I've worked with have been exclusively first or second generation americans (almost all hispanic).

So is it labor costs that drive the price up?

I remember spending my youth in a broken-down shack and wondering why it was so difficult just to build/buy a new house. It was really tough for me, so the answer to the question is important to me.

[Frodo]

53. It's "all of the above".

Lumber is a lot more expensive these days.

More importantly, when housing prices go up (independently from construction prices) new home prices go up too - there's profit to be split among all of those people. New home prices don't drive home prices in general, it's the other way around.

In more direct answer to your question, you CAN save TONS of money building a house yourself or being your own GC. I saved about 75% adding a bedroom/bathroom myself over what the bids were.

But you can also ruin your finances if you don't know what you're doing... that's what they get paid for.

[blurp]

55. So supply is very inelastic? Lumber cost surprises me.

I would have thought that lumber would be a small part of the cost.

But back to what you said before about new home prices:
does what you describe imply that supply is very inelastic? Normally, when housing prices go up, I would assume that producers would rush in to supply the need and keep the prices in check. But apparently this doesn't happen. What's going on?

I don't mean to be trying. It's just the home ownership is such an important part of moving out of poverty. It seems like making building easier could help large numbers of people.

[Frodo]

60. ok.

Lumber IS a reletively small part, though plenty of other supplies are rising as well - it all adds up. I was just giving an example (and all of my examples here are at least six months out of date)

If you're looking for a supply/demand curve I can't give you one, but I CAN tell you that it's been awfully hard to find skilled subs that will come out to an individual home for improvements at reasonable prices. They're all out working on the larger projects. So perhaps there aren't enough contractors to hold prices in check.


As for making building cheaper - the home industry is always looking for ways to do that (new floor joists, new truss systems, new plumbing materials, more efficient design, etc), but the goal is always higher profits for the builder, less so "more affordable" housing.

Builders can only turn out so many houses at a time... only develop so much land at a time. If resale prices go up 20% there just isn't any incentive for the new homes to price themselves below a comparable resale, they're always more expensive. So more profit in the builders hands AND the subs all demand higher prices as well... they just aren't going to build a house for you to sell at a $50,000 profit and "break even" themselves. It NEVER goes in to the pocket of the buyer (as a cheaper house) until market pressures move the other way. If home prices start to FALL builders will use those cost savings to still sell houses (while cutting corners of course) because they can't just lay EVERYONE off, they need some crews to be building houses even if they're losing money. In an UP market though... you pay what the market demands.

[blurp]

61. Hey, thanks for the useful information.

Thanks for taking the time to explain.

[truthisfreedom]

51. bush thinks the dream is "home" but it's actually "job" for millions of us

[Lostmessage]

62. What's he going to take credit for next giving gifts on Christmas

Like he came up with the idea of zero down payment on a house. They have that already if you have good credit but who has good credit these days.

[gulliver]

85. Where is the money coming from?

If it were possible to do this at zero cost to the government, it would have happened already. Obviously, everyone wants families to be able to own homes.

But this is going to cost money, money that Bush already spent in Iraq and on tax cuts for the rich. So Congress will block it or it will be cut out of the budget. Remember, the other side of Bush's mouth is also calling for spending cuts.

What a two-faced, "fuzzy math" con-man.

[Frodo]

88. Largely a self-financed plan

Those fees are pretty substantial and don't go to the lender (if it's like similar state-run programs). The fees act as a sort of "insurance" pool against the occasionally default.

There would be start-up costs (and of course the "government bureaucracy" they claim to loath), but little ongoing expense unless defaults go way up (as some here have speculated)

[Sannum]

93. Is it just me

or does he sound more and more like a used car salesman...'no down payment"....

[leftchick]

95. Worse than that Sannum...

He is a used car salesman who does not have to pay for his Ads!!

Welcome to DU... :toast:

[Silversocal]

98. Damn that suks

:-(