Amid a continuing mortgage meltdown across the nation, Congress has begun efforts to revive a controversial housing program to provide down payments for low- and moderate-income families.
The program was killed late last year by the Bush administration and Congress due to concerns that its default rate was too high -- two to three times higher than standard mortgages, according to one government estimate.
But supporters of the program, which over the last decade helped more than 1 million Americans buy a home, say its demise has deepened and extended the economic crisis by preventing a significant pool of buyers from entering the home market.
The controversy goes to the heart of the debate over how to revive and stabilize the housing market -- whether the government should opt for financial security by eliminating as much of its own risk as possible or reach out to employed, lower-income Americans and help them buy homes at the most opportune moment in recent history.
"Tens of thousands of families are sitting on the sidelines, employed people who can't move into home ownership," said Scott Syphax, who pioneered the concept of the down-payment program. "They are trapped."
Rep. Al Green (D-Texas), a member of the House subcommittee on housing and community opportunity, has offered a House bill to renew the program.
"We are not talking about a program that taxpayers have to subsidize," Green said. "We can handle any defaults within the program. These loans are pretty solid."
If subprime loans with no income verification and negative amortization represented one risky extreme of low-income lending during the housing bubble, then the down-payment assistance program was somewhere on the other side of the scale, proponents say.
The program was designed to help working-class families that could afford to pay their monthly mortgages but couldn't save enough for the 3% down payment required by a federally backed loan.
For example, Eric Jones, a letter carrier in Sacramento, had never quite been able to afford a down payment on a home.
Last summer, Jones, along with his wife and two sons, moved into an almost new, $208,000 home in Sacramento with help from the down-payment program. Jones has made his mortgage payments and even shifted to a biweekly payment schedule that will shorten his 30-year loan.
"There is no way I would want to lose my home and go back to renting," he said. "It gives me a sense of pride. It makes me feel more a part of American society."
Under the program, down-payment money did not come from the government, but a nonprofit middle man, such as Syphax's Sacramento-based Nehemiah Corp. of America, which grew to handle about 40% of the transactions.
The nonprofit would send money for the down payment to an escrow agent, who would get the money to the seller. After the deal closed, the seller would reimburse the nonprofit the amount of the down payment. Sellers could recoup that money by increasing their price, or simply take the loss in exchange for getting a buyer with a federally backed loan.
If the buyer continued making mortgage payments, the deal cost the government nothing, although some critics complained that the program artificially drove up the price of homes because sellers wanted to recover the money they provided for the down payment.
But if buyers defaulted, the government had to pay off the guaranteed loan provided by the Federal Housing Administration.
Bush administration housing officials had few misgivings about killing the program. In a proposed rule published in the Federal Register, the FHA said that on average, 7.5% of the down-payment assistance loans were in default in 2007, compared with 2.9% of FHA loans in which borrowers brought at least a 3% down payment. FHA chief Brian D. Montgomery declined to be interviewed for this article.
The warning also caught the attention of Congress, which was worried about sparking another financial meltdown. Actions by the Department of Housing and Urban Development, which oversees the FHA, and Congress killed the program.
But the FHA claims about high default rates are sharply disputed by both liberals and conservatives who saw the program as a financially sound way to help working-class families.
"If there are financially responsible people in the country who need homes and an excess supply of homes, then we should have policies that can help solve both of those problems," said Alex Brill, a conservative economist at the Washington-based American Enterprise Institute for Public Policy Research.
In a financial analysis of the program last year, Brill found that the FHA had significantly overstated the default rates on the loans and had exaggerated the risks of insolvency.
Brill, a mathematical economist, constructed an alternative analysis that showed defaults from the down-payment program were about 50% higher than FHA loans in which borrowers put their own money up, not two to three times higher as the FHA said.
Syphax said the program offered other benefits besides bolstering the housing market. A recent study that Syphax commissioned found that the program had created 235,000 jobs and generated $38.6 billion in economic activity last year.
"Programs like ours stabilize the market and can bring a floor to communities that continue to have falling property values," Syphax said. "There has been nothing to replace it."
A concern about the program was that in case of hardship, buyers might not feel as great a commitment since they had not invested their own money. "The idea of making somebody who has nothing at risk a homeowner is a mistake," said UC Berkeley economist Kenneth Rosen.
But ignoring moderate income Americans is not a good policy either, he said: "If we don't allow the people in the mass housing market to buy homes with some kind of assistance, we can't stabilize the housing market."
Amid growing criticism that HUD has played little, if any, role in addressing the national housing crisis, Secretary Shaun Donovan pledged at his confirmation hearing last month to step up efforts to solve some of the problems. But he has given no indication of how he feels about restarting down-payment assistance and declined to be interviewed.
The bill to revive the program would require borrowers to have good credit scores. Borrowers with intermediate credit scores would be charged a fee to cover the higher cost of insuring the loans. And the bill would create sanctions for inflated home appraisals.
A Congressional Budget Office cost estimate found that the program would break even over its first five years.
Proponents say that Green's legislation is unlikely to pass on its own but hope to insert it into a larger housing bill in coming months.
