Follow-Up to IRS Ruling

June 1, 2006 |

On Monday, I posted an article regarding a recent IRS ruling that could spell the end of down-payment assistance corporations.  These non-profits are responsible for "gifting" purchasers the down-payments that they could not otherwise afford.  Many people credit this non-profit corporations for increasing the amount of financing available to buyers with questionable financial backgrounds.

A recent article from Inman News describes reaction to the IRS ruling.  As always, there are experts on both sides of the fence.  Some feel the ruling opens the way for enhanced consumer protection in the mortgage industry, while others feel that inhibiting these non-profits could lead to an exacerbated slowdown in the real estate market by limiting potential buyers.

From the article:

"There has been a tremendous effort to introduce a whole new segment of American society to home ownership," Mark Dotzour, chief economist at Texas A&M University’s Real Estate Center, said. Dotzour said there used to be three barriers of entry for home ownership: lack of income, lack of down payment, and lack of quality credit rating.

"To attack the issue of home ownership and increase home ownership among minorities, creative loan programs have been offered in the last few years to allow people to buy homes," Dotzour said. "These down-payment-assistance programs were one way to address the barrier of not having a down payment."

While I find Mr. Dotzour’s assessment of the situation to be factually correct in that down-payment assistance does help to address the barriers facing people buying a home, there is a big problem. . .the three barriers he mentions: "lack of income, lack of down-payment, and lack of quality credit rating," are reasonable barriers to have up.  It is not a good idea to buy a home if your income is unstable or inadequate, you won’t or can’t save for a down-payment, and/or you have a poor credit rating.  It is also a bad idea to loan money to people who have such problems.  While, on the surface, it seems like the greater good is being served by increasing home-ownership rates, that ownership is no good if it creates undue financial hardship for the owner.  How many people who received such assistance could have benefited to a greater extent by receiving credit counseling to improve their FICO score and financial counseling to help them find ways to save for a down-payment, no matter how modest.  Both of these things will help people for life, not just enable them to buy a home at a high interest rate with no equity.  Things like down-payment assistance are prone to fall victim to the law of unintended consequences.  In this case, helping people buy a home now may cause them to experience financial hardship later.  Think this sounds crazy?  Listen to what the Department of Housing and Urban Development said in the article:

"HUD recognizes that loans with down-payment assistance from seller-funded nonprofit gift providers do not perform as well as loans to borrowers with no such assistance,"

When the government is saying that handouts may not be a good idea, that should get your attention.

Posted by Daniel | Filed Under Buying, Finance, News 

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