Friday, October 24, 2008

Dr. Thoma shows his compassion and not necessarily his Economics...

The Goal of Increasing Home Ownership
If someone has been paying rent month after month, year after year, and has a good credit record, it seems to me there ought to be some way for them to buy a house.
Maybe there should be considering that there may be some social benefit for the general population to own homes. I can not find it now but there was an interesting article pointing out that homeowners tend to become more conservative politically at least with home ownership. They have more vested into the markets and the overall economy and desire to have less taxes overall. So it could be selfish Republican desires to increase ownership and get the political advantages of increased voter registration. Similar to Democrats wanting to register prisoners and give amnesty to illegal aliens.
We are about to start passing rules and regulations to try to prevent another financial crisis from happening, and I don't want to see people excluded from home ownership unnecessarily. I know it's unfashionable to stick up for the poor right now, to advocate for increased home ownership, and in particular to say that it was not a mistake to try to increase home ownership rates at lower income levels, but (1) poor households didn't cause the financial crisis, though in many cases they were victims of it, and (2) it's the right thing to do in any case.
Yes the operative word is "unnecessarily". As far as what is popular, it seems that just like Thoma, that we should only be concerned about the poor. Not that I am shedding any tears for Wall Street brokers etc, but just seeing everything in terms of implied benefit or harm to the "poor" is too much at times.

I can not think of anyone else better to blame than those that took out mortgages that they could not repay. Sure there is probably some unscrupulous lenders but I have not heard of anyone being duressed into signing the papers with a gun to their heads. I also wonder if he differentiates between poor and homeowners with mortgages above their means to pay? And maybe it is the "right thing to do" but at what cost? It does not seem to bother Dr. Thoma that the costs we are bearing now may be more than any benefit we could possibly get over the next 50 years.

After spelling out some benefits and drawbacks to homeownership missing the investment aspects he pontificates on the following.
If we, say, require a 10% or 20% down payment for all buyers, that will impose a substantial barrier to purchasing a home. Many people can get access to a down payment somehow - real estate agents will fill you in on tricks such as how to borrow the money from family and have it look like a gift - but many others don't have access to those resources, and saving money when you are living close to the edge is not easy at all.

But what about all the lower income households who have never missed a rent payment, that have decent credit, but cannot possibly meet even, say, a 10% down payment hurdle, how do we ensure that they have a path to home ownership? They have shown themselves to be able to reliably pay a particular amount, and there ought to be a house they could buy with a similar payment profile.
There seems to be alternatives at any time including borrowing from relatives. Including my first house we bought with a 80-15-5 loan package. I quickly told my wife every month that her savings was netting $5 per month and the second note was interest of $150. Although we diminished our savings to too low a number we paid it off and saved thousands of dollars in interest.

But there could be a false dilemma in that the number he is talking about is very low that pay their rent and have good credit but can not find the down payments. Also it could be "good renters" may not be good homeowners. Renters know that one week late on payments and they are looking for a new place and homeowners have a lot more leeway as foreclosures by banks is a very expensive proposition.
So let's fix that instead of excluding them from ownership. Households with a verifiable, reliable payment history and with decent credit need a way to buy a house if that's what they have their heart set on doing. But it has to be a house they can afford, the payments have to match their income and their rental history. The process has to ensure that this happens.

[Sketching something out quickly without intending to get every detail correct, perhaps something like the following would work. First, you only get one shot at this program. If you walk away or default, that's it, you can't ever use this program again. That probably means not buying a house again for a long, long time, if ever. The program would involve mortgage loans with minimal down payment requirements.

Second, if your household income is in the qualifying range, the government will grant you an equity stake in the house of, say, $5,000 (or pick an amount you like better). If you stay in the house for seven years or more, then the $5,000 is yours if you ever sell the house (perhaps as a tax credit). [There could be some payback mechanism if the homeowner makes an excessive amount on the sale, or not. Also, I don't like that there is an incentive to sell the house after seven years, so perhaps the $5,000 could go into an IRA or something similar if it is not used to purchase a new house, that way the cash would not be immediately available if the household went back to renting.]
OK, so an interesting proposal. And Dr. Thoma is at least economically sound in his assessment of what policies would be least distorting to the market as compared to the Acorn and GSE's problems of forcing markets to make bad decisions. So if there is a benefit to society and we can calculate that value like what he provides above at $5,000 cash incentive to purchase a home, then it is simply a lump sum cash transfer in society and will be least distorting to a market.

To expand upon this idea, it could be expanded to what the Libs call "Redline" districts. If there is a bias against lending homes in certain areas then provide the incentive to overcome such obstacles. That would be a market enhancing measure instead of market destroying mechanism of forcing banks to cover this extra loan through legislature that the police state would enforce or worse yet rule by the mob.

Anyway food for thought from Dr. Thoma.

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