Say Goodbye To Down Payment Assistance Plans

It looks like Congress is poised to dispatch down payment assistance plans, programs whereby low income buyers can obtain a home loan backed by FHA without the need to save up a down payment on the purchase price.  Under these FHA approved programs, the down payment money is supplied by a non-profit housing assistance organization.  Helping low income families buy homes is noble idea.  However, FHA claims that the program is being used by sellers (who often pay the cost of the program) to increase the selling price of their property.

Easy terms, like down payment assistance plans, allow more people to buy houses.  More buyers in the market result in increased demand and the price for housing goes up.  If low income purchasers can not make the payments on their new home loans and their houses go back on the market the supply of housing increases and values decline.

It is clear that abuse of the down payment assistance program has contributed to increased housing prices.  The increase in price made refinance more available and securitization of home loans, guaranteed by government agencies such as FHA or government sponsored agencies like Fannie Mae and Freddie Mac, provided the money.

The government has realized that some of these programs are not actually good for the market.  When people are sold homes and given loans they can not afford, the ultimate result is a roller coaster of price inflation then deflation.  These programs are worthwhile investments of government money if the monthly payment terms are reasonable and the purchasers can be expected to make the payments.  When quality control and prudent lending standards go out the window, the result is foreclosure, a drop in housing prices and dislocated families.

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