Some people are
not cut out to be homeowners. I call them NOHOs. What distinguishes
them is not their income, their mobility, or where they live –
rather, it is how they live.
NOHOs live from
week to week or month to month, depending on how often they are
paid. Typically, they have nothing left at the end of the period,
and if they run out early, they often borrow at high interest rates.
When they
purchase durables, such as a TV set, NOHOs price the purchase in
terms of the monthly payment, which they attempt to fit into their
weekly or monthly budget. They never get ahead of the game, and if
they run into an emergency that costs money, they are in trouble.
Because homeownership is rife with such emergencies, NOHOs should
not be homeowners
NOHOs sometimes
write me about buying a house because they have heard that owning is
cheaper than renting. They would buy a house in the same way they
would buy a TV set, by seeing if they can afford the monthly
payment. They have no savings but have heard that it is possible to
get a loan for 100% of the sale price. I try to discourage them by
explaining the hidden costs and risks of home ownership, and by
pointing out that as owners, they rather than the landlord are
responsible for everything that goes wrong.
The bubble period 2000-20006 was extremely friendly to NOHOs. This
was when lenders were offering 100% financing and turning a blind
eye to the adequacy of borrower incomes. It is possible that more
NOHOs became homeowners during this period than in the prior two
centuries.
Even if the bubble had not been followed by a financial crisis, the
foreclosure rate among MOHOs would have been horrendous. Any bump in
the road is enough to throw home-owning NOHOs in the ditch. One who
wrote me had calculated her monthly obligation net of the tax
deduction on the mortgage interest, and fell behind on her payment
because her tax saving did not become available until year-end.
A common bump in the road is property taxes. Another NOHO who wrote
me was in serious trouble almost immediately because the property
tax estimate by the lender turned out to be $200 a month too low.
The NOHO said he would not have purchased the house had he known the
correct figure. The reason for writing me was to solicit advice on
how to sue the lender.
More often, NOHOs can manage the tax when they move in but can’t
manage a future tax increase. Of course, property taxes are known to
rise, if not this year then next, it doesn’t take a lot of foresight
to expect it. But foresight is in short supply among NOHOs.
During most of our history, NOHOs had to rent, primarily because
they did not have the down payment lenders required to finance a
purchase. The down payment requirement is the most important
condition imposed by home mortgage lenders to protect themselves. In
the event a loan goes into default, the down payment reduces the
loss from having to foreclose on the property. This is the
equity protection
provided by the down payment. Perhaps even more important, the down
payment requirement is the most effective way to screen out NOHOs.
Because NOHOs can’t save, they can’t make a down payment. This is
the screening protection
provided by the down payment.
However, NOHOs can slip through the down payment screen if somebody
other than the borrower puts up the down payment and the lender (or
insurer) accepts it. NOHOs are getting mortgages right now through
this escape hatch, most under FHA. The FHA down payment requirement
is only 3.5%, but in 2008, borrowers provided their own down payment
on less than half of all new FHA loans. In the other cases, down
payment assistance was provided by (in order of importance)
non-profit agencies, family, state and local government agencies,
and employers.
I am not making a blanket condemnation of down payment assistance
programs. Not everyone who can’t make a down payment is a NOHO, and
our society seems to have a weak spot for “first-time home buyers.”
But providing down payment assistance to first-time home buyers
allows the NOHOs among them to slip in.
Perhaps the least harmful source of down payment assistance is family members, for whom assistance is a vote of confidence by those who usually know the borrower best. The most harmful are the non-profit entities that get their money from home sellers. They not only remove the screening protection of the down payment, but they reduce or eliminate the equity protection as well. The reason is that the home sellers who provide the assistance raise their prices in order to get it back. These programs were made illegal by Congress last year, but legislation to revive them is now in the works.