The Vegas Decade

As I research the history of the mortgage meltdown, it's funny how often Las Vegas takes center stage. For example, here's a USA Today article from January 20, 2004:

Bush seeks to increase minority homeownership

By Thomas A. Fogarty, USA TODAY

In a bid to boost minority homeownership, President Bush will ask Congress for authority to eliminate the down-payment requirement for Federal Housing Administration loans.

In announcing the plan Monday at a home builders show in Las Vegas, Federal Housing Commissioner John Weicher called the proposal the "most significant FHA initiative in more than a decade." It would lead to 150,000 first-time owners annually, he said.

It's not the particular government program that's of major interest, it's the message the Bush Administration was sending. Federal regulators are supposed to take away the punchbowl when the party gets interesting, but announcing that the President hates down payments, that the Chief Executive feels that requiring people with bad credit to put money down on a house is UnAmerican and probably racist, at a homebuilder's convention in Las Vegas, well, I've exhausted all the punchbowl similes ... This is liking filling all the nasal decongestant inhalers at the Betty Ford Clinic with pure pharmaceutical cocaine.

The percentage of first-time homebuyers in California (Ground Zero of the disaster) who put no money down increased from 11% in 2002, when Bush first banged the anti-minority evils of down payments to 33% in 2004 to 41% in 2006. So, Bush certainly got what he repeatedly called for -- a big weakening in credit standards.

Nothing-down options are available on the private mortgage market, but, in general, they require the borrower to have pristine credit. Bush's proposed change would extend the nothing-down option to borrowers with blemished credit.

The FHA isn't a direct lender, but guarantees loan payments for mortgages on moderately priced owner-occupied property. The FHA guarantee now permits private lenders to finance as much as 97% of the purchase price of a home for millions of low- and middle-income borrowers.

In the proposal soon to be delivered to Congress, Bush would allow the FHA to guarantee loans for the full purchase price of the home, plus down-payment costs. As a practical matter, the FHA would guarantee mortgages as high as 103% of the value of the underlying property.

103% Loan-to-Value?

Sure, why not? What could possibly go wrong?

Weicher says the change is aimed at potential home buyers whose credit excludes them from the private mortgage market. Borrowers would need sufficient income to meet monthly payments. But, he said, the plan would eliminate the single largest impediment to homeownership for millions of households — lack of money for a down payment.

Well, lack of money for a down payment was supposed to be an impediment to homeownership.

The most recent government figures show a national home ownership rate of 68.4%, the highest ever. But less than half of black and Latino householders own the home in which they live. Bush has a goal of 5.5 million new minority homeowners this decade.

FHA loans carry higher risks of delinquency and foreclosure than do private mortgages, and the proposed change presumably will lead to greater losses to the government than the current program does.

Weicher said the added risk will be offset by higher fees charged to borrowers who opt to make no down payment.

On a $100,000 mortgage with an interest rate of about 6%, the nothing-down borrower could expect closing costs $750 higher than other FHA customers. Monthly house payments would be slightly higher.

Mortgage analyst Keith Gumbinger of financial publishers HSH Associates says the Bush plan "would fill at least a small niche in the mortgage market" — first-time buyers with somewhat impaired credit.

Affordable-housing advocate Scott Syphax, CEO of Nehemiah Corp., called the proposal "revolutionary." It marks the clearest official acknowledgment that millions of potential homeowners are being blocked by high down-payment costs, he says.

The Nehemiah Corp. describes itself as:

In 1994, Nehemiah Corporation of America (“Nehemiah”) was founded by a young African-American preacher with a $5,000 loan from a Baptist church in Sacramento, California. ... However, as its Vision Statement indicates, its charitable activities are more expansive than just down payment assistance, it also provides opportunities for economic empowerment and community revitalization.

Personally, I can't make sense out of what they do, but it seems like they do it on a pretty large scale. The point is that everybody who was anybody across the ideological board was for the steps that led to the mortgage meltdown.

My published articles are archived at iSteve.com -- Steve Sailer