We’ve talked a lot here on Doom and what caused the housing bubble. Virtually all speculative bubbles are fueled by easy credit. People are generally more reluctant to put their own money on the line. That’s part of why lenders have traditionally required a downpayment– it means that the homeowner has something to lose if the house goes into foreclosure, as well as helping to minimize potential losses by the lender.
There’s been all kinds of grandstanding by politicians who have vowed that the days of easy credit are over. They talked about the poor and minorities being taken advantage of by getting them into loans that they often don’t understand and can’t afford. Any glitch in their income, and they are forced to walk away, causing losses for lenders and the taxpayers who keep being stuck backing them. After all that we’ve seen, I confess to being somewhat horrified by Wells Fargo giving away downpayment money to lower income wannabe homeowners. [Also called “downpayment assistance”, or DPA]
Wells Fargo is giving away money for housing down payments.
At an event that starts today at the Sacramento Convention Center, the San Francisco-based banking giant will begin awarding $7 million in down-payment assistance to hundreds of Sacramento-area homebuyers with modest incomes. Those who attend the two-day workshop will have a chance to qualify for up to $15,000 each.
Wells Fargo, through its NeighborhoodLIFT program, is working with housing group NeighborWorks to provide down-payment assistance in 13 cities across the U.S., including Sacramento, saying it will bolster neighborhoods hit hard by the foreclosure crisis.
The FHA discovered that the problem with this kind of assistance is that the real source of the funds often wasn’t a charitable organization — it was the builders and sellers of the homes involved. And when you have a seller paying you to buy a home, it brings up all kinds of questions about what the home is truly worth. In fact, it was discovered that homes purchased under this program sold for (surprise!) two to three percent more than comparable houses outside the program. These inflated prices made the homes more likely to end up underwater and in foreclosure. Despite the efforts of several groups and members of Congress to continue the DPA program, HUD Secretary Shaun Donovan is solidly set against reinstating the program, and with good reason, given concerns about the FHA’s shaky fiscal position.
Wells Fargo is clearly not a “charitable organization”, but the results here are likely to be similar. Buyers in this income range and without the down payment are marginal borrowers. The neighborhoods that WFC are trying to “revitalize” have homes that need a lot of work and maintenance, and these borrowers often do not have the resources to make this happen. Then if there is any illness or unemployment, the borrower often has no resources to fall back on.
Sadly, the American taxpayer is going to be backstopping the vast majority of Wells Fargo loans. It was a risky practice during the housing boom, and it is a risky practice today