The U.S. government likes homeownership. The more people who own homes, the more stuff they buy to put in those homes, the more the economy grows. The “American Dream” is really another way to fuel the economy.
Unfortunately we are at the point where homeownership is being viewed as something we are owed, something the government owes us, or at least must facilitate.
There are incentives in our tax code to encourage buying, like the mortgage deduction. But these incentives generally assume one thing; they assume you can afford the house. They assume your monthly income is sufficient to cover the expenses of owning a home.
To afford a home people use to save for a down payment. Banks wanted to be sure buyers have some equity, a stake in the game. But to encourage people who did not save for a down payment, banks and insurance companies came up with the PMI, private mortgage insurance. In lieu of a 20% down payment, buyers take out insurance to cover the bank in case they fail to make payments. The government programs to encourage homeownership have adopted these tools as well.
Before leaving office, the outgoing administration issued directives to cut the PMI fees by 0.25%- 0.46% for first time and low income buyers, or buyers with bad credit, to offset increasing mortgage rates.
On Monday, the Federal Housing Administration announced its plan to reduce mortgage insurance premiums by 0.25 percentage points for 20 to 30 year loans under $625,500, notes The Wall Street Journal. For loans that exceed $625,500, a percentage point decrease of 0.45 applies. PMI was also lowered for loans with 10 to 15 year terms.
If someone is looking at a $625K home, then they need to save $125k for the downpayment or pay for the PMI until the equity is 80%+. Our tax dollars should not be subsidizing the risk of homes over $500K, or even $250K. If a buyer cannot afford the downpayment or PMI for a $625k house, perhaps they should buy a $400k house.
Set aside the issue of government subsidizing a purchase the buyer likely can not afford, what HUD was prepared to do was decrease the premiums for insurance at a time when the risk increases. At the very least, the offset left the risk the same but decreased the pool of money to cover the defaults.
We have become a country of instant gratification. We neither value planning nor patience.
Homeownership came after people planned and saved. It may take 5 or 10 years to put aside enough for a down payment. It is the very discipline of saving for a home that indicates your ability to afford it. Yes, for a while you live in a smaller rental, or perhaps you even buy a condo rather than a house. The difference between your rental (or lower mortgage) and the monthly cost of the house you want is what you put aside; it is what you save for the home.
If you can’t save that money, then you can’t afford the house.
Buyers need to save. While buyers save they live in a smaller place. They live in a neighborhood that is not their ultimate desire. They don’t buy that new car, or new TV. They get a cheaper android phone rather than a new iPhone or Galaxy. Forgo HBO, Cinemax or other premium channels. They take that money and save it.
Bad credit? The whole point of waiting and saving is to stabilize finances and demonstrate discipline. People may have hit a rough patch that causes problems. If they are really ready to buy a new home, the time it takes to reestablish credit is the time to also save for the down payment, reestablish good habits. There is a reason financial institutions want to wait for 3, 5, or 7 years before people start spending on credit again; it is to get their financial footing back.
The directive of the previous HUD leadership would have made it easier for people to do something that they are not properly prepared to do. Reversing it was the right thing to do.
Homeownership, mortgage and financial tools need to be market driven with proper regulatory government oversight, not driven by a government facilitating bad habits at the expense of taxpayers.
The hard reality is that not everyone can afford to buy a house. Homeownership may be part of the “American Dream”, but it is not part of the American Rights.