The Right Way To Run Loan Programs For Low Income Families

In the last year or so, I’ve seen a lot of ugly nonsense, but one of the recurrent themes I find most repellent is the idea that loans written to low-income and minority families, and loans that forgive past credit problems, are the cause of the mortgage scandal and the new depression.  Dishonest and predatory loans written to those folks: that’s the ticket.  But faulting the consumer is easy, stupid, wrong — and distortive.

I say “distortive” for the simple fact that low-income housing loans have been great for families and the economy in many incarnations sinse the end of the second world war.  They bolster real estate markets, provide incentives to rehab derelict properties, and help economically disenfranchised people to live the American dream.  Well, what used to be referred to as the American dream, before we all got so ridiculously greedy and credit-happy.

Here’s how a successful low-income mortgage program works:

First, you limit the program to areas where housing prices are low, or where there are a lot of empty properties clogging the market.  The idea is to provide homes, not convince people to take part in get rich quick schemes.

Second, you reduce the down money requirements from the traditional 20%-30% to 3%-7%.  One of our readers, Max, is going to be mad at me for saying that, but it works.  3% of a house’s purchase price is a lot of money to a poor person.

Third, you cap the hell out of the interest rates, or even deflate them — and this is where the mortgage industry got ugly.  The idea is to help people into their first homes, and make money off of them later, when their real estate investment pays off and they upsize, or retire to a condo, or whatever.  Instead, the banks gouged the hell out of poor people, forced them into foreclosure, and then tanked the economy, making those people into “deadbeats” while wealthy executives looted our economy, creating poverty and unemployment that will surely lead to more foreclosures.

Finally, you make sure that the buyer’s debt-to-income ratio will support the payments — duh!  Homebuyers are optimistic and not entirely rational; those aren’t crimes.  Fraud and misrepresentation — those are crimes.

In Pittsburgh, the city went so far as to offer rehab loans that allow a family to buy a $23,000 house that needs $100,000 worth of work, and finance the repairs along with the purchase price.  And guess what that did?  It turned crack houses into tax revenue streams!  Guess how high the rate of foreclosure was with those well-run programs.  Now guess lower….

In no way do these programs give away money; they make money by creating taxable properties.  Some even offer loans that allow a buyer to buy a house, pay a portion of the total rehab & purchase price as a mortgage, and let a chunk of interest-free priciple sit there until the homeowner re-sells the house, at which time it has to be repaid.  It sounds nuts, but the city makes its tax money, and eventually the taxpayers get their dough back.

These sorts of programs are great for the market and the economy.  Greedy manipulation of them?  Not so much.

Get ready to see more of them.  They’re part of the real solution we so badly need.

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