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Lenders, economists question first-time homebuyer bills

Legislation could create more problems than it solves, experts say

house question HW+

While first-time homebuyers welcomed news of a down payment assistance grant or tax credit, the mortgage industry and housing experts expressed deep skepticism.

Two proposals under consideration in Congress aim to give first-time homebuyers a leg up by offering a grant at closing time, or a tax credit after the fact. Loan officers — who are monitoring the progress of both legislative efforts closely — aren’t in love with either of those options.

One bill, which U.S. Rep. Maxine Waters, D–Calif., unveiled earlier this month, would give first-time, first-generation homebuyers an upfront grant of up to $25,000. Experts have said that determining who would qualify for the benefit could be a significant obstacle.

It’s not wise to bet against legislation backed by Waters, who chairs the House Financial Services Committee. Still, the White House indicated her bill is not a part of President Joe Biden’s infrastructure package — and any standalone bill would be on a difficult road to passage.

The second first-time homebuyer tax credit bill, introduced by U.S. Rep. Earl Blumenauer, D-Ore., aligns more closely with Biden’s campaign promise, as the bill’s author highlighted when he introduced it. But that piece of legislation hasn’t made the cut for the infrastructure package, either.

More bills could certainly be brewing. In the meantime, however, loan officers, industry experts and economists have some thoughts on the two current proposals. Ultimately, lenders, appraisers, loan officers and real estate agents will have to grapple with whatever bill becomes law.

“It’s exciting that so many lawmakers are taking up this issue of increasing minority homeownership seriously — it’s a big win,” said Tai Christensen, director of government affairs at CBC Mortgage Agency. “I say, bring on the bills, and may the best bill win.”

Help not wanted

Given that demand and prices are at their highest levels in modern American history and supply is at its lowest, many industry pros who spoke to HousingWire questioned the wisdom of creating a new federal down payment assistance program for first-time homebuyers.

Few loan originators or economists expect that a $15,000 or $25,000 down payment credit would make an offer competitive when others are offering significantly above the listing price.

“There’s no shortage of buyers in the market,” said John Meussner, executive production manager with Mason-McDuffie. “If a seller knows buyers are coming to market with $15,000 or $25,000, they’re just going to raise prices by that much.”

It’s unclear if sellers would increase prices just to sop up a down payment assistance benefit, especially if they already have a dozen other offers to choose from.

But that doesn’t shake the feeling for many that such a stimulus would only fan the flames of an already overheated market.

“It’s hard to argue that it would be anything other than inflationary, particularly in a market that is already so tapped out from a supply standpoint,” said Tim Rood, head of government & industry relations for SitusAMC.

If — and it’s a big if — enough borrowers took advantage of a down payment assistance program, it’s conceivable that it would impact pricing in the market overall, said William Emmons, assistant vice president and economist at the St. Louis Federal Reserve Bank. He cautioned that an impact on pricing is unlikely if there is only limited participation in some local markets.

Most economists frown at the mention of down payment assistance. But first-time homebuyer programs are wildly popular with the general public because “it’s easy to understand; it’s clear,” explained Emmons.

“It’s, ‘I’m going to have more money to put toward a down payment,” said Emmons. “People like getting a check if they think it doesn’t cost them anything.”

But, in his view, the overarching problem with such a program is that it spurs demand without increasing available homes. While down payment assistance is a political slam-dunk, tinkering with the supply side of the housing market remains fraught.

“It would be more difficult to understand that what we should really be doing is tackling restrictive zoning laws — especially because existing homeowners are going to fight it,” said Emmons. “We seem to be stuck in this situation now. The same thing is true in healthcare and in higher-education. The people who benefit from the current situation are resistant to change.”

Lenders look elsewhere

From the lending standpoint, there are some concerning elements with both first-time homebuyer down payment assistance programs.

Pandemic notwithstanding, Jeff Anderson explained that a state-level down payment assistance program administered by CalFHA has its problems, too.

“There are some drawbacks to many of the DPA programs: in some cases it takes lenders longer to approve and close loans,” Anderson, the CEO of mortgage brokerage shop Rancho Capital Home Loans, said.

More pertinent to the current frenzied housing market is the ability to cope with an appraisal gap. The current demand for houses has led buyers to pay the difference in appraisal and total financing amount out of pocket – often tens of thousands of dollars. A first-time homebuyer taking advantage of down payment assistance may not have that flexibility.

“It puts buyers at a competitive disadvantage,” said Anderson. “How do I cover a shortfall in an appraisal if I’m being pressured to come up with an appraisal contingency?”

In the Waters bill, the grant funding would be administered by state finance agencies. Some have a sterling reputation with lenders for speed, transparency and efficiency — such as Arizona’s Housing Finance Authority — while others inspire less confidence.

“Look, CalFHA has great people — but they’re not going to be able to make a program efficient and streamlined,” said Matt Gougé, a loan officer at Answer Home Loans in Folsom, California.

Some lenders have said they avoid doing business in some states altogether, like New York, whose finance agency is known for being litigious.

Others criticized the bill as shutting out nonprofits and government entities that already have expertise in downpayment assistance and relationships with underserved communities.

“We would argue that the language needs to be such that any government entity that provides DPA should have those resources,” said Christensen. (CBCMA, a federally chartered government entity, provides down payment assistance financing through its affordable housing program, the Chenoa Fund.)

The first-time homebuyer tax credit program, on the other hand, would be administered by the Internal Revenue Service, which would offer the tax credit months afterward. That’s not a big help for those who would have trouble scraping together a down payment anyway.

More concerning, the need for cash at closing time could potentially give rise to a cottage industry of short-term lenders, Christensen said.

“If you need down payment assistance, but don’t have the funds up front — it could lead to payday loans,” said Christensen. “It could get out of control very quickly. A community of people could be preyed upon, or charged higher interest rates because the market is so saturated.”

That outcome would run counter to the intent of the legislation — to make homeownership available to those who have historically been excluded. Borrowers could instead find themselves over-extended.

“It seems like that’s defeating the purpose from a policy perspective, if you’re trying to get [borrowers] to initiate a sustainable homeownership process, but you’re asking them to compromise their financial situation even more,” said Emmons.

“It’s precisely the people who have difficulty coming up with a down payment that don’t have liquid assets available,” said Emmons.

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