Don't homebuyers need to have some "skin in the game" in order to assure that they act responsibly and do not permit their mortgages to go into foreclosure?

By gifting the downpayment to the buyer, seller-financed downpayment assistance (SF-DPA) gives buyers equity stakes in their new homes in the amount of assistance provided. The buyers then make mortgage payments which increase those equity stakes over time. Although mortgages with higher loan-to-value ratios generally have a higher foreclosure rate than those with lower LTV ratios, it is not clear that "skin in the game" makes any difference. Instead, those who have higher LTV mortgages are likely to be in worse financial circumstances, whether or not they received SF-DPA. A mortgagor's overall financial situation is the best predictor of the likelihood of foreclosure.

Further, there are a number of other programs which permit families and individuals to become homebuyers without having any "skin in the game." In the final analysis, these differ from SF-DPA only in that they are a different source of funds. For example, there are over 500 programs of nonprofits and governments which fund downpayments, programs which have often been applauded by critics of SF-DPA.

In addition, the FHA Secure program permits the refinancing of mortgages that may exceed the value of the house. By doing so, this program effectively provides downpayment assistance to homeowners. Similarly, FHA's Hope for Homeowners program explicitly creates equity for the homeowner who refinances through this program. In this instance, it is the original lender who provides equity for the homeowner, who until receiving this equity has no "skin in the game."

Last year, Congress passed legislation that authorizes a $7500 tax credit for certain homebuyers, which is to be repaid over 15 years without interest. Since this tax credit is applied to reduce an individual's income tax, it is identical to SF-DPA in its effect: buyers get homes without having to put up a downpayment (although they do have to repay the $7500 over time). It should be noted that for homes costing less than approximately $200,000, this tax credit is larger than the assistance normally provided by SF-DPA. Finally, Congress will reportedly consider legislation to eliminate the payback requirement for this tax credit. This would effectively create pure downpayment assistance.

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For additional information, please contact Shelley Mitchell, smitchell@nehemiahcorp.org, 916-231-1999.

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