In the wake of a storm of public outrage Houston Mayor Bill White ordered the city’s housing department to shelve a plan to subsidize homebuyers by giving them $3000 grants to pay off debt to improve their FICO scores. Anti-tax organizations became virtually apoplectic in their denunciations.
People are right to be concerned with this approach to getting some people into homeownership, but it turns out there is cause for far greater outrage over where the city was taking the money from.
The City of Houston’s housing department came up with the idea of helping potential homebuyers qualify for a loan they were currently ineligible for by helping them pay down their outstanding consumer debt. When the newspaper reported the proposal, all hell broke loose in Houston.
According to Houston Chronicle reporter Carolyn Freibel…
The “Credit Score Enhancement Program” would have given up to $3,000 in grants to individuals who are trying to qualify for mortgages through the city’s homebuyers assistance program. City officials say some applicants fall short of eligibility by only 10 or 20 points on their credit scores, and paying off some debt balances can quickly improve their numbers. …
The city has three programs that provide grants for down payments and closing costs for qualified homebuyers. The most generous one offers a $37,500 grant to buy a home that costs $135,000 or less, but only in certain disadvantaged Houston neighborhoods the city is trying to revitalize. Participants cannot earn more than 80 percent of the Houston median income.
When I got a call from the reporter Monday afternoon I was a bit taken aback by the proposed program. While research has shown that down payment assistance is generally one of the more efficient types of homebuyer subsidies I have never been a particular fan of it, particularly as it is practiced by cities like Houston. It has always seemed to me to be a rather expensive approach the housing subsidy and often provides a poorly secured income transfer to a limited number of moderate income families. Down payment subsidies often rob money from lower income and more needy families who desperately need basic shelter.
And besides, FICO scores are there for a reason. They predict the likelyhood that someone will not default on a loan. And FICO scores are based on borrowers credit history. Houston’s approach under this program sought to defeat the protection of the FICO system through changing the borrower’s FICO score with a government grant.
It is possible to argue that this approach is not radically different than regular down payment assistance. The purpose of a downpayment is to both ensure that a borrower has demonstrated a disipline to save and to keep a borrower from walking away from a loan becuase they have their money invested in the house.
Granted this is true but the mortgage credit system seems to commonly tolerate, for better or worse, people skirting these downpayment protections by (if their parent have money) borrowing downpayments from family members or even taking out a second loan to come up with the downpayment. In my opinion FICO scores are more important and more predictive of borrower success than whether the borrower actually saved up the downpayment themselves.
Readers of this blog know that I approach the City of Houston housing department program and policy decisions with a rather healthy dose of skepticism based on the city’s past performance. But not wanting to criticize the Houston program without knowing all the facts I simply expressed to the reporter my reservation that the program was “very aggressive,” and stated that I was worried that it might saddle some families who did not really have the financial resources or the financial literacy to successfully maintain homeownership with a loan they might default upon.
John Henneberger, co-director of the Texas Low-Income Housing Information Service, called the Houston plan “a very aggressive approach” to housing assistance. He said he needed to know more details but ventured that it could work if the city provided a good pre-purchase homebuyer education program. The city requires all applicants to complete an educational program.
Henneberger said the subprime meltdown and global financial crisis have made housing advocates take a “more conservative tack.”
“We’ve certainly learned that we don’t do low-income people a whole lot of favors when we get them overly extended on credit.”
When the Chronicle reporter called me she told me that the funds for the program were to come from locally generated revenues from tax increment refinancing zones. What I did not know at the time, and what absolutely outrages me about the city’s proposal, according to the Chronicle story, was to spend $444,000 of “leftover money” from a $1.5 million appropriation the city made for emergency home and roof repairs after Hurricane Ike.
How this money could possibly be diverted from making repairs to homes damaged by the hurricane to pay down credit card bills so that a few people can qualify to buy a new $135,000 home is simply beyond comprehension. The City of Houston has been pleading for additional housing disaster assistance funds over the past two weeks to make repairs to homes damaged by Hurricane Ike.
This debacle certainly damages the city’s credibility in asking for that funding.
Where are the city’s priorities? Why is there left over, unspent money for emergency home and roof repairs in the face of the city’s pleas for more housing money?
What sort of terribly mixed up priorities guide the City of Houston’s housing programs that would allow it to carry out a moderate income credit subsidy program of dubious merit by diverting funds from emergency home and roof repairs for the poor, the elderly, and the disabled?
That is the true scandal behind this sad story.