Why The Government Must Stop Making Housing “Affordable”



Yes, you heard that right. We don’t need any affordable housing if it’s up to the US government to provide it. From “section 8” to housing voucher programs, to government insured “low down payment” loans, we do not need any more “affordable housing”. In fact, since the 1930’s when Uncle Sam created FHA, housing has become more and more expensive. “Affordable Housing” has become an oxymoron.

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There is nothing affordable about so-called affordable housing. Why? When the federal government becomes involved, prices and costs only go up – not down.

Here are a few quick examples:

1. The costs of an FHA loan are exorbitant.

An FHA loan supposedly makes housing affordable by lowering the required down payment for the buyer to 5% of the purchase price or less. This simply means that the borrower may find it easier to get into a loan, while making it virtually impossible for them to pay the loan off.

The average 30 year FHA loan at 5% interest on a $100,000 home with a $5000 down payment will result in an “affordable” payment of $509.99 per month. For the first 149 months the borrower will pay more than $50,000 in interest alone! In fact, the vast majority of the first 15 years of payments will go toward making profits for banks. Have you ever noticed that most amortization calculators on financial websites do NOT include totals for interest paid over the life of the loan? If they did you’d quickly realize just how unaffordable these loans really are.

This IS the primary reason why 49 million home owners owe more than their homes are worth today, though some have owned their home for more than 10 years! For buyers who live paycheck to paycheck and often have little cash in the bank, this is tantamount to financial suicide. In fact, according to Edward Pinto at the American Enterprise Institute, approximately 21% of all FHA mortgages are delinquent today. Compare that to a historical pre-crash rate of less than 5%. It’s clear that FHA and other highly leveraged government created finance programs are not helping lower income borrowers build wealth. Just the opposite is the case.

Private mortgage insurance or PMI, will add more than $35,000 over the life of a $95,000 mortgage loan.  Borrowers don’t usually understand that they will have to pay for insurance on their “affordable” mortgage, which will add as much as 35% to their loan costs.

Further, Property taxes and insurance aren’t even included in these totals. Local governments are also prone to ride on the backs of property owners, thus driving up the cost of home ownership even further.

2. According to this piece in Mortgage News Daily, rents actually go up when the government gets involved in subsidizing rent for so-called affordable rental units.  And since minority buyers tend to lack an understanding of how these programs work, they tend to be easy targets for expensive programs that actually lead to minority households being overly burdened with debt due to expensive loans that are supposedly affordable.

3. Just last week I attended a closing at which a young couple took out a $155,000 government insured mortgage to buy a home. Clearly the lender had to “massage” the structure of the mortgage in order to get one of them, in this case, the woman, qualified for a loan that I fear will leave her financially over-burdened for many years to come. The tactics used to structure this loan would only be allowed with a government insured loan. No private lender would make such a loan without a guarantee from the US taxpayer.

First, only she signed for the loan. Her fiance’, his credit impaired by a previous marriage, could not qualify, so the deal was set up using only her credit. Then, to lower the monthly payment to a level that would be within the income requirements, the lender had her waive her escrow account, so her mortgage payment will not include an escrow for taxes and insurance. This means that she will have to pay her taxes and insurance as they become due, thus putting a yearly burden on her that could have a very negative impact if she fails to make those payments. Of course the buyer was happy to get the house, but often those home-buying emotions cloud what otherwise might have been better judgement.

Government insurance has come a long way since the 1930’s when FHA was originally created, and a borrower was expected to put up a paltry 50% as a down payment. Today the mega banks, the GSE’s, HUD and a host of housing industry entities have gamed the system in the name of expanding home ownership to include people who otherwise could not afford it. But hey, even with these loan programs, indeed BECAUSE of these loan programs, these borrowers still can’t afford it. It is clear that “affordable housing” whether owning or renting, is much less affordable. And the government provided insurance is like chum in the water to a great white shark. It only motivates lenders to find a way to move in for the kill.

Perhaps potential home buyers should be required to take a class on how mortgage amortization actually works, along with a true accounting of the real costs of owning and maintaining a home.  Such education would help borrowers make better financial decisions and beat the banks at their own game. I guess this must be why such education is virtually non-existent. The importance of prepayments is one of the biggest secrets in the world of insured mortgages.

The biggest tip for those who will buy or have already bought a home using one of those so-called affordable programs is this: Prepay as much as you can in additional principal each month.

If we can’t get the government out of the housing market, at least smart buyers can take the sting out of government insured loans.

Every dime you contribute above the regular payment amount will go directly to pay down your loan balance. If you do this beginning with payment number 1, you’ll avoid paying tens of thousands of dollars in mortgage interest and you could shorten your mortgage by as much as 10 years. The more you can pay, the more you’ll save. The truth is that paying down your mortgage as quickly as possible is the real path to affordable home ownership.

 

Donna S. Robinson is an 18 year veteran of the real estate industry and residential real estate market expert. She believes that all home buyers are real estate investors, because no one buys a home expecting to lose money. She is the author of “Real Estate Investing Fundamentals & Strategies”. Follow her on twitter @donnaconsults  Watch her videos here. read more articles and contact her about real estate investor coaching and business consulting services on her website.

Comments

  1. Great info.
    I like your realist approach in your articles.
    And unlike a chronically overactive “optimism” shill writer that also submits articles to realtybiznews.com, you actually post reader comments.

    I had a mortgage company try to apply my extra principle payment, that I made every month, to my next months interest payment.
    I had to call them each and every month to have them reallocate the extra $$ to the principal.
    You must be diligent about follow up when dealing with some banks

    • Thanks for your comments KJ.
      Realty Biz News does allow me to freely express my thoughts. Like you I am skeptical of the “always sunny skies” forecast that constantly emanates from the industry media machine. As for prepaying principal, I’d like to add that it’s best to include prepayments as a separate check, marked specifically “to be applied directly to principal”. This makes it more difficult for banks to make – ahem – “mistakes” such as you have experienced. It is also a good idea to check with your specific lender to see if they have a particular procedure for submitting additional principal payments.

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