Zero Down for the American Dream 

The House Financial Services committee on which I serve often passes legislation that wastes taxpayer dollars, harms the economy, and egregiously violates the Constitution. The “Zero Downpayment Act” recently passed by the committee is a striking example of a bill that does all three.

This legislation is considered completely noncontroversial by both political parties, and will breeze through the full congress later this summer with the blessing of the administration.  Nobody in Washington thinks twice about another welfare scheme that further entrenches the something-for-nothing mentality so prevalent today in America.

The Zero Downpayment Act, as its names suggests, creates a federal program that allows some homebuyers to obtain federally-insured mortgages without making a down payment.  “Federally-insured” really means taxpayer-insured, as taxpayers like you foot the bill for defaults.  So while Congress congratulates itself on yet another program that supposedly helps the poor, it is taxpayers who pay for the inevitable defaults.

Every mortgage banker knows that even a modest downpayment greatly increases the likelihood that a buyer will pay his mortgage as promised.  A buyer who has consistently saved money for a down payment is by definition a better credit risk, and it’s harder to walk away from an obligation if it means losing a sizable amount of hard-earned money.  A downpayment measures a buyer’s willingness and ability to make sacrifices in order to reach a goal and improve his standard of living.  Banks used to recognize hard work and thrift as indicators of creditworthiness, and in a free market would demand a significant down payment for virtually all homebuyers.

But as with all federal intervention in the economy, housing welfare distorts the mortgage industry and makes ordinary Americans poorer.  Banks, of course, love federal mortgage programs- after all, the risk of default is transferred to American taxpayers.  The lending mortgage banks get paid whether homebuyers default or not, and what business wouldn’t love having the federal government guarantee the profitability of its ventures?  Between the Federal Housing Administration, which is the largest insurer of mortgages in the world, and the government-created Fannie Mae and Freddie Mac corporations, the mortgage market is hopelessly distorted.  Millions of mortgages in this country are federally insured, and the tax bill for defaults could be astronomical if the housing bubble bursts.

Despite the congressional rhetoric about helping the poor, federal housing policies often harm poor people by pushing them into houses they may not be ready to buy.  Given the realities of insurance, property taxes, maintenance, and repairs, many low-income buyers lose their homes and destroy their credit ratings.  Easy credit and low interest rates, courtesy of the Federal Reserve, have dramatically increased housing demand and artificially increased prices.  Zero down payment schemes do the same thing by pushing renters into the housing market.  This increased demand actually serves to price many poor Americans out of the housing market indefinitely.

The American dream cannot be lived courtesy of taxpayer handouts.  The experience of working hard, saving for a downpayment, and buying a home is the essence of the true American dream.  Eventually the beneficiaries of government programs stop thinking of themselves as independent citizens, and start viewing themselves as wards of the state.  It is impossible to maintain a free society when more and more people look to the state to provide what Americans used to provide for themselves.