Should The Poor Make A Profit?

Peter G. Miller
OurBroker®

Owning a home is a wonderful thing, in part because real estate offers the potential to rise in value. Why then does government discourage home ownership by limiting profits for the poor?

There is no end to the news releases and announcements from government officials at every level explaining that they want to see the highest possible levels of home ownership. HUD, as an example, tells us that "America's home ownership rate rose to 66.7 percent for the first quarter of 1999, including a record number of African American and Hispanic families."

But such glowing news should raise a question: Is there a better way to increase ownership levels?

If we agree that Adam Smith was right and that the "invisible hand" of self-interest is a core motivating force, why then do we deny the right of the poor to make a profit when they buy homes with federal assistance?

For example, FHA is considering a ban on seller-assisted home purchases through non-profit groups, the logic being that such arrangements increase local housing prices as well as the potential for foreclosure.

The main victim, should such a ruling come to pass, is California's Nehemiah program, an organization which has created some 7,000 owner-occupant households.

"Under FHA guidelines," explains Nehemiah, "it is inappropriate for a seller to contribute money towards a down payment for a buyer to purchase the seller's property."

Instead, Nehemiah provides a gift equal to 3 percent of the purchase price to the party that conducts the closing. The result is that qualified buyers get assistance within the rules -- rules that FHA now wants to change.

In other words, we have a large pool of buyers who can afford monthly payments but have trouble raising an up-front down-payment. FHA argues that the down payment must come from the buyer's own funds -- even though so-called "seller contributions" of 3 to 9 percent are routinely allowed under various conventional loan programs and 25 percent of all first-time buyers receive help from relatives and friends, according to the National Association of REALTORS®.

There are several issues here:

First, Nehemiah, Habitat for Humanity, Christmas in April, and like groups are all doing what the government should be doing. The catch is that such groups are succeeding without massive funding, huge bureaucracies, and reams of self-congratulatory press releases -- indeed, cynics might argue that if volunteer groups continue with their successes, we won't need either FHA or HUD or the tax bills they represent....

Second, once people have ownership, foreclosure rates are remarkably low. Given that property values tend to rise over time in most markets and at levels above the rate of inflation, ownership by and of itself is one way for households to create wealth. By denying seller contributions to buyers who can make monthly payments, FHA would effectively exclude many households from the potential for realty profits if it adopts the policy it now proposes.

Third, since when has making a profit when dealing with the government been a sin? Washington has more lobbyists than cherry trees, all looking for favorable deals, rules, and laws so that clients can pocket big dollars. Surely what's good enough for big business, big labor, and big interests should also be available to the poor.

A number of progressive groups are providing services and opportunities which the government should support, especially given public pronouncements lauding the volunteer efforts. FHA has now raised a policy idea, and the time has come to place it back in the dust-bin where it belongs.

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Question Of The Week

Q Is it tough for someone who is 21 to get a mortgage?

A Age is not an issue. Income, credit, and the ability to make a down payment are among the factors lenders must consider.

As an example, imagine that someone joined the Army at age 18. After 24 months of continuous active duty service they would be eligible for the VA loan program, mortgages with no money down if otherwise qualified.

Weekly Resource

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Published: October 12, 1999

Use of this article without permission is a violation of federal copyright laws.

Editor's Note: This article reflects the opinions of Peter G. Miller only and not necessarily the views of this or any other publication, organization or Website owner.

Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .