"Free" Down Payments

In response to the slowing housing starts, homebuilders have founded an organization to help consumers finance new homes. In their article in the Wall Street Journal, Patrick Barta and Queena Sook Kim describe how a single woman who was a postal worker was able to obtain the $4,400 down payment required on a new $148,000 house. The builder referred her to the nonprofit group, the Nehemiah Corporation, which agreed to provide the down payment "with no strings attached."

And where did Nehemiah get the money? From the builder, of course. The Federal Housing Administration debated the program at some length, but finally agreed to guarantee home mortgage loans with down payments that were, in effect, provided by the builder. It is estimated that about 17,000 Americans purchase new homes with their down payments supplied by gifts from groups that obtain their funds from the builders. However, a basic economic principle still applied: There is no such thing as a free lunch. A study of the gift program conducted by the U.S. Department of Housing and Urban Development showed that default rates on mortgages financed under the gift program were "far above average." Clearly, the "gifts" from the builder must be balanced by a higher price for the house, or, perhaps, a higher rate of bankruptcy among builders.