Home Buyer Tax Credit as Down Payment - A Bad Idea

It never ceases to amaze me just how short our collective memory is in this country. Just how short is it? Well, we are currently trying to stimulate our economy with the same kinds of practices that wrecked it in the first place.

See if this sounds familiar:

In the 1990's there was a huge push to increase home ownership in the United States. The federal government challenged banks to find new ways to get people into mortgages -- even if those people normally would not qualify. "Home ownership for everyone" was the word of the day.

As you might imagine, this push for easier lending attracted a lot of people that really couldn't afford to buy houses. Eventually, millions of these people went into foreclosure. And the rest is history -- housing collapse, mortgage collapse, and a full-scale economic recession.

And here we go again:

The first-time home buyer tax credit can be used as a down payments on certain types of loans. So we are once more using government stimulus and incentives to get people into mortgage loans -- people who cannot afford to put any money toward their down payments. According to a recent article in Business Week, people with government-subsidized down payments are twice as likely to end up in foreclosure. The reasons why are fairly obvious.

At the height of the subprime mortgage meltdown, politicians were shaking their fists about the "easy credit" mentality that got us into that mess. Too much government stimulus in the housing market was blamed as well. So what are we doing right now? We are using government within the housing market ... again. We are trying to stimulate our economy with the exact same strategies that tanked it to begin with.

Sadly, I even predict a comeback of subprime lending in the near future. Of course, it won't be called "subprime lending," because that phrase has a stigma tied to it now. Just like AIG is now called AIU -- same company, different name. So when we start making loans to people with bad credit again (and thereby planting the seeds for the next housing crisis), we will probably give it a much friendlier name. I vote for "universal lending."

The tax credit should not be used as a down payment on mortgage loans. Lenders should not use "creative financing" to qualify unqualified borrowers. We should stop pretending that home ownership is available to all, because it's not. People who want to buy a home should save their money and earn a good credit score by being financially responsible. The further we get from this notion, the closer we get to the next recession.