By: Mark Glennon*
Was the “Welcome Home Illinois” Loan Program a noble effort to help first time home buyers or a vote buying scheme premised on bad policy? Here are the facts. Decide for yourself.
Governor Quinn announced the program in April 2014. It provided $7,500 to first time buyers to help cover the down payment, secured by a second mortgage on the home, and was administered by the IHDA — the Illinois Housing Development Authority. About $80 million was disbursed under the program to over 10,000 home buyers, according to the Tribune. Credit requirements were relaxed compared to conventional home loans — a minimum credit score of 640 was required. The program terminated about two weeks after the election. It was earlier scheduled to terminate on November 30.
Importantly, the down payment loans are forgivable.
One term might jump to mind after reading that program description: Sub-prime.
Sub-prime home loans were a primary cause of the recession. Billions were lent to buyers around the country with poor credit, inflating housing prices and making homeowners out of those who should not have been. The spiral down when borrowers defaulted and prices collapsed triggered the worst American financial crisis since the Depression. Millions of owners remain stuck in homes they cannot afford, or unable to move to better job opportunities because they cannot suffer the loss that selling would entail. All homeowners suffered, including responsible ones.
The minimum credit score of 640 that was required for Welcome Home loans is right around the break point for borrowers to be considered sub-prime. Bankrate defines sub-prime as borrowers with scores less than 660, though others use more lenient definitions.
But it’s the feature that allows the loans to be forgiven entirely that’s the zinger in the loans made through Welcome Home. Sub-prime loans never had that.
I had earlier brushed off a comment from a friend familiar with IHDA loan programs, who said, “You know, they’re just giving away money for down payments to get votes, don’t you?” Exaggeration, I thought, until I saw the program terminated just after the election, which is suspicious to say the least, and it was only then that I learned the loans are forgivable.
Forgivable loans to credit-challenged buyers aren’t sub-prime, they are sub-sub-prime, at least from the perspective of the state if it really hopes to get its money back.
And are you really doing anybody a favor by relaxing credit standards to make homeowners out of them? It may be different in hot markets, but large property tax increases are probable in most of Illinois, home prices are weakening again, population is stagnant, job growth is tepid, apartment construction has surged, and Federal Reserve purchases of mortgage securities, which lowered mortgage rates, have been curtailed since quantitative easing is over.
Or is the idea to allow borrowers to walk on their loans if they decide they can’t pay, with no fear of losing a down payment they invested? Whatever the motive, forgivable loans will make prices less stable.
Decide for yourself, but I say it was a scandal hiding in plain view. Shame on all of us, including me, for not catching it earlier.
The ugliest to-do list in the country belongs to Governor-elect Rauner. Add to it a top-to-bottom review of Illinois’ housing policy and operations at IHDA. The Welcome Home program is over, but plenty of other housing programs remain.
*Mark Glennon is founder of WirePoints.