Texas Representative Ron Paul explains what is wrong with the Zero Downpayment Act:

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.

What is wrong with this bill? For starters, it is bad for taxpayers:

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?

He also points out that between the FHA, Fannie Mae and Freddie Mac, millions of mortgages in this country are federally insured. That means one very large potential tax bill if the housing bubble should burst.

The bill is also bad for the poor:

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.

This bill has moved through committee and will likely be voted into law. If you find it problematic like Mr. Paul does, please contact your representative and let them know how you feel.

(Hat-tip to my good friend Sam)