The Washington Post: D.C. Gov’t Loans Create ‘Million-Dollar Wasteland?

The Washington Post recently published an investigative report entitled “Million-Dollar Wasteland,” which finds Washington, D.C.’s Home Purchase Assistance Program (HPAP) for low-income residents is scourged with foreclosures, liens, and financial hardships. The following outline of HPAP’s operating procedures is distilled from the original investigative report, which is worth reading in full and is available online here.

The D.C. Department of Housing and Community Development has managed HPAP for over three decades. HPAP is funded primarily through grants from the U.S. Department of Housing and Urban Development and is intended to assist low-income families by making home ownership more affordable. First, applicants must apply and receive a first mortgage from a private bank. Eligible lenders meeting these first criteria then have their loan reviewed by the Greater Washington Urban League. Approved lenders then receive a second taxpayer subsidized no interest loan with payments deferred for five years. Some lenders receive further help in the form of equity from the D.C. Housing Authority.

In practice however, HPAP’s intentions belie its impact.

The Washington Post finds:

Nearly one in five buyers participating in the city’s 35-year-old loan program for first-time homeowners is behind on mortgage payments, city officials said – a default rate that’s at least three times higher than the overall rate in the region…

… The money can be a lifeline for working families in the District, which has wrestled with steep rent increases and an acute shortage of affordable housing.

But the program has put some families in financial distress.

The Post tracked more than 1,300 loans, about 80 percent of the loans awarded by the District between 2005 and 2009. The analysis found that about one in three were made on homes priced at $250,000 or more, with some houses topping $375,000.

The practice appears to run counter to a city guideline that suggests a buyer in a four-person household have the ability to purchase a $218,000 house. The price point has fluctuated somewhat in recent years: In 2006, it was $235,000.

No investigation into government loans would be complete without examples of waste, fraud, and abuse! The report continues:

Real estate records show that among those who have been involved in the loan program is Jack Spicer, a longtime developer involved in a sweeping 1980s real estate scheme where straw buyers would purchase properties in the District at inflated prices using fraudulent appraisals. HUD backed the loans and ultimately lost millions of dollars. Spicer cooperated with prosecutors during the investigation and served four months in a halfway house.

More recently, he was one of several developers who sold distressed apartment complexes in Southeast to a government-subsidized nonprofit group that later declared bankruptcy; the deal was detailed in a Post investigation in May about troubled HUD-funded construction projects.

Records show that Spicer and his companies sold six houses to city-subsidized buyers for far more than he had paid.

The full investigative report recants unfortunate stories of people who were drawn into mortgages to buy homes they simply cannot afford. At first glance I’d suggest that borrowers in over their heads peruse the Federal Trade Commission’s pointers for Americans “Knee Deep in Debt.” Then again, government loans incentivized borrowers’ problems in the first place. This ultimately begs the question: With government financial assistants like these, who needs loan sharks?

For more on failed government loans, see my recent op-ed in The Denver Post entitled, “Government Loans Bring Trouble.”