Bankruptcy

Congress is Costing You Thousands of Dollars...?

By Angie Littwin

The other day I heard an alarming advertisement on the radio. It began by warning that a new federal law could cost "you" thousands of dollars. It then proceeded to say that, if you want to avoid paying this money, you'd better hurry, hurry, hurry and purchase a home by September 30, when the statute goes into effect. The ad had the tone of a going-out-of-business sale: "Think you have all year to buy a home? Not anymore! Act now while you can still afford to make your dream of home ownership a reality! Offer (or law, in this case) expires on September 30, 2008." (Not an exact quote.) By this point, I was waiting with bated breath to find out how Congress was going to drain potential homeowners of so much money.  Didn't it just pass a law designed to help homeowners weather the mortgage meltdown?

Well, it turns out that the thousands of dollars new home buyers will be paying are their own down payments. After some careful listening and some less careful inference based on the September 30 date, I came to the conclusion that the ad was referring to the ban on seller-financed down payments in the Housing and Economic Recovery Act of 2008. The bill was signed into law on June 30 and will go into effect on the October 1 (hence the rush to sell before then). The law's main focus is providing help for current struggling homeowners, but it gets just a little bit proactive about prevention by banning sellers from lending money for down payments. This provision is intended to protect homeowners in the long run. It forces buyers to do a sticker-shock test on whether they can really afford their new homes. And it eliminates some incentives for seller-lenders to overprice houses. When a seller is financing the down payment, there's a temptation to overstate the price because, in the company's role as a lender, it will have the final say over whether the buyer can really afford to spend that much. The only pricing obstacle left to overcome is the buyer, and it's reasonable to think that buyers will be slightly less sensitive to price when they're not paying as much of it right away.

So it's easy to see why real estate developers would be against this provision. But what struck me about the ad is its attempt to pass on this sentiment to buyers, an attempt that borders on misrepresentation. While it's true that the new law "costs" consumers money in the short-term since they'll now have to pay their down payments upfront (or borrow from somebody else, anyway), a borrowed down payment is hardly the same thing as a free one. In the end, buyers who finance their down payments will almost certainly pay more for their houses than those who don't.

By the way, I was in the car when I heard the ad, so I couldn?t write down the details. I remember the advertiser being a company called Portrait Homes, but when l looked it up, all I found was a web site for Pasquinelli & Portrait Homes. Yes, it is a Texas real estate company, but, if it's the same company, its position on the Housing and Economic Recovery Act has certainly changed: the web site features an ad based on the $7,500 tax credit the new law offers certain first-time home buyers. So it sounds like Portrait Homes is treating the changing-of-the-law like a sale after all. Throughout September you'd better buy a home right away before old law expires, but if you happen to stop by on October 1, they may just have a new legislative provision that will still save you money. If any Credit Slips readers out there hear this advertisement, I would greatly appreciate a confirmation about whether or not the company behind this gem is, in fact, Portrait Homes.

Full post as published by Credit Slips on September 03, 2008 (boomark / email).