LOUISVILLE, Ky. (WDRB) -- Chris Proano doesn’t recall much about the housing crash that crippled the nationwide economy in 2007. At the time, he wasn’t struggling with a mortgage he couldn’t afford. He was in high school.
“I was at that age when you can kind of see what’s going on, but you’re just a kid; you don’t know anything,” he said.
Despite his limited experience of the housing crisis, Proano, 26, is now the beneficiary of a federal government program meant to shore up the real estate market – one that has its roots in the $700 billion bank bailout Congress passed nearly 10 years ago.
Earlier this month, Proano got $10,000 from the government to help him buy a three-bedroom, $160,000 house in Middletown, which he will share with his girlfriend and his 7-year-old daughter.
Proano, an engineering recruiter who recently moved to Louisville from Atlanta, said it sounded “too good to be true” when his real estate agent and mortgage broker first told him he could get a $10,000 down-payment gift from the government.
“I said, ‘What’s the catch, what’s going on?’” he recalled.
There is no catch, other than the fact that he has to keep the house for five years to avoid repaying the full $10,000.
Proano is among more than 1,700 first-time homebuyers in Kentucky who have received the down-payment gifts since 2016.
The money comes from Kentucky’s $207 million share of the U.S. Treasury’s “Hardest Hit Fund” – a small component of the $700 billion Troubled Asset Relief Program, or TARP, that Congress approved in 2008 to bail out failing banks.
Proano was lucky to have been home shopping in January during the nine-day window when the money was available.
Kentucky Housing Corp., the state’s housing finance agency, administers Kentucky’s share of the bailout funds and accepts reservations for the down-payment gifts only twice a year, in periods that last a week or two.
To avoid being overwhelmed with applications on a single day, KHC doesn’t say in advance when the down-payment money will be released.
Even so, agents and mortgage brokers try to time their purchases – including having an accepted sales contract and loan pre-approval – to apply for the money as soon as it is made available.
“We did hear rumors about it a few weeks in advance, so I told Chris, ‘We’ve got to find a house, just to be prepared,’” said Lisa George, the agent who helped Proano with his purchase.
Proano was one of 432 buyers who got $10,000 commitments from KHC between Jan. 9 and Jan. 18, when the most recent batch of funding was exhausted.
Brenda Walker, KHC’s managing director of single-family programs, said three more rounds of down-payment grants are planned as the agency hopes to exhaust the money by 2020.
The next round will be “late summer” or “early fall,” she said.
If past practice is a guide, the next rounds would be in July, August or September of 2018, January 2019 and, finally, in July, August or September of 2019.
Kentucky shifts money from jobless aid to down-payments
The “Hardest Hit” fund is one component of the $46 billion in bank bailout funds that Congress dedicated to directly help homeowners through a variety of state-level programs aimed at staving off foreclosures.
Homeowner assistance programs were a relatively small part of the bank bailout, leading to criticism that the effort helped well-off bankers more so than average Americans. By comparison, the Treasury spent $70 billion alone bailing out the giant insurance company AIG.
In 2009 and 2010, higher-than-average unemployment rate resulted in Kentucky being named one of the 19 states “hardest hit” by the economic recession, sending some of the federal aid to the Bluegrass State.
KHC – an arm of state government – has used the bulk of the $207 million to pay the mortgages of more-than 9,400 Kentuckians who experienced a drop in income through a job loss.
That effort, called the Unemployment Bridge Program, started in 2011 and is still available to new applicants at least through June. Homeowners can get up to a year of mortgage payments, or $15,000 in assistance.
But fewer people have been raising their hands for help paying mortgages as the job market has improved and the state’s unemployment rate has come down.
So, to meet the 2020 deadline for spending all $207 million of the federal money, KHC started offering down-payment grants for first-time homebuyers in 2016.
Thus far, the state agency has committed or provided $24 million in down-payment help and has shifted another $20 million from the unemployment aid program to down-payment grants. It hopes to spend all that by 2020.
Florida pioneered the idea of down-payment help, and Kentucky was one of four states that followed it, Walker said.
Because of regulations imposed by the federal government, KHC can offer the down-payment gifts only in Jefferson, Hardin, Kenton and Christian counties, she said. Those counties had the most problems with mortgages not being paid, foreclosures, under-water homeowners and bank-owned properties.
Indiana, meanwhile, has already spent or allocated the $284 million the state received from the Hardest Hit fund, according to Brad Meadows, a spokesman for the Indiana Housing and Community Development Authority.
Indiana created a similar program to help unemployed homeowners keep up their mortgages, but it is closed to new applicants, he said. Indiana used another portion of the federal money for local blight-elimination programs.
Upfront costs a challenge for young buyers
Proano, the new homeowner in Middletown, said he was prepared to use “a few thousand” dollars in savings to make a down-payment, but the $10,000 gift allowed him to hold onto that money for other needs.
The house, for example, came with no refrigerator.
Elayne Havens of American Mortgage Service Co. in Louisville, the broker who helped Proano get his loan, said many first-time homebuyers have the employment income to support a mortgage but lack savings for a down-payment and the unpredictable costs of homeownership.
“A lot of times people have money in the bank, but if they use it for a down-payment, it totally wipes them out, they don’t have an emergency fund or anything like that, so they are able to keep that money in the bank in case something happened – the hot water heater breaks,” she said.
Havens said the program is especially valuable because the $10,000 can be applied to the other upfront costs of buying a home such as lender fees, title insurance, an appraisal and prepaid taxes. Those typically add $3,000 to $5,000 to a buyer’s tab.
First-time buyers with little savings will often ask sellers to pay those costs out of their sale proceeds. So buyers who can fund those costs themselves make more attractive offers to sellers, Havens said.
‘A problem that doesn’t exist anymore’
While the real estate industry loves the down-payment grants, not everyone is certain it’s a good use of federal money.
Ken Troske, a University of Kentucky economist, said the taxpayer money might be better spent on things like education or job training, which could lead to longer-lasting income growth, and thus, more sustainable homeownership.
Troske, who served on the Congressional Oversight Panel that reviewed the bank bailout in 2010 and 2011, said the recovery of the housing market makes the program less relevant than in the aftermath of crisis.
“This program seems to be addressing problem that doesn’t exist anymore,” he said.
In Louisville, government grants are hardly needed to get buyers into the market.
In 2017, Louisville-area agents sold the most homes– at the fastest pace – since 2007, with prices continuing their seven-year climb, according to figures from the Greater Louisville Association of Realtors.
Meanwhile, the number of homes listed for sale has been depressed for the last two years, especially for the lower-priced homes that first-time buyers target.
“The starter home market is still a hot sellers’ market,” Dave Parks, the association’s president, said in the organization’s January press release.