Jack M. Guttentag The Mortgage Professor

Some people are not cut out to be homeowners. I call them NOHOs. What distinguishes them is not their income, their mobility, or where they live -- rather, it is how they live.

NOHOs live from week-to-week or month-to-month, depending on how often they are paid. Typically, they have nothing left at the end of the period, and if they run out early, they often borrow at high interest rates.

When they purchase durables, such as a TV set, NOHOs price the purchase in terms of the monthly payment, which they attempt to fit into their weekly or monthly budget. They never get ahead of the game, and if they run into an emergency that costs money, they are in trouble. Because homeownership is rife with such emergencies, NOHOs should not be homeowners.

NOHOs sometimes write me about buying a house because they have heard that owning is cheaper than renting. They would buy a house in the same way they would buy a TV set, by seeing if they can afford the monthly payment. They have no savings but have heard that it is possible to get a loan for 100 percent of the sale price. I try to discourage them by explaining the hidden costs and risks of homeownership, and by pointing out that, as owners, they, rather than the landlord, are responsible for everything that goes wrong.

A Lucky Time for NOHOs

The bubble period of 2000 to 2006 was extremely friendly to NOHOs. This was when lenders were offering 100 percent financing and turning a blind eye to the adequacy of borrower incomes. It is possible that more NOHOs became homeowners during this period than in the prior two centuries.

Even if the bubble had not been followed by a financial crisis, the foreclosure rate among NOHOs would have been horrendous. Any bump in the road is enough to throw home-owning NOHOs in the ditch. One such person who wrote me had calculated her monthly obligation net of the tax deduction on the mortgage interest, and she fell behind on her payment because her tax saving did not become available until year-end.

A common bump in the road is property taxes. Another NOHO who wrote me was in serious trouble almost immediately because the property tax estimate by the lender turned out to be $200 a month too low. The NOHO said he would not have purchased the house had he known the correct figure. The reason for writing me was to solicit advice on how to sue the lender.

More often, NOHOs can manage the tax when they move in but can't manage a future tax increase. Of course, property taxes are known to rise -- if not this year, then the next. It doesn't take a lot of foresight to expect it. But foresight is in short supply among NOHOs.

The Down Payment: Screening Protection

During most of our history, NOHOs had to rent, primarily because they did not have the down payment lenders required to finance a purchase. The down payment requirement is the most important condition imposed by home mortgage lenders to protect themselves. In the event a loan goes into default, the down payment reduces the loss from having to foreclose on the property. This is the equity protection provided by the down payment. Perhaps even more important, the down payment requirement is the most effective way to screen out NOHOs. Because NOHOs can't save, they can't make a down payment. This is the screening protection provided by the down payment.

However, NOHOs can slip through the down payment screen if somebody other than the borrower puts up the down payment and the lender (or insurer) accepts it. NOHOs are getting mortgages right now through this escape hatch, most under FHA. The FHA down payment requirement is only 3.5 percent, but in 2008, borrowers provided their own down payment on less than half of all new FHA loans. In the other cases, down payment assistance was provided by (in order of importance) non-profit agencies, family, state and local government agencies, and employers.

I am not making a blanket condemnation of down payment assistance programs. Not everyone who can't make a down payment is a NOHO, and our society seems to have a weak spot for "first-time home buyers." But providing down payment assistance to first-time home buyers allows the NOHOs among them to slip in.

Perhaps the least harmful source of down payment assistance is family members, for whom assistance is a vote of confidence by those who usually know the borrower best. The most harmful are the non-profit entities that get their money from home sellers. They not only remove the screening protection of the down payment but they reduce or eliminate the equity protection as well. The reason is that the home sellers who provide the assistance raise their prices in order to get it back. These programs were made illegal by Congress last year, but some legislators are trying to revive them.