RIP FHA Down Payment Assistance Programs, Not So Fast

by Morgan on August 21, 2008

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Here’s another guest post, this one comes from Josh Lewis. Josh and I have sparred over many topics in the mortgage space and through that conversation I’ve learned a lot from Josh. I have tremendous respect for him and his understanding of the mortgage industry.

Josh Lewis has assisted California homeowners as a Certified Mortgage Planner, Certified Liability Advisor and licensed real estate broker since 1995. Josh is a recognized expert on mortgage planning, equity management and the cyclical trends in real estate. You can learn more at his website www.JoshLewis.net or contact him via email at info@JoshLewis.net.

Lost in all of the hoopla and back patting after the passage of the recent housing bill is an important provision that makes it illegal as of October 1 for sellers to fund the down payment for buyers of their homes by funneling the money through a non-profit third party. These down payment assistance programs (DAP?s) have been a huge support and source of liquidity in the current market. FHA originations are at their highest levels in over a decade an currently 2/3rds of all FHA loans make use of down payment assistance programs to effectively create an FHA 100% financing program.

Banning DAP?s has been on HUD?s radar for several years due to the fact that loans with seller funded assistance default at nearly 3 times the rate of traditional FHA loans where the buyer provides their own funds to close. This isn?t exactly an apples to apples comparison because HUD will continue allowing down payment assistance from 3rd parties not related to the transaction which can mean family members, employers and government entities among others.

When comparing FHA loans with 3rd party down payment assistance and seller funded down payment assistance the default rate is pretty similar. Seller funded assistance results in a 94% success rate while 3rd party assistance yields a marginally better 95% success rate.

At the end of the day, it?s great that the government is looking out for the bottom line and seeking to minimize losses from FHA loans in a declining housing market. However, there are a few important things to consider. First, we must recognize that this will have a further negative impact on an already weak housing market. Second, we must remember that the GNMA bonds that all FHA and VA loans are placed in have only resulted in a loss one time in their history when HUD made an ill timed attempt at a negative amortization program during a housing downturn.

These are full doc loans with a proven system of mortgage insurance that protects against losses even in periods like the early 90?s when home prices took a pounding. With that in mind a bill has already been introduced in Congress to authorize the use of seller funded DAP?s with some precautions. The new program will allow assistance to anyone with a credit score above 680 (which correlates to a higher likelihood of repayment mitigating the higher default rate of loans with seller assistance.) Borrowers with scores from 620 to 680 would also be able to use seller assistance but would be subject to higher mortgage insurance premiums to cover the losses from a higher default rate. The bill leaves open the possibility of opening the program to those with scores below 620 but doesn?t specifically authorize it.

The bottom line is that FHA currently funds nearly 20% of all loans in the US. If 2/3rds of those loans disappear with the banning of DAP?s you?ll see almost 15% of the liquidity sapped from an already credit starved market. If half of these borrowers manage to scrounge up a down payment from somewhere else, you are still looking at 7-8% of current buyers being taken out of the market.

If we?re going to outlaw DAP?s, how about we wait for a healthy market that can handle a punch to the gut. Until then, I recommend supporting HR 6694 to allow down payment assistance with proper safeguards to protect the long term viability of FHA loans.

Last 3 posts by Morgan

Viewing 24 Comments

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    How could any taxpayer support this ridiculous practice? You said yourself loans having seller funded down payments default at 3x the rate of traditional FHA loans. If the bill can eliminate some of these seller funded DPA programs it would go a long way towards improving the credit quality of the FHAs portolio. The seller funded DPA program amounts to buyer's being able to capitalize the cost of the down payment onto their loan amount. Of course this contributed to an unsustainable rise in prices. There will still be third party down pmt assistance but this bill will reduce those significantly. Seller funded DPA is borderline fraud vs the government.
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    Renter,

    It's obvious you have no idea what you're talking about if you can say DPA is borderline fraud. HUD guidelines currently allows for DPA and has for as long as I can remember. If a broker somehow inserted DPA without the buyer, seller or HUD knowing it, then that would be fraud. Explain to me how it's fraud if it's allowed?

    I'm amazed at all the negative comments from you and all the people on this blog. If HR 6694 isn't successful at reforming DPA, the effects that the elimination of DPA will have on our economy is going to be enormous. When the horrible ripple down effects start showing in our economy, in the next several months, who will you blame then? Congress will then be scrambling for another resolution.

    HUD has been trying to eliminate DPA, on their own, for many years because of exactly what you're saying. However, as recently as March of this year a judge ruled that HUD hadn't proved DPA had caused the foreclosures that they were stating. The result, DPA survived once again remained in place. Then here we are with all of our wonderful and intelligent Congressmen rushing the bill HR 3221 through for the President's signature for DPA to be eliminated before they go on break. GIVE ME A BREAK!!

    I would ask HUD to provide to Congress their foreclosure statistics that include DPA and their foreclosure statistics that don't have DPA. You can't find that information anywhere because they are including it all together in their statistics. I haven't been able to find these statistics separately anywhere. Please Mr. Renter provide me with accurate information.

    Lee
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    A few clarifications: (1) DAPS have been running about 1/3, not 2/3 of FHA originations; (2) 3rd party, non relative DAPS have performed massively worse not just than "no gift" loans, but from loans where the down payment assistance came from relatives. Here are the cumulative claims rates by origination year from 2002 through 2005, as of the end of FY 2007:

    No Gift Relative "Non-Profit, etc,
    2002 3.53% 4.23% 12.17%
    2003 2.26 3.04 9.37
    2004 1.82 2.14 6.65
    2005 1.03 0.98 3.46

    While the credit performance of loans where relatives provided the down payment has only been a "scooch" worse than "regular" FHA loans, the credit performance of loans with 3rd-party down payment assistance -- where in essence the down payment came from the seller -- has been MASSIVELY worse.
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    Mr. Tom Lawler,

    You are quoting statistics as if you are a professional. However, it would greatly assist anyone reading your blog entry to provide the source with which you are so negatively quoting. I've been in the mortgage business for 20 years and have yet to be able to find the source, and I quote from you at the end of your entry "in essence the down payment came for the seller - - has been massively worse."

    In short, don't quote statistics without your source. State your opinion, which is obvious, but not statistics. We're not impressed.

    Lee
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    Here we go again. Would the author of the post mind reading CR blog entry

    http://calculatedrisk.blogspot.com/2008/08/defa...

    Having read it could he please define "success rate" ? It's really tiring when Certified Mortgage Planners aka mortgage brokers throw around nicely sounding statistic implying that only 6% of FHA mortgage applicants eventually default. Is this success rate over one month or 10 years and what vintage year we are talking about ? I bet that recent vintages (2006-2007) will have quite a bit less than 94% "success rate".

    HUD site shows that cumulative default rate for FHA loans in double digits (17%). I'm willing to wager a bet that 2007 Seller funded DPA loans will have in excess of 40% cumulative default rate over next 5 year period. I'm not even mentioning "success rate" defined as FHA loan borrowers that remain homeowners and didn't return to renting w/o defaulting/foreclosing.
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    Who says prices going down is a bad thing? (Call me biased: I don't own a home, and am waiting until I can own one on sound terms, without any government cheese involved, inside an actual city).

    Further, how can price fixing of mortgage rates too-low, which was the source of the market collapse, also be the solution to it?

    From an activist standpoint the most worrisome revelation of this article is that "family"-financed DPA is just as bad, and it will be allowed to stand.

    Looks like housing "welfare" is just a bad idea in general. Which isn't a surprise, since there actually is no shortage of housing in general.
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    I'm guess I'm a little more biased here, but I actually LIKE FHA loans and think that the downpayment assistance can be a good thing.

    First off, Aaron, this isn't "welfare". The gov't isn't loaning money, private lenders are. Borrowers are buying insurance from the gov't to guarantee the loans. And let's get real, the u/w guidelines are pretty strict and maybe if we would have stuck with full doc loans, we as taxpayers wouldn't be having to continually bailout these private banks. THAT'S welfare! BTW, as I understand it, FHA actually makes money for the gov't, or at least it did when I was doing these in 2004.

    I just think that their throwing out the baby with the bathwater on this one. I just think there are some cases where downpayment assistance is a good thing.
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    Instead of worrying about falling home prices (which is good for all home purchasers - the people you are trying to "help") we should worry about the real effects of DAPs. Those that utilize DAPs had a free call option on homes - no skin in the game. They default 3x more than others that utilize FHA loans. That means you and me - taxpayers - have to foot the bill because prices are now falling. This entire bubble was created because we allowed exotic financing to put people in homes they can't afford. If someone can't save up 3.5%, then they have no business owning a home. Morgan, what you're saying is like arguing that lower prices on big screen TVs hurt big screen TV buyers. That is such a load of crap. If prices fall, maybe the average American can save up the 3.5% or even 20% to put a down payment on a home. You're working for the DAPs and the REIC, not the little guy... You're full of it Morgan.
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    mo - this wasn't written by me - it's a guest post.
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    I can't understand how anyone would argue for keeping seller funded DPA programs. FHA loans having seller funded DPA are widely agreed to exhibit far poorer credit performance than other traditional FHA loans with non seller funded down payments. The FHA recorded a loss this year, which means they'll need to obtain money through the approriations process, which means that taxpayers are covering their shortfall. What a disgrace to taxpayers to try to resuscitate this practice. Good riddance seller funded DPA programs, this taxpayer won't miss you one bit. This practice borders on fraud vs the government. Worse the housing bill prevents the FHA or places a moratorium on the FHA's ability to apply risk based pricing to these loans. Effectively, this will raise borrowing costs for all FHA borrowers, as better quality credits will have to subsidize lower quality credits. Smells like socialism. Regardless, limiting the ability of the FHA to use risk based pricing is a joke. Why wouldn't anyone want the FHA to protect taxpayer money and lend prudently.
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    There are a lot of statistics out there regarding the default rate of DPA programs. Would we be having this conversation if the sub-prime meltdown never occured? If home values hadn't plummetted across the country? If people hadn't bought outside the city limits and then gas hadn't gone to over $4 a gallon? If the economy hadn't slowed and people hadn't been laid off en mass?

    Hard to say but it does make it apparent that their "MAY" be some additional factors to consider for the increase in default rates whether they are supplemented through DPA or not.
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    The reason we are talking about SFDPA because w/o banning that practice they are the biggest reason FHA would have requested budget appropriations (meaning sticking bill to the taxpayers) for first time in its history in FY2009. HUD Secretary testified that FHA would need 5 something bln for next fiscal year if practice to continue.
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    The problem is very simple, it's not the default rate with DPA's or anything else. Our banking system and the mortgage industry as a whole continues to mislead our country into believing the mortgage is a debt and should be treated as a debt. They have programs that take extra money out of the home owners hands and puts it into theirs. Our job - as financial advisors - is to help our clients understand the benefits of using a loan program that allows them to give less money to the bank and help them establish a savings program by investing the difference. Intorduce them to a financial planner who understands the concepts and will put them on a monthly bank draft savings program where the money is taken from their account each month. It's really no different then buy term and invest the difference.

    Our country has a negative savings rate. If the mortgage professionals in this country took a proactive stance and educated their borrowers on the mortgage process and helped them understand the mortgage is a financial tool - not a monthly bill or debt and how to save money, we wouldn't be in the mess we are in now. Instead they took the used car salesman approach and said "Oh, you want that $500K home but can only afford $1500 a month - I've got just the program for you." They never expained the true reason the option arm and interest only loans were created.

    Can a homeowner go to their banker and ask them to "let them slide" a few months because they have paid in an extra 10 months of payments? Can they go to the banker and say "hey, Mr. Banker, can you give me some of the equity I paid into my home because I've lost my job and really need the money to pay my credit cards, car payments etc?" Every time they pay extra money to the principal of their home to "Pay down their debt" they mights well say to the banker "Here you go Mr. Banker, don't bother paying me any interest on that $300 and by the way, if I need my money back, you can charge me whatever you want for fees and interest rate. Hopefully I'll have a job and be able to qualify."

    DPA is nothing more then a borrower being able to finance in their closing costs and downpayment that a third party can then give back to them. If the mortgage professional isn't taking the time to seriously look at the borrowers credit and savings habits and realizes the borrower is a credit risk regardless of whether they are renting or owning, they should be ashamed of themselves. They are doing nothing more then getting someone in a home to make a buck. They aren't looking out for the best interests of the clients and helping them do the right things now so when they are ready to own a home, can do so without the worries of default because we have properly educated them and helped them start the right habits.

    I am all for DPA and believe it's in the best interest of the mortgage community and the country. But we need to do the right things by our buyers and make sure they qualify and are truly capable of repaying the mortgage, not just qualifying them on a number.
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    I want you guys to imagine what your lives would be like if the FHA insurance program goes down.

    We should listen to HUD. Erradicate DPAs like a tumor and let FHA live. We need to experience the pain of getting rid of this disease so we can begin to rehabilitate the mortgage industry.

    As it is, 3%/3.5% down is not all that much given the projections of FURTHER price declines all across the U.S.

    DPAs along with 100% LTV/seller paid closing costs contributed to massive pressure on appraisers to hit the numbers. Then appraisers and Realtors doing their CMAs used those closed sales as comps, further inflating prices just a little bit each time.

    Death to DPAs. May you never return.
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    The bottom line is that seller funded DPA programs are a shell game. If FHA thinks that it is OK for their risk parameters they can easily change the guidelines to allow seller funded down payments, getting rid of the cost and paperwork of the middle man. However, they see this as not an arms-length transaction and therefore ripe for explotation. THIS is why they don't like it , don't want it.
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    Morgan actually had it right. I do loan portfolio analysis for a living and my wife has been a realtor for 23 years. Due to our interest in DPA's with the declining availability of other loan products, my wife has been on me to do some analysis on DPA loan performance. She follows her clients dilligently and she is aware of only one DPA buyer that has been foreclosed, compared to more than a dozen non DPA buyers. As a chapter president of our local Realtor Association, she frequently hears the same from her peers in other parts of the country. Her Question to me is, if DPA foreclosure was that prevelant, where are they?

    After gathering the needed data, here is what I have found. HUD uses 400 variables to report their findings, but will only make 12 of those points public. I checked with all my triued and true resources, they can get the whole thing either. Hmm, are they hiding something? Duh! Without the rest of their data, I can't check their work. My friend at FHA told me, "that's the idea". When I asked him if the data is bad, he said, "#1 remember this is a huge political issue and things aren't always what they seem. #2, they are starting out with the end game in mind and manipulating the data to justify it." He said he is so disgusted by the stuff they do behind the scenes that he is looking for work elswhere.

    Two points to consider; 1) HUD frequently quotes default rates instead of foreclosure. Default rate just means they are over 45 days late on their payment. A small percentage of defaults end in foreclosure. 2) the skin in the game arguement is philosophical, not statistically signficant. The data show about a 1% difference between foreclosure of seller-assisted DPA and Gov't DPA and about another 1% difference in Family Assisted DPA. Does this mean that all downpayment gifting should be banned? If you think there should be skin in the game, you answer has to be yes. If HUD believed DPA's 8.7% foreclosure rate (if accurate?) was a danger to the FHA MIIF Fund, they would also think Gov't and Family gifts were a danger. You mean 8.7% of DPA will cripple the insurance, fund but Gov't 7.5% won't? My buddy is right; POLITICS!!!!
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    Mr. David M.,

    I can't believe I'm reading a blog from someone with actual intelligence. Here, here to you and your wife. I've been in the Mortgage and R.E. Industry for coming up on 20 years and they're just now outlawing DPA...."our heroes." HUD has fought DPA for years with the unjust figures that you speak about, but to no avail because their figures aren't accurate. I hope all the previous bloggers will read you closely and realize how wrong their negative statements really are.

    To the Mtg. Planner above: I truly resent your statement that I wasn't looking out for the best interest of my client and that I was only in it for the buck. I don't know of one of my clients that I helped with their puchase or a refinance that is in foreclosure to date. Oh.....and I was working in California the whole time of my career. People like you are hopeless.
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    It's difficult to get man to understand when his salary depends on not understanding it. That's about all of you whose compensation is directly impacted by elimination of SF DPA, you are all screaming and kicking at HUD taking punch bowl away.

    Me, on other hand is a Joe Taxpayer who is going to be stuck with the bill, so please spare me YOUR ANECDOTAL evidence and go directly to HUD site pull up national cumulative default statistic and claim rates and see for yourself. Obviously since you don't like direct evidence you are going to claim that the statistic is bogus and your ANECDOTAL EVIDENCE and ANONYMOUS NON-SUBSTANTIATED HEARSAY is substantially better reflects reality. Reminds me about flat earth society. Some friend of mine doing astrophysics research at Cal Tech told me that all of those pictures and earth being a ball are bogus and because there would be huge upheaval they perpetuate lie. Sounds familiar about "your friend in FHA" ? I thought so.
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    IMHO borrowers need "more" guidance when working with down payment assistance loans (and programs.)
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    Visit http://www.dpagroundswell.org/ to express your support for HR 6694.
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    My basic question is the following: How is seller-funded downpayment assistance any different some other kickback from the seller that reduces the effective sales price to the buyer? If the only point is to make the sales price look larger than what it is, why should lenders play along with that?

    Put it another way - if the seller was giving the buyer a second mortgage for the remainder of the sales price, a lender would want to know about that (and would factor that into their assessment of the loan). Why should seller-funded downpayment assistance be any different?
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    Some of the logic here is insane.

    I can't address them all.

    The Lender DOES know about the DPA when it is used, it is IN the purchase contract....so if it is, how is this fraud? How does the seller carrying a 2nd the same even come up as a comparison in this case?
    "Skin" in the game is nonsense by the way, the embarrasment of losing one's home is way more of a deterant than a few thousand down. The reason for most foreclosures is loss of job. Whether you put down 5% or 20% or 50%, if you lose your job and can't pay the payment and don't have the luxury of borrowing from mom and dad, what do you do?

    Go read my blog on this topic....I am actually in favor of getting rid of DPA, with a huge caveat though....HUD could get rid of DPA and have it nver come back by doing one simple thing: 100% financing like VA.

    http://blog.fhainfocenter.com/2008/07/fha-why-r...
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    I purchased a home using a DPA program back in 2002 with a 630 credit score and have never been late on a payment. I'm a single female college grad working at a Fortune 500 company. With single women making up much of the economy and the historical fact that women still earn less than their male counterparts, DPA is a valuable tool to move them into homeownership which forms the foundation of most people's financial security.

    There is a large segment of the population that does not have a gazillion dollars of "extra" income each month, making it easy for them to quickly save the thousands of dollars needed for a DP. Yes, I could have waited 5 years to save the additional funds above my emergency fund balance, but I would have missed out on over $10k in income tax savings. I would have also missed my the opportunity to realize a modest capital gain as I am now looking to move into a larger home and use the equity to pay off all of my current debt.

    Anything done without moderation can turn into a 'bad thing'. I don't think that DPA is the sole culprit. Even with DPA, if I cannot afford to pay the monthly mortgage I should not be given the loan. If my credit history shows a failure to pay anyone ontime - I should not be given the loan. If I can barely pay the loan today at $1000, why would anyone ever think I will be able to handle $1500 in 2 or 3 yrs?

    Support HR 6694
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    They must do what hey can to help the housing market not make more limitations. I simply don't understand all the undercutting of loan programs. Now kill the DAP's. They already killed ALt-A which was due anyway with ridiculous no doc loans. FHA simply nees more monitoring and verification. I remember those FHA inflated flip scams that happen every 5 or fewer years.
 

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