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FHA will again try to restrict seller funded down payments

It was reported today that FHA Commissioner Brian Montgomery stated FHA would again be trying to eliminate seller funded down payments. Documentation has been provided demonstrating these loans are 3 times more likely to default than regular FHA loans, and it is clear that HUD wants to restrict them. By the same token these loans are now representing about 1/3 of the loans insured by FHA and it is quite obvious they serve a great need. The thousands of families who have not defaulted on their loans are an excellent example of why we need to keep these programs.

All said, why don't we all accept there is a greater risk associated with loans that incorporate seller funded down payment assistance? Instead of doing away with the programs we could consider it an additional "layer of risk" as we say and make it slightly more difficult to qualify, especially if a buyers ratios are high or other risks are apparent. AR members please comment on the thought.

In the interim if you have buyers using Nehemiah, Ameridream or any other seller funded DPA programs do be aware there is no time like the present for them to buy!

And look for more information on this as it happens. I will be posting links to any Federal Register notices or requests as they become available.

Gerry Suarez, Jr.

Your HUD loan pro!

Posted by Gerry Suarez Jr- Your FHA Loan Pro! on 06/09/2008 02:36 PM

Comments (14)

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14 Comments on FHA will again try to restrict seller funded down payments

JUN

2008

Perhaps, FHA should consider 100% loans in lieu of down payment assistance programs.

Gerry, I agree with you we need layers of risk, I would hope that the risk layers coming into play in mid July would compensate for some of the defaults

i truly hope they dont do away with the program all together. I do agree that by making it harder to qualify the risk could be cut to an extent.

Thank you all for your responses!

Stephen

A great solution that has been addressed. HUD keeps saying it's coming, but it remains to be seen. Considering most FHA deals have sellers paying closing costs 100% financing would work.

Bryan

The risk based pricing matrix was originally slated to have a mark up for seller funded DPA but it was scrapped. The matrix as it stands does not differentiate between how down payments are accounted for.

Staci

If they do away with the programs HUD will negatively impact many deserving families. It's our job to make sure we are vocal and keep these options available for those who truly qualify.

The program needs to stay, but you are absolutely correct. Make it tough to qualify. There is no reason why a person with a 30-35% DTI shouldn't have access to this loan. But then again, people will always find ways to bend rules and get things through. Even when the mortgaage professional knows the family they are financing should not be getting into the loan. We just experienced this with the abuse of subprime loans.

I have seen and I am sure you have.

I think the program needs to stay. I think they should limit the debt to income ratio to make a difference.

Gerry,

How long have you been helping customers with FHA and VA products?

On another note: I've heard some chatter that congress is looking at a tax credit for homebuyers. Have you heard any discussions in this arena?

Getting rid of Nehemiah would eleminate a big part of the first time home buyers.

Gerry,

You are very right about FHA wanting to get rid of the down payment assistance programs, siting the higher delinquency ratios.

I think though that it is not the DPA's themselves that cause the higher delinquencies. It is probably the DPA's in conjunction with housing increases and limited trade history.

Your idea of an increased layer of risk being added to the FHA Total Scorecard would go a long way to easing the pressure on a program that has served a public need quite well.

It may be though that the new FHA will lower the downpayment requirements. This will effectively end the need for down payment assistance.

Good thoughts.

Thanks,

Richard

I have mixed feelings about this. DPA's are the only 100% option left for non-VA eligible buyers. Maybe the DTI ratios should be tighter for these proggrams.

JUN

2008

Very good dialogue! Now let's make sure to pass these comments to HUD when they request public input! Again, thank you all for your comments!

Casey

We have absolutely seen abuses and I agree ultimately we will need to better police ourselves (you can't legislate morality-right?). Far too many loans were done without regards to true affordability but much has happened to change that!

Matthew, Mike and Tina

That's why we have to work to make sure HUD doesn't eliminate the program or provides a suitable alternative.

Karen

I've been writing mortgages for over 21 years and was doing government loans back when FHA was a non qualifying assumable (remember that folks! I don't recall a "Real Estate bubble then!)

The current bill making it's way through Congress does contain a number of variations, all throwing more money at the problem it seems. Remembering that it was just a couple of years ago that Congress approved private mortgage insurance as a tax deduction (below certain income levels) we have already given first time buyers extra incentives. It will be interesting to see what Congress approves though, and what the White House agrees with!

Richard

That is the head of the nail you hit! It's not the lack of down payment that makes these loans bad, it's the fact they are bad loans! In this market a huge cross-section of loans are defaulting for a myriad of reasons. We just need to make sure underwriting is realistically looking at each deal, and the underwriters are running scared!

JUN

2008

Gerry, Thanks for the updated information on the continuing fight by HUD to eliminate or alter the DPA programs as court injunctions have permitted the couple of programs left to continue uponl further review. I agree with the thoughts that DPA programs have shown they are needed if in fact they have been used in conjunction with 1/3 of currently FHA insured mortgages. A tax credit for home buyers is an excellent idea, but that would not address the issue of buyers needing assistance to initially qualify. As conventional products have tightened qualification requirements, the number of FHA insured loans will now grow at a much faster rate. I am hopeful that we will see some sort of requirement change for FHA and not the total elimination of the DPA programs.

JUL

2008

Save Ameridream and other Down Payment Assistance programs
If you haven't done so, go to this website, http://www.rallyforhomeownership.org/

It only takes 30 seconds. This form will go to your local Congressmen and Senators.
CONGRESS MEETS ABOUT THIS TODAY!

HUD should modify to lessen the risk BUT don't get rid of it. This is one of the last loan programs out there right now that can get buyers into a home with no money. (They still have to credit and income qualify)

http://activerain.com/blogsview/605114/Down-Payment-Assistance-Congress

AUG

2008

Some of the myths surrounding DPA's are continually being stated as truths. I hope to enlighten the masses with the actual truth in regards to the DPA numbers that are being touted by HUD. As the GAO (General Accountability Office) contends, HUD's information is unreliable at best. Think back over the last 6 years. How many FHA loans were done? How many loans were done with DPA? The answer...not many. During those years the conforming lenders provided new loans programs in the form of 80/20 SIVA financing that fueled the foreclosure rates once the market went bust. Most of those buyer/refinancers were placed into short term 2 year and 3 year fixed notes, or neg-am products. Now that they are underwater it is easier for them to walk away. DPA was not a factor.

Loans that are funded with DPA provide the buyers with a 3% equity position in their properties. This helps to offset the loss of value and increases the chances of staying in the property.

HUD states that they default rates are currently at 28%. Do not let them confuse you with their terms: Delinquency is when you are late on your payment, but are not in default of your loan. Default is when you miss a monthly payment and you default on the terms of your loan. Foreclosure is when payments have not been made for some time and the lender is in the process of repossessing/auctioning off the home through the legal process outlined in their loan documents. Claims mean that the insurance carrier has paid a claim on the loss to the lender.

Considering the current economic landscape with the increased gas prices and the rising costs of goods and services, not to mention the high unemployment rate, the delinquency rates are higher than what would occur during a stabilized economy.

I am familiar with Nehemiah and their statistics. With over 300,000 families that they have assisted with DPA, only 6 percent were in default. That is a 94% success rate!

I do agree that the industry needs regulations in place for DPA. Unfortunately HUD has never wanted to work out a solution to benefit both parties. They wanted to provide a 100% product on their own, so we would not have to rely on DPA. But they never did. If you go to Ameridream's web site you will see a video of HUD being grilled, and acknowledging that they should have worked out a solution a long time ago. By HUD supporting this law HR3221, they did not realize that no gift means no gift opportunity for them too. Remember the $100 down HUD homes. Gone as of 10/1/08...

I hope that the new bill HR6694 provides an opportunity to the large number of buyers that don't have the Bank of MOM and DAD to lean on.

DPA is 40% of all FHA loans today. Can the economy absorb an initial loss of $50 Billion in the first month alone? Where will the 10,000 professionals in our industry go when they are let go/laid off/or cant make a pay check due to the decline in business? Most of the Realtors and mortgage pros I know are self employed. Unemployment is unavailable to them.

Once DPA is gone, it will never come back... Then who will be next to blame? Brokers? Think about what this means to you.

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