Down payment Assistance could be a thing of the Past

Sellers and Buyer alike took another blow to their marketing efforts today. In an ongoing attempt to keep watch on the New "FHA REFORM BILL" I have just learned that Seller funded down payment assistance programs are in serious trouble. 

Either the House is accepting the Senate's terminology language or they will not stand in the way of HUD's action terminating these programs.  It is now likely that seller participation in these DPA Programs will be terminated soon.  I will keep you apprised of events that could affect the way property is marketed in South Florida. Below is current status of the bill that has the possibility of passing in the very near future.

1.       Status of the Housing Bill:  It appears that the House will take up the housing legislation early next week (likely Tuesday) based on a letter that Chairman Frank sent to Ranking Member Spencer Bachus yesterday.  Many on Capitol Hill are now concerned about the Treasury Plan for supporting Fannie Mae and Freddie Mac.  It looks like the House will need to hold a hearing on the plan before the House vote.        Yeah another delay for the homeowners looking for relief.

This means that final passage of the bill will be delayed until later next week and possibly the week of July 28^th.    There is the firm deadline for any legislation of about August 1^st,  the day Congress leaves for Summer recess.

 2.       Risk-based Pricing:         FHA has applied new premiums as of 7/14/08. Please check with your current Lenders as to how this will affect your Buyers loan and ability to close.

On an MBA-FHA conference call yesterday, FHA staff acknowledged for the first-time publicly the possibility of the moratorium taking effect.  FHA staff seemed genuinely surprised about the fact that the moratorium was now a likely outcome.  They repeated several times "we don't know" in response to questions about the potential implications for loans in the pipeline.   

What does the moratorium provision in the Senate bill say? The provision on the moratorium on risk-based pricing premiums states:

"During the 12 month period beginning on the date of enactment of this Act",  HUD " shall not enact, execute or take any action to make effective" any risk-based premium plans.   The legislation also states that FHA cannot implement any risk-based pricing plan that "is based in whole or in part on a borrower's Decision Credit Score", as HUD has defined that term in its Notice implementing risk-based premiums. 

Based on this provision, HUD would be compelled to withdraw its risk-based premium program by the date the President signs the bill.  FHA would be required to advise lenders of the withdrawal of risk-based premiums on or before the date of enactment.  FHA, at its discretion, could withdraw risk-based pricing sooner once the Congress passes the legislation and the termination of risk-based premiums is inevitable.

In the second bullet above, the Congress is saying any risk-based pricing by borrower credit score is not permitted for the next year.  However, HUD would be able to charge different premium prices for higher risk products (e.g. FHASecure).

 What are the next steps?

First, the legislative situation must be resolved.  When the House acts on the Senate bill (probably next Tuesday), we should be closer to eliminating any doubt about the future of risk-based pricing as well as other contested items (including, seller funded down payment assistance programs, maximum loan amounts in high cost areas and the calculation factor for high cost areas (i.e. 110% or 125%). 

 It is important to note that the Congress is not saying that FHA cannot raise premiums but rather Congress is stating unequivocally (if the legislation is enacted) that HUD cannot continue implementing risk-based pricing using borrower FICO scores. 

 Impact on Loans In the Pipeline:

First, any case with a case number assigned prior to July 14^th should not be affected by any action HUD takes going forward.  For the other two categories ( 1) For cases assigned on or after July 14^th but prior to the enactment of the moratorium and 2) loans w/ case numbers assigned on or after the day President signs the bill w/ the moratorium language, we are not sure what FHA will do.  In light of FHA's comments on the call yesterday, it is clear that they are still investigating various alternatives assuming the moratorium is enacted.    Based on our experience with the FHA program, we do not believe FHA will stop issuing case numbers or taking any other action that suspends FHA business particularly in these trying market conditions.