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No more DPA - Are you kidding me?

By Stephen Adams

Real Estate Agent with Keller Williams Realty

July 22, 2008 03:03 AM

It is coming to our attention that "DPA's" - Seller Funded Down-Payment Assistance programs could very well be "outlawed" by Congress. I am going to keep this blog both brief and for fellow Realtors others in the Real Estate community as well as the public because I know that there thousands of you out there feel quite strongly about the issue on both sides of the fence. Feel free to add to this blog everyone's "justification" for the existence or the eradication of these programs. We need to start a real dialogue - fast.

For the record, it is my understanding that the "high number of defaults and foreclosures" are "3 times as likely to occur" by people who used these programs 2,3 AND 4 YEARS AGO. Folks, a LOT has changed over the last year, esp. since August when both the Financial and Credit world literally imploded (according to and thanks to Mass Media). Lending standards have tightened considerably. It seems that FHA is basing it's own potential insolvency (conveniently at the same time that Freddie Mac and Fannie Mae need infusions of billions to survive) on a 2005 report of foreclosures. There are also, by the way, very responsible people in this country who haven't lost their homes and utilized the same programs like Ameridream and Nehemiah.

Which brings me to my own position and I would love to create a dialogue between all of us. Whether it was Speculators, Investors (both amateur and pro), historically low interest rates, Builders, greed created from cocktail stories of "instant equity" and that little sin called envy...whatever it was, the truth is that between 2000 and the middle of 2005 many, MANY cities, neighborhoods and homes throughout the country experienced, not just Appreciation (double-digit in some years) but a mass feeling and comfort of instant wealth. Though we all intuitively knew that "what comes up must come down", most of the rest of the world watched with "baited breath" just how high perceived values of properties would go. Seasoned Agents have seen it before, just not on the scale of this past phenomenon.

Yes, prices have come down...a lot in many of these same places. However, many people, good people, with good credit are still priced out of the market. Sometimes, the only way for people to get in a house (these rates won't last forever) is through the use of these same DPA programs. And so, you say, they should "stay in apartments, with relatives, etc., save money for a down payment". You say, "been there, done that". Perhaps so, but I'm not walking in any other set of shoes but my own, but I do know this...Every situation is different. I am a human being and I have seen my own set of struggles AND accomplishments. Everyone has a story. Many people (good people. intelligent people) have been enticed into all sorts of financial agreements and arrangements that they will be paying for for many years. The inventory of homes is extremely high in many of the places I am speaking of. But more buyers are finally getting off of the proverbial fence. And yet foreclosures still abound. We are in the business of helping people to buy and sell homes. If I were to address certain members of Congress - both in the Senate and the House, I would ask the following question, "Are you there to be part of the solution or part of the problem?"

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Stephen Adams

Keller Williams Realty - Leesburg, VA

Chris, you are correct, the dishing out of money to seemingly anybody with a breath brought us here. Being approved that a person "qualifies" to pay back the loan is key. And debt to income ratios have kept many people from buying a house. Seller funded assistance sometimes has kept many responsible people "under the radar" - i.e. the debt to income ratio from exceeding ones ability to repay - thereby making monthly payments achievable.

Vertical, Yes, I agree with your line of thought. Not just appraser, but an accurate appraisal, will help determining the right value hence the loan amount. I do not believe anyone should ever take an inflated loan based on an inflated price, hence value, of the home. Call me naive if you will, but yes there were many instances of people doing this. We just saw many people arrested throughout the country who tried to pull that stuff. However, that was over things done in the past. The "present" (which by the way, I remind you, has more strictly enforced guidelines than even this time last year) gives all of us an opportunity to get back on track. Yes values have dropped, yes homes are "worth less' than they were before, but why punish those just coming into or trying to come into the housing market. You are a lender, you tell me... if you owned a home in a neighborhood that was "declining" and because some of the homes around you "got stuck" in a "no doc", "stated income" sub-prime (some even call them "liar loan") and you have very real potential buyers willing to buy these homes but with a little bit of assistance (because of the current market and the successful negotiations and sales of still other homes in the area) from the seller. Would you want the sale to happen? If not, why? Honestly, I really would like to know. Last time I checked, a house is an investment (absolutely shouldn't be the only one) tool. Yes, first and foremost it is a home, where you can watch little Johnny and Susie grow up, have get togethers with friends every Christmas, etc. I truly am "seeking to understand." I do agree with you, however, and don't understand why sellers have to pay up to $500 to use these programs. It's like saying "can I have the privilege to loan money to you so that I can sell you my house?" Why can't we just write it in the contract?

Jimmy, you might be right, ones perspective could call these "unethical", but that the ensuing popularity of these programs have followed the "American Housing Market on Steriods" period (jacking prices into the stratosphere in relation to most people's income) at least give people the opportunity to come to the table does provide hope for some. Also, you aren't just dealing with First time buyers. What about people who own a home that absolutely have to get into a bigger home because of more and new family members? What about those who absolutely have to downsize because of kids moving out or divorce? What about new job transfer???

Folks, I really need to see a good argument why we need to get rid of down-payment assistance, and I'm still not convinced.

Jul 22, 2008 07:02 AM

Jim Fischetti

The Fischetti Group/Keller Williams - Wake Forest, NC

Stephen,

The best reason to see an end to DPA is simply:

If the buyer/borrower has "skin in the game" he is much less likely to walk away.

It is too easy to walk away from a loan now, if you have some of your own money in it, we'd see less foreclosures.

Jim

Jul 22, 2008 07:17 AM

Stephen Adams

Keller Williams Realty - Leesburg, VA

Jim,

Thank you for your comment. However...Show me the numbers. Some people will walk away. Most I venture would not, esp. if, as is reported, so many people are "living paycheck to paycheck". Ah! You say, "if they aren't responsible enough...yada yada". Things happen, my friend. All it takes is a job loss (due to, for example, layoffs because of "the economy", etc - how many businesses in your area has had to close shop due to less people in the store/restaurant?), an accident, medical bills (know anyone diagnosed with 3rd or 4th level cancer that didn't have insurance or with high deductibles?), one accidental missed payment on a credit card with "universal default" rates jacking everything else to 24.99%. Some people have to live on cards...last year I paid half as much to fill my gas tank. 5 years ago I could still get a gallon of gas for right at a dollar.

Sir, people make mistakes. And sometimes not...What about a identity theft? Know anyone who has had to go through trying to clean up their credit because a local bank, company had their laptop stolen with 1000's of social security numbers, etc. And at the same time it so happened that the same family on that list was finally ready in there "phase of life" to get pre-approved to move out of an appartment and into a house and can't? What then?

No, show me the numbers...verifiable numbers from this past year. Not from 2 and 3 years ago. The date loans originated last summer (07) that are now in default or in foreclosure. Okay, you can even go back further, but I'd be willing to bet money that the percentage (ratio) of loans in default has drastically dropped. The system isn't perfect, there will always be people who try to get by and get caught. But again, lending standards and criteria has tightened up. For all of the finger pointing and blaming done, banks and investors have "wizened up", which is the very reason why it is sometimes more difficult to get a loan - TODAY.

Jul 22, 2008 08:18 AM

BJ Matson

The Choice Group - Olney, MD

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 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

Jul 22, 2008 06:37 PM

Stephen Adams

Keller Williams Realty - Leesburg, VA

Hello Maryland homes,

Thank you for sending the link to me. It is easy and I hope Reason wins over Emotion (and politics).

Jul 23, 2008 02:37 AM

Randall Schrader

Competitive Insurance of Dundee - Dundee, FL

To explain further; Home ownership is a great thing! Investment? Not so much today. If the seller wants to assist the buyer, fantastic. The lenders caps the amount of assistance that the seller can provide because they know, from prior failures, that too much help is detrimental. (You can give a man a fish . . . ) Just like smoking and life insurance, there is a correlation.

DPAs disguise the seller's assistance to a large degree. The seller donates money to a non-profit and then the non-profit AND NOT THE SELLER, donates a gift to the buyer. Does this make sense to you? Since the gift came from the non-profit and not the seller, it's okay?

I could never understand HOW this was ever acceptable. I'm all about lending and helping anyone I can, but this wreaks and has contributed to our current state of affairs - POINT BLANK. IMO

Jul 23, 2008 03:22 AM

Stephen Adams

Keller Williams Realty - Leesburg, VA

Vertical, show me current numbers. You can't do it because FHA is twisting using old statistics to find a reason to find blame for the current high ratio of foreclosures. Teaser rates do NOT reset right away - depending on the program, it took 1-5 years to reset. You are as confused that sellers have to donate money to a non-profit as am I - I quote myself above:

"I do agree with you, however, and don't understand why sellers have to pay up to $500 to use these programs. It's like saying "can I have the privilege to loan money to you so that I can sell you my house?" Why can't we just write it in the contract?" - See above. No, it doesn't make sense to me.

Listen. I am not trying to "be argumentative" here. I just don't and cannot make sense out of why (other than Wall Street's ties to new home builders and their stock portfolio?) the FHA is doing this. Intuitively something is not right with this picture.

Jul 23, 2008 07:46 AM

Randall Schrader

Competitive Insurance of Dundee - Dundee, FL

I hope my email helped you understand this. It needed reform years ago, but were prevented by their charters from reform.

Jul 27, 2008 12:54 AM

Stephen Adams

Keller Williams Realty - Leesburg, VA

Randall,

I did receive your e-mail. Thanks for your explanation. I understood your point about FHA, and will even "trust you" when you say that FHA monitors its numbers. I have no evidence myself at how recent these reports really are. However, I will continue to disagree that "people should always, necessarily have skin in the game" to show their willingness to risk. Look, houses get old. They need repair or even updating. Sometimes by a lot.

Let me give you a scenario - What if a neighborhood has a bunch of good solid homes perhaps built in the 40's and 50's. They didn't have garages as part of the homes, but almost everyone of them has had both garages built and add-ons (because each one has enough land to accomodate that. There is one that doesn't have these additions, and one that does. Yet my buyers want the house that is on the market that doesn't have the garage. They would like to add a garage, perhaps even one with a room above to rent out or as a future Rec room, etc. Yet they have enough money for the house but not enough for both the closing costs and down payment but NOT to add a garage (to park car, add tools, resale, etc). Oh yes, their Credit is solid, but they just don't quite have all of the funds to do everything, yet the property has been on the market for over a year BECAUSE of obcelesence, etc. To make the deal work we ask for Seller to help out. Is that really wrong? I can give you another, or 10 more situations, but it doesn't matter, because it now looks like the FHA is going to get what they want. Again, thanks for the discussion. Cheers,

Jul 27, 2008 09:58 AM

Anonymous

a new bill, The FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008 was introduced by several members of Congress on Thursday, July 31, 2008. Representatives Maxine Waters, Gary Miller, Al Green and Christopher Shays sponsored this bill that if passed and signed into law will allow downpayment assistance to continue indefinitely.

Scott Syphax, President and CEO of Nehemiah Corporation of America praised this group earlier today.

"Maxine Waters, Gary Miller, Al Green and Christopher Shays have demonstrated the willingness to understand all sides of this issue and the courage and leadership to follow their conscience. All those who understand the importance of working class American's having their shot at homeownership, need to work together to encourage our elected officials to pass this bill."

Click here to help and contact your local elected officials, http://capwiz.com/nehemia/issues/alert/?alertid=11598811

Aug 04, 2008 06:28 AM

#13

Randall Schrader

Competitive Insurance of Dundee - Dundee, FL

I think they are trying to save face by rescuing the DPAs, but watch this go absolutely nowhere. They are going to tell their constituents that they TRIED.

Aug 04, 2008 08:48 AM

Wayne Frazier

Licensed Public Insurance Adjuster - Hunt Valley, MD

One of the funniest things regarding this entire issue is that FHA was pushing for a 100% loan program that they could provide NOT so long ago.

Another thing, I can name over a dozen lenders that have gone belly up and NONE of them allowed DPA's. With out getting into details, many of them were forced into bankruptcy not just because of defaulting loans, but also because they experienced the Credit Crunch just as many borrowers have.

Also, I have yet to see an in-depth, independent third party analysis determining if DPA's actually caused the disproportionate amount of foreclosures that FHA keeps bantering about or was it other things. For instance, in Maryland we've experienced over the past 2 years an astronomical increase in Gas and Electric bills. Fuel, both Home heating and fuel for our vehicles has nearly doubled, Try being a Truck driver with 300 gallon fuel tanks that need to be filled at nearly $5 per gallon. How about the ever increasing PROPERTY Taxes based on (A term that's also bantered about adnauseam) Inflated values of yester year. I don't see the government implementing Emergency Bills / Laws to rectify this problem. Oh, and did I mention the increases in EVERYTHING from Milk and Bread to Corn and sucrose products. <----- Don't even get me started there!!! As I said in my post, this rabbit hole goes much deeper than most are willing to look.

Food for thought, VA financing can cover 100% of the transaction with NO MONTHLY MORTGAGE INSURANCE. That's interesting to say the least, because I haven't seen them begging for a bailout for these loans as of yet. Aren't they going thru the same climactic market change as FHA.

Now let's bring Fannie and Freddie into the equation. If my memory serves me correctly, I don't recall them ever allowing DPA's to be used, didn't they just get propped up by the Fed to the tune of Billions???

I'm done venting, Now fire away!

Aug 04, 2008 11:19 AM

Stephen Adams

Keller Williams Realty - Leesburg, VA

Randall, my friend....You just don't want to give up, huh. It doesn't really surprise me they did it. Members of Congress and supreme court have done it before. Even if this law the previous entrant so anonomously added to the discussion were voted down, it will come up again. This is a very contentious issue that has pond=wave affects one way or the other for thousands of people throughout the country.

Wayne, I hear you. I'm not even in the financial world and am quite sure that many banks that folded simply provided the teaser rates to highly underqualified and over-leveraged buyers who bought into the mass hysteria of instant equity/riches. They didn't need to foster DAP's, because the rates and numbers catered to "stated income" and "no doc" buyers. DAP's I believe aren't the real reason either, esp. today, after all of the new regulations since last year. It's just the scapegoat du jour.

Aug 04, 2008 02:55 PM

Randall Schrader

Competitive Insurance of Dundee - Dundee, FL

Stephen, You are 100% correct about the banks. We did loans at 1% for the first 3-5 years, crazy. When property values slip and you are mortgaged to the hilt, many people are just walking away. The savings rate among Americans is close to zero. One little hiccup can throw the family's budget into turmoil. I know a lot of people locally that find themselves financially better off by walking away and starting over in a rental home. THIS is causing bank faliures! Two years ago, the borrower could have borrowed against the equity in their home in a pinch and gotten through a rough patch, now they are upside down.

Wayne, Why would we need an independent 3rd party to evaluate DPAs? It's public knowledge. Secondly, there aren't enough VA loans funded to amount to a hill of beans. And the fact that Fannie, Freddy and the recent bank closings didn't use DPAs, so DPAs must be okay, is illogical. FHA has their own demons and they have determined that DPAs are one of them. Do you want them to blindly continue and need their own bailout down the road?

The overriding premiss was that home values would continue to RISE. If you loaned 100% to help someone become a homeowner, and the home's value increased to $110,000 the first year, you were okay. If you loan 100% and the home's value decreases 10%, coupled with a much higher cost of living, no reserves for emergencies for our borrowers, maxed out credit cards . . . UH OH!

Aug 05, 2008 02:15 AM

Wayne Frazier

Licensed Public Insurance Adjuster - Hunt Valley, MD

Vertical,

Please provide us with the PUBLIC KNOWLEDGE you are talking about. If you don't understand the value in an independent 3rd party investigation / analysis regarding this topic, I know not what to say.

FHA's market share until recently had decrease to a pathetic low. I can't remember the exact # but you can look it up if you want.

"And the fact that Fannie, Freddy and the recent bank closings didn't use DPAs, so DPAs must be okay, is illogical."

The point being made was if DPA's are the Armegeddon being purported, why is the mortgage industry as a hole having problems? Hell, at least FHA is Full Doc with tighter requirements for Ratios.

Not to mention the hefty Upfront Mortgage Insurance Premiums paid along with the Monthly MI requirements.

DPA's have a place. But if they are ever legalized again it is certainly your moral right to to refuse to do the loan for anyone needing such help. I can tell you that I've helped many good hardworking, credit worthy people use these programs to achieve home ownership and will do it again if ever allowed. If FHA wishes to put sensible restrictions on their use, I have know problem with that, but to completely ban them is ridiculous.

Regarding the appreciation comment, NO lender should EVER lend on a properties anticipated appreciation, as well, nor should a borrower, except in extremely limited instances.

Aug 05, 2008 03:09 AM

Michelle Chamberlain

Above All Financial Services -Pennsylvania Mortgage Broker - Secane, PA

Suburban Philadelphia Mortgage Broker

I think you raise a lot of good points but I disagree with your conclusions. You talk about the double digit appreciation and the subsequent falling prices and many people still being priced out of the housing market as a reason that we still need DPA's. I would say that this is the exact opposite reason that we need DPA's.

Part of the reason that home prices rose so quickly was because it was easy to get a loan, due to DPA's, no down payment loans, loose lending guidelines etc. As more people were able to qualify, demand for housing rose and so did the prices. Now as less people are able to qualify and more homes are on the market, housing prices will come back down to more affordable levels.

Personally, if I were a new home buyer at this point in the market, I would rather save up for my downpament while prices continue to correct, than take a 3% assistance on an overpriced house.

Aug 05, 2008 04:21 AM

Anonymous

Michelle, you'd rather lose 3% of your own money than 3% of the DPA's money? Wow, while you're at it send some $ my way you don't mind losing.

Aug 05, 2008 04:23 AM

#20

Michelle Chamberlain

Above All Financial Services -Pennsylvania Mortgage Broker - Secane, PA

Suburban Philadelphia Mortgage Broker

Michelle, you'd rather lose 3% of your own money than 3% of the DPA's money? Wow, while you're at it send some $ my way you don't mind losing.

Sorry Stephen to hijack your blog but in response to the person who "forgot" to log in (which would make it impossible for me to send you money btw). Yes, I would rather lose my own money. That is what being a responsible adult is about. That is why the mortgage and real estate market is collapsing now because so many people are walking away from homes that have depreciated or they decided they could not afford because it was not their money invested in it anyway.

My point also being that if you buy a home for 100,000 now with 3,000 DPA you still have a loan for 97,000. If you wait to save your own downpayment and home prices fall 5% within that period, you'd now be buying the same home for 95,000 with a mortgage of that minus your downpayment.

Aug 05, 2008 05:59 AM

Stephen Adams

Keller Williams Realty - Leesburg, VA

Wayne, I fully agree with your position. Please allow me to quote you, "but to ban them [DPA's] would be ridiculous" If good hardworking families are priced out of the very market in which they live, how much "giving back to the community" of their selves, time and talents can they be. Seems that our youth needs role models. How can a dad coach a local little league team that his son wants to be a part of, or a mom playing with a local community band or orchestra as a volunteer if they have to work two jobs to make ends meet to pay for rent (by the way, is Northern VA the only place in the country that's starting to see rising rents?), or a church to open doors to the homeless at night? They also have to drive a long way out to the next county or state to sleep because that's what they can afford. And they cheerfully fill up their tanks once or twice a week <moment of irony>. Hmmm...

Randall, thanks for agreeing with something I said :)

Michelle, No worries on the hijacking. I'm enjoying the conversation. It is important for members of congress and the FHA, responsible lenders and realtors to see the issues at stake. Also, if you're looking to send some money, feel free to send it to my office :)

Aug 05, 2008 02:01 PM

Randall Schrader

Competitive Insurance of Dundee - Dundee, FL

In an excert from Congressman Jay Inslee from another post;

As you mentioned, this bill prohibits down-payment assistance from the seller or a third party benefiting financially from the transaction or a third party being reimbursed by transaction participants. This component of the legislation is intended to reign in irresponsible lending practices and prevent default loans. The FHA is reporting above-average default rates for seller-assisted down-payment programs which will force the FHA to request a government subsidy for the first time in the agency's 74-year history. Please know that I understand your concerns about the importance of helping first-time homebuyers and I will look for responsible ways to assist homebuyers in achieving their dreams.

Just like I've been telling you . . . Randall

Aug 07, 2008 08:37 AM