Get DPA reinstated NOW!!

Seriously folks!  If your not worried you should be.  This recent emergency housing bill that George Bush signed today contains an amendment that kills down payment assistant programs.  What does that mean for you and me as real estate professionals.  It means additional pain for you as a professional, but more importantly minorities and first time home buyers will be affected the most.

Let's look at it closely, the new home buyer to qualify for a FHA loan will have to save 3.5% for a down payment.  This will magically keep the borrower from going into default, because they now know how to save money, and that they will not want to let the home go into foreclosure due to their down payment.

Hmmm....let's look at the real fact's of today's market.  So I buy a home for $200k in Phoenix Arizona.  I qualify for a FHA loan.  I come to closing with $7000. (3.5%)  But the home depreciates in value to $180k in the next six months.(10%)  Then disaster strikes, my company let's me go due to massive corporate layoffs from the declining economy.  The problem is I'm new in the job market, it took me pretty much two years to save up the $7000 for my down payment, and now I have very little in the bank to cover my next mortgage payment.  What do I do now?...I can't sell it for what I owe.  I can't borrow an equity loan for the money I need to make my payment.  I guess I can use my credit cards for a few months, but then I need to pay them off or face disaster with high interest rates.  I guess I can ask my family for the money, but they already helped me with the closing costs!

That's a pretty realistic scenario folks and some of you wonder how DPA would help in this situation.  The first reason is your not emptying your bank account to make the down payment.  In other words my $7k stays in a savings account and can be used for emergency's.  But what about all those people who don't have savings before they get a DPA type loan.  The answer is already happening.  Banks and HUD have been adjusting the LP and DU approvals so that you need to have assets now to qualify for a mortgage.  Asset's that are liquid and available for a down payment or closing costs.  But if your putting all these funds into the down, then what is left to make the mortgage payment when there's an emergency?

DPA's need to be fixed, but not banned or done away with totally.  The problem now is that it's going to take allot more work to get them back then to have saved them from extinction.  A borrower should have to qualify for a DPA in the following manner.  First, you need to have the 3.5% in a savings or checking account before you approach your broker for a loan.  The money has to be seasoned at least 60 days, and you can get a gift but if it is a gift the person giving it must realize they won't see this gift again for at least 7 years.

The next step is that the mortgage broker verifies the credit, income and asset information like normal. He then files for a DPA exemption with the bank that your closing the loan.  The bank then sends the borrower a DPA savings form, where the borrower fills it out and submits it with the bank.  When the borrower closes, the 3.5% from his savings account goes into a special certificate of deposit, which pays the borrower the going rates on CD's for the next 72 months.  There is only one special caveat with this deposit.  Like any secured account, the bank has the option to pull out deficient funds if the borrower defaults on the home loan.  This in effect would allow the borrower at least 5 or 6 mortgage payments before the house is truly in default. It also gives the borrower the motivation to keep his payments current, but allows for an emergency cash reserve if he does loose his job or is disabled. 

Would there be issues with this type of program. I'm sure there would be, but it's better then this alternative.  The only thing this new bill does is help the banks.  As usual the banks and their lobbyists get the best end of the deal and the rest of us have to deal with the problems their self interest generates.  I'm personally going to take up this crusade and I'm already drafting the letters and researching the material I'm going to need to send to my congressmen.  Hopefully some of you will do the same.