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DPA...nice, but not the answer to this mess.

An associate of mine wrote a blog about seller funded down payment assistance programs. It is his belief that they may hold the key to jump starting the market and resolving the mortgage crisis.

I don't happen to think so.

Down payment assistance programs require money from the seller. Today, the sellers with a problem don't have the cash available to put into the transaction. I thought I should share my reply.

Jeff.............maybe I missed something in your presentation. You are extolling the virtues of "seller funded down payment assistance programs". You are linking this with the foreclosure problem.

Hmmmm.......so you think that banks that have lost money and now have a non-performing asset will set aside additional funds to help people buy the homes? You are talking about people/companies that already are up against more walls than any room should have. You believe that in addition to the 6% that is allowed in some cases..........they will fund borrowers that are by definition "without sufficient funds".

I don't think so. I would hope we have learned the folly of selling property to people that don't have dime invested in the deal.

If they pass such a law, it will have no impact on the short sales. The seller in those cases can not even pay the mortgage. You think people in a short sale position will have funds available to put into a seller assisted down payment program?

What seller, involved in this upside down, negative equity market has the funds to partake in the program? I have represented buyers that have used Nehimiah and I have represented sellers that have participated.

The buyers really could not afford a toaster, but they went to the class and could use the program. The sellers were all in a positive equity situation and were glad to take a small hit to sell the home.

It is a bitter pill to swallow.

You mention the $7,500 or $15,000 dollar tax credit. You say that it would take the average person a long time to save up the money necessary for a down payment. You also mention the much ballyhooed average savings balance of $1,300 dollars. That is quite a general number that does not focus on potential home buyers. The bigger problem with the tax credit is that it only covers homes purchased in 2009. For most, saving up is not an option unless the amount saved can cover the 3% needed by FHA approved loans. Of course, this is an apple and we were discussing the DPA orange. Let's not confuse the two.

My experience with foreclosures and short sales has been that banks will approve buyer credit to cover closing costs. Banks will usually list through an agent and not attempt to violate tort laws by reducing commissions. They sell property "as-is, where-is" and will not make any repairs or warranties.

On the short sale side, there is no consistency. Prices listed are just a best guess as to what might be accepted. Banks are still using agents to do BPO's and they are as accurate as the agent can make them. Here again there is no standard procedure and determinations are as varied as the agents presenting them.

Mortgage companies also have this strange belief that they can violate tort laws and alter compensation. Some where an attorney general will enter this fray and point out that there is a significant difference between actually being a party to a contract and approving an offer.

The only real solution to our housing crisis will be found in resolving the negative equity problems that exists. This problem will have to ferret out those that have a first trust, a second trust and a HELOC (Home Equity Line of Credit). The first and second will have to be dealt with. The HELOC will have to moved to an unsecured debt that will remain with the homeowner and probably should be removed from bankruptcy protection.

As for the first and second trusts, I will readily admit, I don't know the solution. I do know, it will not be solved with smoke and mirrors.

As for the TARP, to this point funds have only been used to keep the system afloat. There is little if any accounting for what has been spent and little if any of the outstanding debt has been resolved.

Posted by John MacArthur on 02/09/2009 01:47 PM

Comments (24)

dap, tarp, down payment assistance program, jeff belonger

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24 Comments on DPA...nice, but not the answer to this mess.

FEB

Good for you. You identified the elephant in the room. DPA isn't going to get rid of that large interest gobbling elephant that is sucking the life out of the economy and taking 30% of our consumers out of the market for just about anything including real estate.

When 30% of home owners cannot buy or sell, which kind of market do the fools on Capitol Hill think we will have?

I don't feel that I fully understand all of this (i am on the newer side of the business) but i agree with you that there does not seem to be an easy fix and the negative equity problem is HUGE right now...

John.... I just wanted to let you know that I haven't replied to your comment as of yet. Since you left a very detailed comment with debate, I thought it would only be fair to reply in length.

But one thing in regards to your post. You said "You are extolling the virtues of "seller funded down payment assistance programs". You are linking this with the foreclosure problem."

And then went on to say this "Hmmmm.......so you think that banks that have lost money and now have a non-performing asset will set aside additional funds to help people buy the homes?"

So, to answer your questions here, and I can't find where I stated this, but I never said that I expected banks to go even lower. My blog was already to long to go into the specific details. Otherwise it would have looked as long as the Stimulus bill itself... lol

Seriously.... each market is different. I have helped 7 buyers in 2008 and so far, I have 2 closing this month, all whom have bought a foreclosure. Each one was being bought under market value. Part of my plan would be to allow the borrower to buy the property, if there was some room, to pick up the difference that the bank can't do.

Now, many of you will say that is what got us into this mess. I am not talking about over-inflated values, which was part of the reason that caused this mess. But outside of DPA's and the argument of no sweat equity in the property from the borrower, I could sit here and state 4 other legit reasons to why 70% of these homes went into foreclosure.

John, I see your point and actually agree on several of the topics mentioned. But I found it impossible to cover each one in detail in my blog, because it would have to be an outline.

I do have one argument and question. What is your feeling if HUD agreed to 100% financing?

What about this part of the topic... if I had $10,000 to buy a home. It was a $250,000 home.. even with 3 1/2% down, my downpayment would be $8,750. That leaves me with $1,250. So I would need seller help. Now, if I spent my remaining $1,250 on other closing costs, now I have zero. But let's say that I have some major issues come up in regards to my heater or air conditioner... my refrigerator breaks down, or that I need to replace my roof. I have no money to do any of these repairs.

My question to you then... should we now require $5,000 in escrow on every house that is bought, just for the example that I set forth? Again, I know where you are coming from and I do agree with your points. But I also believe that you added some words or my thoughts, that were even on paper. I just wanted to merely point out a possible solution, which I never said was an end to all. And possibly to look into some other possibilities. Do you think the new stimulus bill is going to help us out? And the tax credit? It also covered homes that were bought in July of 2008 until June 30th of 2009. The new proposed bill would go from July 1st until Dec. 31st.... because this is what you had mentioned in your blog... "The bigger problem with the tax credit is that it only covers homes purchased in 2009."... unless I missed something, then I apologize.

Overall, again, you make some excellent points and many are concerns of those in the real estate market. But I didn't truly define my points behind buying the foreclosures, except for buying them. I never said that the bank should even take less and cover the DPA... and if I did, please show me, because I didn't mean to. thanks

jeff belonger

Jeff...first and foremost............I responded to the essence of your blog. Regarding the dates of the tax credit, allow me to share........I am a Realtor, if anyone wants exact information regarding their tax situation I refer them to an accountant. As a mortgage broker, I would encourage you to do the same. Let the experts get it wrong. In general terms, I was trying to convey that the proposed tax relief was for a very short period.

Regarding HUD agreeing to 100% financing, I don't. I don't think it is wise. The little secret about 100% financing is that the borrower has a much higher payment. Now, philosophically, I still believe that requiring that a buyer be invested in their home is a good thing.

Forget the games played with over inflated values so loans could be made in the past. I have always felt that upping the offer so that the seller could then credit back any amount of money bordered on illegal and was certainly not ethical. Appraisals be damned. They were rigged for several years and rarely reflected actual value. Telling your borrower or your buyer client to up the offer and get back credit should never pass muster in the light of day. Anyone that deals this was is essentially advising their client to pay more money than the property is worth. If anyone thinks they are doing a buyer a favor by having them finance closing cost over thirty years, you are wrong.

I could go on and on about the unethical practices that seem to be acceptable in this industry.

I could also spend more time going through the facts and pointing out that everyone wants to find a solution but no one in authority is willing to accept that there is only one solution.

The government needs to fund the negative equity in homes. Period. If they move in that direction, they will not have to buy all the bad debt. They will not have to bail so hard. What ever the negative equity is today should be addressed. Allowing the situation to continue is only increasing the eventual price tag of a solution.

ps - on the other point about someone being cash poor. I do my best, everyone I represent has home warranty coverage. If not offered by the seller, I pay for it.

We are witness to some excellent debate here! Here in the DFW area a DPA would help many buyers get into the game! Most homes have not gone down significantly in value over the last year, some have, but some have gone up as well. There is room in the sellers equity to be able to offer some DPA assistance. Regarding short sales and foreclosures, well it may not help them a great deal but if we get some volume happening then prices may start climbing across the board again and foreclosures and short sales may not be as numerous.

Just my 2 cents

Brian.

I happen to agree with you. Downpayment assistance is not the solution. Additional seller contributions are not the solution. I read the other post and the one thing I can say is this whole situation gets more confusing - and more dire - by the day.

John, Good post- it looks like you have stirred up quite the debate! I hope congress puts their minds together and debates like this to come up with a real solution (not holding my breath though!)

Hi John -- What you say makes sense. My sense is that until people have decent, stable jobs and a positive horizon in focus, it doesn't matter much how you try to shuffle the money around.

The DPA will help here in MI, they did in the past and they will if allowed back in.

The 15K will help some.

Nothing will work for everyone.

Right now we need all the avenues available to help buyers, IF they have good credit scores and want to buy.

It is not one solution but many that will get us out of this mess.

Jeff Belonger was trying to make a point for 100% FHA financing. When the VA and the USDA both offer 100% financing AND both have no MIP, AND the VA allows the funding fee to be rolled into the loan over and above the 100% financing, AND USDA allows the 2% UFMIP to be rolled into the loan over and above the 100% financing, why can't FHA do the same?

FHA DOES allow the UFMIP to be rolled into the loan, but doesn't allow 100% financing. The only solution WAS seller-assisted down payment assistance. I can understand the arguments AGAINST seller-assisted down payment assistance. So that brings us back to: WHY CAN'T FHA ALLOW 100% FINANCING LIKE THEIR GOVIE SISTERS VA AND USDA? Hmmm? This will do a LOT more than what any tax credits will provide.

Lewis, my point exactly! A loud and resounding YES to a 100% FHA program!

100% financing.............

How about this.........................for every home that goes into foreclosure..the agent has to pay the government the commission they earned on the sale. for every home that goes into foreclosure the lender has to pay the government every dime they earned on the sale.

Maybe this will work.................let folks just have the home and all they have to pay is the commission that would have been earned and the ysp that would have been earned and they can finance that at 0%.

Why bother going through the silly motions of lending money that won't be paid. Just let the feds take over all property in arrears and give it away.

Any 100% financing is based on the premise that the value of the collateral will rise. It will either rise due to demand or the person paying the mortgage actually begins to pay on principal.

The demand for more 100% financing is a sign that some people either don't care or don't understand how the negative equity problem was over fed.

Asking the FHA to adapt the practices of the VA and USDA makes as much sense as asking the Pope and the head of the Anglican church to adapt the practices of Jim Jones.

Reducing the need for any investment into the purchase will only increase the problem of negative equity.

John... allow better loans for investors to come back then. Those that know what they are doing and have a proven track record. Not the wannabe investor, trying to make a quick buck. That is not the true definition behind investments then. Is it? Invest, to gain a return... and usually returns don't happen over night. You make some excellent points. But we can't keep going in the direction that we are heading into, right? Do we at least agree with that? Please read this post as an excellent idea... I am a genius. I have solved the housing crisis..by Beth Forbes.

Just saying that we need a plan of action and not just money thrown into the face of a storm, that would be blown away and not work. I know that you know, from talking to you today.

jeff belonger

The problem with no money down loans is that "easy come is easy go". As much as I'd love to sell a house, I don't like the idea of tacking on a trillion dollars of debt onto the backs of my children and grandchildren. If a buyer can't save 3.5% for a down payment on a house on an FHA loan (in Illinois) , how prepared will they be for a job loss, unexpected illness, or other loss of income?

We need to stop thinking about what the government needs to do so we can sell a house, and think about the big picture without chasing our tails into round 2 of this economic mess. Buyers need to be qualified to purchase, plain and simple. Zero down financing and 80/20 loans are a bad idea, seller assisted programs are just another way to set someone up to fail. Hard work and self control are the key ingredients to becoming a successful homeowner... and real estate professional :) (that's just my honest opinion anyway!)

I agree.

The last thing we need is more overleveraged homes.

I have a hard time understanding why people have such issues with DPA. A first time buyer or not, who is renting, looking to purchase, and can qualify to buy a home is able to make their rent payment so why does it matter how they get the funds to buy the home? DPA is a brilliant program when used correctly and should never have gone away. It brings more people back in the market that are unable to purchase. Just because I use my own money for my own downpayment doesn't mean I will take better care of the home or be less likely to let it go. We've had a major falloff in prices since DPA went away and it should come back. Lastly, anyone who refers to DPA as 100% financing needs to check their terminology. It might be 0 out of buyer's pocket but if there is a down (D) then it is never 100% financing.

FEB

John, you are obviously in a different market than I am in. While seller paid down payment assistance was available, foreclosures were being to subside and housing prices were not falling at such a rapid rate of decline. Now that this option is gone our supply has spiked and our prices have dropped drastically.

FHA is a great program whether it's becomes 100% or DPA comes back. It's insured through mortgage insurance and if the premiums aren't enough, simply raise them. FHA was not the issue in our market. It was conventional loans done to avoid the mortgage insurance ie. 80/20 with no document, no verification of assets, underwritten only on a FICO. Then we top it off with a negative amortization product that is not insured.

All good debate on where we are, how we got here and where we need to go. The question that always pops into my mind is why are we bailing out the homeowners who couldn't afford their homes in the first place and leaving the homeowners who are making payments on upside down homes in the dust? Shouldn't we be focusing on helping those homeowners with a mortgage restructuring plan to bring the value of their property in line with the market? Then they are the ones who then have additional funds to go out and spend on other consumer goods or perhaps even invest in real estate in their communities.

Perhaps a no homeowner left behind bill?"

John, I totally agree with what you are saying and commented about true DPA programs on Jeff's blog. I saw that he mentioned buying "under market value", but try finding an appaiser to appraise over sales price which is a mess that typically happened with seller funded DPA- not going to work in our very depressed Michigan market- not at all.

I personally like DPA. Now I understand the numbers, like higher rate of foreclosure & such. If you break down those numbers you will find out where the break point is.

If you were to raise the standards for DPA to a higher credit score, lower debt/income ratios and an increase in the upfront MI, it would make sence and I bet the foreclosure rate would fall in line with the national average.

What we have done is damn them all, when only a portion were the problem. I bet it is the same people causing the subprime mess, they didn't have the credentials to be homeowners in the first place.

John: I don't think we will ever see DPA's again. If you've no skin in the game, it's just too easy to bail...and the banks are suffering the consequences of that right now.

Great points made by everyone! May I add my 2 cents?

I have to agree with Chris Ann. I'm a Realtor and I also do loan modifications and when I have a client that has poured over 50,000 to over 100k of their own money into the home and now see their investments dwindle to squat, the pain is written all over their face. They really want to keep their home. However when I meet with someone that got the home with no money down, they really dont care one way or another what happens to the house. They have the attitude of " the bank can take this home and shove it if they dont want to help me" Thats because they didnt expierience putting thousands of their own money into the home. I see the difference all the time. People were being put into these subprime mortgages even when they were clearly qualified to go FHA. It was all about making money and now these people are suffering and begging the banks just to let them stay in their homes. The banks have made their money 10fold. In the first 5 years of owning your home, 98% of your money is going to the interest anyways no matter what type of loan you have. I think everybody's home values should be brought down to the value that it is today and modify payments accordingly. These people who bought thier homes for half million dollars and are now worth barley 200k. Do you really believe that the home will reach it's full potential again? Probably not in their lifetime. Not only does the home need to go back up 300k but it would have to surpass that just to have any value to it's name. These modifications I see are only a short time solution. It only delays the inevitable. It pretty much allows them to rent their own homes to themselves. Until all property values are brought back in line with what they are going for today, we will not see the end of this mess!

@ Chris Ann.... not actually true. I will be the first to admit that skin in the transaction does make a difference. But so did approving crap with no money down. As mentioned, VA loans and USDA loans have been successful. Read the comment above you, by Michael.... we can change things up to make this work.

Overall, as so many have mentioned, real estate is local. This might not work in every area or for every home. Just my .02.

jeff belonger

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