FHA Needs to Kill 100% Financing (Before it Kills Them)

By
Mortgage and Lending with Mortgage Master

 

 

FHA is looking to end its down payment assistance program and eliminate 100% financing. It is about time!

HUD states the foreclosure rate and resulting losses on these types of loans are 2-3 times greater than traditional FHA loans. These losses contributed to  FHA's total loss of 4.6 billion dollars in 2007 and delinquency rates that were up 12.7%. 

 The down payment assistance works like this. Let's say a buyer needs $7500 for a down payment. The seller can donate that sum plus an administrative fee to a nonprofit organization like the Nehemiah Corporation. Nehemiah Corporation then gifts the buyer back the money and pockets the $400 to $600 administrative fee. HUD reports that 1/3 of the FHA loans originated today have some form of down payment assistance.

 The end result is the buyer can buy a house with no money down. The seller can even pay all the closing costs after covering the down payment. Essentially allowing buyers to walk into property ownership with NO MONEY OUT OF POCKET.

 With none of their own money invested and no equity, there is little incentive for the buyer to weather the storm if they are having trouble making payments. Many strapped homeowners will simply stay in the house and make no payments until the bank finally throws them out.

 So when the bank does foreclose, it is stuck with a property that has more liens than value. Let's say a house is bought for $250,000 and is currently worth $215,000. Now, tack on $48,000 in missed mortgage payments. The resulting  $83,000 in negative equity forces the bank to sell at a loss, a short sale. FHA is liable to the bank for these losses since it insures the loan.

 By eliminating down payment assistance and 100% financing programs, the FHA could limit these situations in the future. Hopefully they will. Because, if the FHA keeps racking up these losses it will either go under or require yet another government bailout financed by us the taxpayer

Comments (6)

Stephen Graham
Inactive - Atlanta, GA

"With none of their own money invested and no equity, there is little incentive for the buyer to weather the storm if they are having trouble making payments. Many strapped homeowners will simply stay in the house and make no payments until the bank finally throws them out."

I have thought about this before. Will a mere 3% investment really influence a buyer to weather the storm? In my opinion, maybe in some cases.

FHA's focus should be on the buyer's credit worthiness; past performance is usually a good indicator of future performance.

Jun 26, 2008 06:53 AM
Gena Bolton
The Premier Property Group | GRI, CLHMS | SoWal 30A Your Beach Awaits | - Sandestin, FL
Sandestin, Destin and South Walton 30A Real Estate

Good info

Thanks

Jun 26, 2008 07:05 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

@ Ron.... how can you say this?   Many of the numbers is misleading and is just say so....  I have not see one piece of information that actually shows these numbers in writing.  It's like one person spreading a rumor and it just grows and grows. 

Bill....

  • do you know that some people in HUD are politicians? 
  • Do  you understand, that you still need a down payment? 
  • Do you understand, that if this program is used correctly, that the appraisal be real and of true value. My appraisers don't "up" value.
  • Do you understand that other lenders and appraisers would raise the value, not only on these programs, but other programs?
  • and where does HUD say that 1/3 of the FHA loans have some sort of DPA attached to it?  Are you sure they were saying 1/3 of the DPA loans were in trouble, instead of the numbers that you gave?
  • Let me add to this.....  does anyone talk about statistics about getting 6% in seller help?
  • What about those that get a 100% from relatives?

 

You make this statement....  "With none of their own money invested and no equity, there is little incentive for the buyer to weather the storm if they are having trouble making payments. Many strapped homeowners will simply stay in the house and make no payments until the bank finally throws them out."

Do you know that you only need 3% of your own money in the deal to begin with?  And that you need 2.25% as the down payment, no matter where you get the money from.  Which goes back to the statement made by Stephen.  In which he makes a great point.

 

And I am leaving this last statement that you made, which makes my point even stringer, that you are knocking a good program without full understanding of mortgages in general.  Here is what you said....

 "So when the bank does foreclose, it is stuck with a property that has more liens than value. Let's say a house is bought for $250,000 and is currently worth $215,000. Now, tack on $48,000 in missed mortgage payments."

Excuse me?  What about the pay option arms?  What about the 2/28 subprime loans at 100% financing. What about the programs that allowed 103% and 107% financing. Do you know that these programs account for a lot more of the foreclosures, than the DPA loans?

Another thing.... do you know the main reason behind many of the foreclosures?  Loss of job,... loss of income?  Divorce or loss of spouse which made people miss payments?

What about no docs and stated loans done at 100%.... and even those stated loans that went down to 560?

 

Overall, attacking a program that has been around for a long time, over a decade, and for many reasons that you didn't list, are the reasons why there are so many foreclosures.  it's called a beaten economy. Sorry if a lot of this sounds rude, but I just wonder what you tell your clients.  Or what you sell them. I have more to say, but it would sound rude.

Overall, what about one main key point that you failed to state. That more consumers got the chance to own... and many that take pride, are doing well.  Because of FHA and DPA, it has allowed for more homeowners, than those that have foreclosed. What about those that could have never owned, because the gov't doesn't have other helpful programs?

jeff belonger

Jun 29, 2008 04:58 PM
Tom Burris
NMLS# 335055 - Baton Rouge, LA
Texas/Louisiana Mortgage Pro - 13 YRS Experience

I hope George Bush gets his wish and FHA goes to a legit 100%.

Credit and reserves guidelines for the higher LTVs should take care of the default rates..... and we won't have to have this discussion.

 

 

Jul 01, 2008 02:47 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

@ Tom.....   I don;t care about that.  Here we have someone trying to make one product look bad when the basics are way overlooked. Bill talks about ...  he says this...

"With none of their own money invested and no equity, there is little incentive for the buyer to weather the storm if they are having trouble making payments. Many strapped homeowners will simply stay in the house and make no payments until the bank finally throws them out.  So when the bank does foreclose, it is stuck with a property that has more liens than value. Let's say a house is bought for $250,000 and is currently worth $215,000. Now, tack on $48,000 in missed mortgage payments. The resulting  $83,000 in negative equity forces the bank to sell at a loss, a short sale."

Let me explain simple mathematics.   Bill talks about someone putting no money into the deal and if the house loses value, they will sit until they are kicked out. It's obvious that you haven't listened to other foreclosure stories.You listen to what you want to listen to.  Do you know that there are actually more people that have gone to foreclosure, whose house lost lots of equity, and these same people walked away from their house. Some of these people even put 15% to 20% down and still had this happen to them.  I have talked to them.

 

My whole point... people that even put 10% to 20% down and went conventional, are even walking away from their homes. Stop making one program look bad based on misleading numbers and just a short post that tells people that these are bad, when you aren't trying to give a solution or a better understanding to the word foreclosure.  It starts with people losing their jobs, loss of income, death in the family.

jeff belonger

Jul 01, 2008 03:28 PM
Tom Burris
NMLS# 335055 - Baton Rouge, LA
Texas/Louisiana Mortgage Pro - 13 YRS Experience

3% down payment won't keep a borrower from walking away..... but it WILL eat into the cash reserves of the new homeowner

 

 

Jul 01, 2008 03:36 PM