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