BY DAVID HOGBERG
INVESTOR'S BUSINESS DAILY
Posted 9/16/2008
In the midst of a housing crisis with its roots in easy money, Democratic lawmakers want taxpayers to once again back loans to borrowers putting up no money of their own.
The House Financial Services Committee on Tuesday marked up legislation to let the Federal Housing Administration guarantee mortgages when the seller helps out with the down payment.
Supporters contend the new legislation contains adequate safeguards. But critics say down payment assistance loans are far more likely to default, raising losses for the FHA — read taxpayers.
It comes on the heels of the Treasury's takeover of quasi-private mortgage finance giants Freddie Mac (FRE) and Fannie Mae. (FNM) Taxpayers may end up paying $200 billion for the emergency move.
Down payment assistance lets buyers unable to put sufficient money down to buy a house do so anyway. Seller-funded assistance often entails the seller giving the down payment to the buyer via a nonprofit, which earns a fee.
But buyers who don't put up any of their own money default more often. Further, sellers may inflate the price in such situations, knowing FHA insurance will cover the loan if the buyer defaults. The down payment essentially is added to the price the seller otherwise would accept, critics argue.
Fully 22% of FHA-backed seller-funded assistance mortgages that were three years old were delinquent, according to a 2007 Government Accountability Office study. The compares with 13% of nonseller assistance and 9% of those without assistance.
Since then, home prices have fallen sharply, leading to a big rise in delinquency rates overall.
The FHA is projected to lose $4.6 billion this year. Commissioner Brian Montgomery largely blames that on seller-financed down payments. In 2007, such mortgages accounted for 35% of FHA's loans.
Congress scrapped the program as part of the broad housing rescue bill passed this summer.
Yet Rep. Al Green, D-Texas, already wants to reinstate it.
Rep. Spencer Bauchus, R-Ala., ranking member of the House Financial Services Committee, told the panel that reviving down payment assistance is "unwise."
Housing and Urban Development spokesman Lemar Wooley said, "We have deep reservations about the legislation in its current form."
Green says, "Those concerns have been dealt with."
Under his plan, a buyer with a credit score of 620 to 679 could qualify for a seller-funded down payment mortgage backed by the FHA with a 3% initial premium and a 1.25% annual premium on the original principal. Those with credit scores 680 and over could qualify without paying the additional premiums. The FHA would have the option of developing a seller-funded program for those with credit scores below 620.
Lenders deem credit scores over 700 to be a sign of good financial health, while those under 600 are high risk, according to the Consumer Federation of America.
Those safeguards may be inadequate. "The problem is perverse incentives," said John Berlau, director of the Center for Entrepreneurship at the libertarian Competitive Enterprise Institute. "The sellers and banks have an incentive to cheat since they know the taxpayers will be left holding the bag."
The FHA faces other problems as well. The housing bailout requires the agency to insure up to $300 billion in subprime loans to try and curb foreclosures.
To ease pressures on homeowners, the FHA will back loans only when lenders write down the principal to 90% of the current property value.
"Congress hopes the FHA will save the housing industry, but who's gonna' save the FHA?" asks Alex Pollack, a resident fellow at the conservative American Enterprise Institute and former president of the Federal Home Loan Bank of Chicago. "No one says it, but the FHA is the government's subprime lender."
Berlau noted, "Because of the bailout, banks now have an incentive to dump their loans that are most likely to default on the FHA."
The second-quarter delinquency rate for FHA loans was 12.6% vs. 18.7% for subprime, according to the Mortgage Bankers Association.
The Congressional Budget Office estimated the bailout would cost taxpayers $24 billion over 10 years, but that's just a stab in the dark.
"$50 billion? $100 billion? No one knows," said Guy Cecala, president of Inside Mortgage Finance.
Cecala points to what he believes is an even more immediate risk for the FHA.
"The FHA is accounting for one-quarter of new mortgages this year, at a time when home prices are still declining. Many of those mortgages could be underwater by next year."
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