Judging by the the title you may already have your reactive response ready to go. Ready to call me an idiot, a clueless rookie, and so on. But before you fire off your response please read this post all the way through.
I am an active member in the mortgage and Realtor communities for the last 10 years and have enjoyed the fruits of that activity. Having said that I have also noticed an alarming trend in our industries. Down Payment Assistance has just added to my overall conspriacy theory. Hold on now, before you click away and say Jay has lost it, hear me out. (or read me aloud).
At its very core DPA programs provide a seller concession to the buyer that does not factor into the mortgage program as closing costs or a prepaid item. Therefore it allows for the "cash poor" borrower to spread their down payment across their 30 year loan. I am assuming we all agree on this basic factual statement.
Now shelf that definition and consider this for a moment. HUD and our wise Legislators have made the bold remark that seller funded DPA's have accounted for the largest default and underperformance of the mortgage backed securties within the FHA 203b loan program. They site that fact that the borrower does not have any skin in the game (down payment)as the culprit. Thus they inacted legistation to do away with seller funded DPA programs all together.
I submit to all of you that DPA is dangerous but not to us the practicing professionals in the trenches making a living. It is dangerous because it threatens market share and the quality of the loan portfolios that these legislators and their buddys are buying.
Here's my argument. The remark that the borrower does not have anything invested in the deal is bull. Here's why that does not hold water. There are 2 other federally insured mortgage programs VA and USDA which are widely used. Last time I checked neither of these programs have a down payment but yet that have not made any significant changes to their programs. And it appears theirprotfolios are not seeing the default rates that FHA is experiencing.
So let us get to the REAL reason for the lack of performance. In my opinion is the borrowers have low credit scores having a pool of those borrowers in a mortgage backed security is risky. Subprime ring a bell? Again hear me out. The borrowers who are not performing have fundemental money management problems. They cannot manage their money or pay their bills on time so naturally their credit score suffers. My opinion of the borrowers money management problems arefurther evidenced by their lack of a downpayment in the first place. Rich guys don't like risky investments UNLESS the payout is worth the risk. Again subprime loans, high rates, prepayment penalties, etc.... In fact, FHA lenders at theinception of the 203b program could not deny a loan based soley on credit scores. Now not surprisingly, through legislation by our government, lenders and banks alike have adopted a 580 minimum score to get a 203b loan. Know FHA has annouced that the 3% downpayment which was the staple of the FHA program is rising to 3.5%. The up front mortgage insurance premium (UFMIP) has also risen and now for the first time ever is score driven. A borrower with a 580 credit score can still get a FHA loan but has to pay a higher downpayment, a higher UFMIP, and a higher monthly MIP payment as part of their total monthly mortgage payment.
Some would say this a great thing, about time. Rightfully so, but understand this until we as professionals step up and make financial literacy a priority in our communities all of our businesses will suffer.
That being said a good conspiracy theory cannot be proven. I hope to be proven a theorists and not a prophet. As Jim Blasingame (sorry Jim if I spelled it wrong) would say "write this on a rock", DPA will come back, but it will be so restrictive that its use will futile at best. I know how about faith based assistance? Nah. Who believes that whole "in God we trust" statement on our money anyway.
Be blessed,
Jay
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