HUD: Why We Oppose Downpayment Assistance
June 24th, 2008
Related FHA Stories
- FHA Reform To Ban Downpayment Assistance
- Court Halts HUD Effort To Ban FHA Down Payment Assistance Programs
- Whaddya Mean Your Daddy Ain’t Rich?
- Should We Bring Back FHA Seller-Financed Downpayments?
- Apples & Oranges, Part II
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Downpayment assistance plans (DPAs) represent about one-third of FHA mortgage volume, and yet as we have reported HUD is at it again, trying once more to end third-party downpayment assistance programs.
Now the full-blown thinking behind the HUD action has been gov/2008/pdf/08-1356.pdf”>posted in the Federal Register.
Nope. Nothing new here.
Opposition on Capitol Hill. Ignored.
Opposition of some 15,000 commentators from the last effort to ban DPAs? Ignored.
Opposition from the Mortgage Bankers Association? Ignored.
Court rejections? Ignored.
As a court ruled earlier this year when it examined the last HUD effort to ban DPAs, it “concluded that HUD failed to provide a reasoned analysis for its departure from prior policy and failed to adequately respond to comments.”
This is strange stuff. It’s okay for owners to provide up to a 6-percent “seller contribution” to reduce general buyer costs when a sale is financed with an FHA mortgage, but it’s not okay for a seller to help with the down payment.
It is okay for HUD to advocate FHA modernization with nothing-down financing, but not okay for private groups to produce the same result.
The Federal Register proposal, all 15 pages, can be found by pressing here.
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June 28th, 2008 at 9:23 pm
If a seller artificially inflates a home’s sales price, but then gives the buyer some “cash back” under the table for a “down payment” on that buyer’s mortgage, it is considered mortgage fraud.
But for some strange reason, that transaction is “ok” under the FHA’s down payment assistance program when “non-profits” get a “contribution” from the seller which they pass on to the home buyer who uses it to make a “down payment” on a FHA loan (and usually the “contribution” includes funds for closing costs as well, and where the seller “recoups” the “contribution” by selling the home for a price higher than the seller otherwise could sell the home. The data suggest that such loans, not surprisingly, performing poorly that “traditional” FHA loans, and it is fully understandable why FHA/HUD wants to eliminate such programs.
Nehemiah’s marketing literature to home builders, e.g., notes that if builders use the program, they can sell homes without using “incentives” (that is, effective price reductions to market levels) — meaning that the use of its program enables the builder to sell the home for an “above market” price.
If Congress wants the FHA to provide no down paymnent loans to certain borrowers — enact legislation that is clear and explicit about such loans, rather than keep in place the “sham DAP” programs.
July 10th, 2008 at 8:00 am
In the present market (at least in California)it would be near impossible to get a higher than market price for a property because of the appraisal. Appraisers are being more careful (honest) and lenders are reviewing appraisals.
July 11th, 2008 at 1:58 pm
I can’t speak to the California market, but in my experience, “appraisers” are really “guess-timators”. My worst example is a small home on 23 acres that I bought many years ago for $34K. After the sale I was given the two appraisals that were used to set the price; one for $24K and one for $44K. Go figure!
There’s more costs to owning a home than just the mortgage payment. If you can’t come up with 5-10% for a downpayment what are you going to do when you are hit with the cost of a new furnace or septic system? Default, that’s what.
Home ownership is great, and a great thing for people to strive for. So much so that they should be willing to sacrifice for it.
July 13th, 2008 at 4:48 am
I think one of the simpler solutions is to do away with 6% concession and just allow 3%. Then increase the rate to cover the closing cost. 3% does not have as much affect on the price and the payment comes in around the same (not exact). If there new buyer were to have to sell or were to do a streamline refi they would owe less money.
Lowing less is a good thing, the pricing premium on the loan is for not having money.
July 22nd, 2008 at 2:26 pm
Better solution than all. Just make better loan decisions. Generally if a borrower pays his bills he will pay his bills. If I have a 700 credit score and you give me 5% as a gift to put down I am not going to suddenly stop being a responsible borrower.
Simple as that. Underwriting guidelines may need to stiffen but DPA is not the issue.
August 16th, 2008 at 10:09 am
I’ve never seen the word “gift” placed in quotation marks as often as it is when discussing this subject.
The real estate industry has always had a bad reputation when it comes to honesty and ethics (see historical annual Gallup Poll rankings on honesty and ethics in professions surveys).
A program where buyers are told they are getting a gift and then have to pay for that gift in the form of a higher price and inflated mortgage balance is simply not honest.
Now I often see how some argue that prices are raised when sellers pay for recurring and non-recurring closing costs and that those are built into the price of the home also; so what’s the difference? The difference is that there is no certification of a gift with those concessions. There is no representation to the home buyer that he/she will be given the closing cost assistance free and without charge. That’s not the same as the “gift” programs. They are certified to be free.
Also, you see the “nonprofits” argue that the “appraisal comes in” so that makes it okay. What they don’t tell you is that appraisals are not exact by their very nature. Appraisals are opinions of market value defined as “estimates” in HUD handbooks.
Existing anti-flipping regulations and more recently, a 2008 FHA Mortgagee Letter state that under certain circumstances, such as the quick resale of a home at an increased price, the underwriting of an FHA loan requires that a second appraisal be obtained to verify the property value. As long as the second appraisal is not more than 5% below the first appraisal, the first appraisal is acceptable. Effectively, HUD has declared that the permissible tolerance between two appraisals is 5%.
The “gift” programs distort sales prices by the 3% down payment requirement plus the “gift” fee charged by the “charity.” Now you can see that the sales price inflation can live like a virus within the acceptable range between two appraisals. Like a computer virus, just because it can find a place to hide in the system, doesn’t make it legal.
The problem is not with the appraisers. How can HUD discipline an appraiser for an “error” of less than 5% when HUD itself has committed to 5% as an acceptable tolerance? So when the “charities” send you after a red herring that “the appraisal comes in” so all is well - think twice. The problem is that there are two different prices on the home. The appraisal issue is a distraction designed to get you off the subject of price inflation.
Let me suggest a mental exercise to see if you think making someone pay for their gift is honorable or ethical. Let’s say it’s your birthday party, and some character shows up that you have never met before. Strangely, this character has brought with him a $4,000 gift (big screen, vacation package, fill in the blank of what $4,000 gift you would like for your birthday) and makes a “big todoo” about it. Kind of odd since not even your parents or other family members, people who actually know you, gave such a gift. After all the fanfare, and the OMG thank you so muchs, the stranger leaves … and leaves you wondering who was that man who gave me so much and why would he give me – a stranger – so much?
A little time goes by and one day, after work, you go home get the mail and are stunned to see that that nice man had charged that “gift” to your credit card. But it doesn’t end there, he also charged you a $750 fee for getting you the gift! Now what do you think of him? Now you know why he crashes every birthday party in town with his “gift.” Welcome to Nehemiah.
I have to stop typing now because I ran out of quotation marks.