Apples & Oranges

by Peter G. Miller
July 1st, 2008

Tom Lawler, discussing down payment assistance programs (DPA’s), says that “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 payment loans to certain borrowers —- enact legislation that is clear and explicit about such loans, rather than keep in place the “sham DAP” programs.”

I disagree with Toni’s analysis. Let me explain why.

First, a lot of real estate is artificially inflated. For instance, zoning impacts real estate values and zoning is a by-product of the political process.

Second, cash back under the table does not show up on a loan application. The result is that the lender does not know the true price of the property.

With a DPA the entire transaction is disclosed to the lender. Thus the lender knows exactly how the down payment is being funded. If the lender is an affiliate or a subsidiary of the builder there is no mystery regarding the down payment.

As to a “sham DPA,” why is it okay to have a 3 percent “seller contribution” but not to allow 3 percent for a down payment? It’s a difference without a distinction, as the lawyers would say.

It’s interesting that we allow billionaire hedge fund managers to claim that their income is a capital gain and thus taxed at low rates, but for people who are not buying the penthouse are standards are a lot tougher.

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2 Responses to “Apples & Oranges”

  1. sfvrealestate Says:

    In my opinion, DPAs aren’t really charities. They’re set up to launder money, essentially, for a relatively small fee. As a Realtor, I’m not against downpayment assistance. I’m just against phony charities.

  2. Tom Lawler Says:

    A few points:

    1. Why should the FHA “require” a 3% down payment, but then let the seller “pay” the down payment by hiking the home price by 3% — effectively meaning that it is a no down payment, 100% LTV loan. If you think the FHA should have a no down payment loan program, then let Congress create legislation to allow it, rather than having a “fake” 3% down payment program that is really a no down payment program. The DPA program is designed to circumvent a 3% down payment requirment in a “sham” transaction.

    2. In the case of the FHA DPA program, the FHA is taking on the credit risk of the loan. Yes, the FHA (and the lender) know about the DPA. And yes, the FHA has found that loans under the DPA program default at a massively higher rate than “regular” FHA loans. So yes, the “lender” and the “insurer” know about it, and the insurer wants to end the program because it is too risky. But for some reason it can’t? That makes absolutely no sense.

    Sure, if a lender who takes on the credit risk of the mortgage knows about the DPA and still makes the mortgage … well, that’s fine. But in this case, the entity taking on the credit risk (FHA, representing taxpayers) DOESN’T WANT TO INSURE SUCH MORTGAGES. And it shouldn’t.

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