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Can “Silent Seconds” Help FHA Borrowers With Little or Nothing Down?

by Peter G. Miller
November 4th, 2008

With downpayment assistance programs (DPAs) now banned from use with FHA mortgages the question arises as to whether there is any replacement for such help.

One idea which has been suggested is the use of a silent second. In basic terms, the borrower gets a loan for some or all of the down payment. There is no monthly cost for the loan, instead the loan is forgiven if the borrower stays in the property for seven years. Also, if half the second is paid back within 18 months the other half is forgiven.

So far, the only example I have found for such financing is offered as an ITMO or Indian Tribe Mortgage.

The concept, though, is interesting, and could have wider appeal if it passes muster with HUD.

Imagine that an owner cannot market a property. Since seller down payment assistance is banned, the seller gives an amount equal to 3.5 percent of the sale price plus a service fee, say $500, to a non-profit group. The group then loans the money to a borrower with the seven-year and 18-month forgiveness features. If the forgiveness benchmarks are not met the borrower pays 3 percent interest per year.

The real attraction of this program is that if the borrowers save and stay they win because they reduce or eliminate their debt. In a world where too many households have too much debt, savings should be encouraged and so should programs which reduce the inventory of unsold homes.

The original news release is below.

SACRAMENTO, Calif.–(BUSINESS WIRE)–In response to former Federal Reserve Chairman Alan Greenspan’s call today for housing stabilization, AmeriDream president Ann Ashburn cited the need to resurrect down payment assistance programs eliminated by Congress October 1st of this year. Don F. Harris, who created the original seller-funded down payment assistance model on which AmeriDream and others are based, disagrees.

Harris, who revolutionized FHA mortgage financing and caused Realtor Magazine to recognize him as one of the “25 Most Influential People in Real Estate” in 2003, says don’t resurrect the old model, but instead use an alternative solution.

Known as ITMO, Indian Tribe Mortgage is a program offered by the Lower Brule Sioux Indian Tribe of central South Dakota. Unlike the banned seller-funded down payment assistance programs banned by the Housing Recovery Act earlier this month, ITMO is a second mortgage program offered by a government entity, a native American Indian Tribe, and complies with existing regulations.

“ITMO addresses the concerns that resulted in the elimination of seller-funded down payment programs, namely inflated sales prices and poor loan performance,” said ITMO founder Don F. Harris.

“I had hoped that a regulatory framework could have been enacted to preserve it. The elimination of seller-funded down payments necessitated a new solution, though. Simply stated, ITMO is that solution.”

“The Tribe is excited about bringing this product to the nation,” said Shawn LaRoche, a member of the Lower Brule Sioux Tribal Council. “This is an incredible economic development opportunity for the Tribe and a chance to redress historic inequities by creating an unprecedented partnership opportunity. We are grateful to be part of a critical mortgage solution during these challenging financial times.”

ITMO is the bridge between down payment and closing for some homebuyers. The assistance program provides a silent second loan that requires no monthly or amortized payments. The principal amount, plus interest accruing at an annual rate of 3%, becomes due upon sale, refinance or transfer. The loan is forgiven if none of these events occur within the first seven years of ownership. In addition, if 50% of the ITMO loan is repaid within 18 months from the purchase date, then the remaining 50% of the ITMO loan is forgiven.

“ITMO is the financing tool that enables the borrowers, realtors, mortgage brokers, lenders and secondary investors to bridge the gap, solidify transactions, and support the delivery long term performance,” said Sue Frost, President of Alliance Mortgage and Marketing in Sacramento, California, who has already processed a number of ITMO loan applications. “ITMO pinpoints what is needed at all levels of the playing field during this time in our US and world economy,” she said.

The market has adjusted such that those who cannot afford rent can afford a mortgage, but have traditionally had difficulty getting over the hurdle of that initial down payment. “There are a lot of loan programs out there to help with that down payment, but the buyer typically must fit within specific qualifiers,” said Jon Nastro, a Broker Associate with Keller Williams Realty. “Often times it’s a difficult match. ITMO doesn’t have these limitations. It reaches low-to-moderate income buyers and, unlike many loan-assistance programs, applicants do not need to be first-time buyers. That’s really where ITMO comes into play.”

To learn more about ITMO please visit www.itmo.com.

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This entry was posted on Tuesday, November 4th, 2008 at 2:20 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “Can “Silent Seconds” Help FHA Borrowers With Little or Nothing Down?”

  1. chris Says:

    Re Silent second mortgages

    “So far, the only example I have found for such financing is offered as an ITMO or Indian Tribe Mortgage”

    FHLBs have been offering silent seconf mortgages for closing cost and down payment assiatnace since 1990. The FHLB subordinate lien is forgiven in equal amount monthly over a five year period. Most if not all 12 of the banks have funded hundreds of these each year either as part of their competitive AHP program since 1990 or AHP set aside authority since 1997. The FHFA will now even allow the FHLBs to use the set-asdie funds to be used in conjunction with refinancings done through Hope4Hopmeowners if any are actually done.

    There are many similar down payment assitance programs funded by state andlocal governments, some with HUD HOME funds. I’m not sur eif these are with FHA loans but I would assume they are.

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