Are Seller Assisted Down Payment Programs Bad For FHA?
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In answer to a recent comment on my post “H. R. 6694 Passes Out Of Committee” I made the statement that:
“I’m absolutely not opposed to people putting money down. For most of my career in the mortgage business, buyers had to put down essentially 5%.
FHA is a self supporting program where the borrowers as a general rule carry their own weight by paying mortgage insurance premiums. They have to prove their ability to make the payments along with whatever payment they may be making on that SUV and those TVs. In addition, every lender and broker who offers FHA loans is held accountable for their default rates. FHA programs aren’t the problem bringing down the credit industry.
With seller assisted DAPs, the borrowers lose some of their ability to negotiate with the seller and end up in the long run funding their own down payment. Unlike the government programs which are being forced as replacements, this down payment assistance doesn’t come directly out of the taxpayers’ pockets.”
Krista Railey, an analyst for ml-implode.com, subsequently posted the following comment in response. You can find the context of her response here, but I will quote it to save you the time:
“I agree with you Carl. These programs create housing inflation and lead to higher default rates. Every single SFDPA program that I look at is ran as a for profit venture without regard for borrowers. I invite you to take a close look at the programs and the individuals behind the programs, and you will likely find a convoluted mess of multiple entities brokering programs. As to providers that do not obfuscate their identity and file IRS 990 returns, the flow of cash from the non profits to for profit entities involving the Officers says it all.
Currently Christopher Russell, Ryan Hill and the Penobscot Indian Nation is suing the ML Implode and myself to remove my documented article regarding their program from my blog and stifle free speech. Needless to say, its a sad day when bloggers get sued to silence criticism- especially on such a controversial issue as seller-funded down payment grants.
DownpaymentOutfitSuesMLImplodeInEffortToSilenceCr.html
If H.R. 6694 passes, it will be a travesty against FHA and the Taxpayers and will create higher home prices, higher defaults, and higher mortgage insurance costs for borrowers that save their down payment.
In fact, some buyers who save their down payment and are ready for homeownership will be displaced entirely just so some buyers can purchase before they are ready.
Representatives Maxine Waters (D-CA), Al Green (D-TX), and Gary Miller (R-CA) are selling out to trade groups and special interest while ignoring the fact that housing inflation and inflation overall is a greater threat to the housing market than whether buyers without down payments can purchase homes.”
Krista has misunderstood my original post which was actually made in support of bringing back seller assisted down payment programs, however her own post she links to makes some excellent important points and brings many issues to the table that I would like to comment on. Some issues that have been bothering me for quite some time.
I have covered in great detail elsewhere on this site the reasons why I feel that seller assisted down payment assistance is NOT, inherently, the significant source of FHA defaults that its critics think.
Here is a short list of just some of those reasons.
- The raw numbers used by HUD to document this increased default rate are significantly inaccurate.
- The study used by HUD to document the higher default rate of DAPs does not adjust for the higher levels of fraud which exist in the areas included in the study. Fraud which was most likely intricately but not inherently associated with transactions involving down payment assistance.
- Defaults are much more closely associated with areas experiencing rapidly decreasing values caused by foreclosures unrelated to FHA loans than they are to lack of down payment.
- Lender analysis has shown that when seller assisted DAPs are not combined with high debt ratios or unjustified bad credit or lack of previous housing payment history then default levels are comparable to loans without down payment assistance.
In other words, in my opinion the difference between a borrower making no down payment or a 3.5% percent down payment is not a significant factor in the desire of that borrower to fight and scrape to prevent default and keep their home when the going gets tough. Now a 20% or even a 10% down payment might be a greater incentive for that struggling borrower, but it is naive to think that 5% or less down payment makes a significant difference as long as the borrower had the real capacity to repay the loan in the first place. I believe that mortgage fraud is the most significant factor in the difference between default rates on loans with seller assisted down payment programs and loans with other types of down payment assistance.
Krista points out in her article that there is a definite “correlation” between increased use of seller assisted down payment programs and increased FHA default rates. I am far from an expert on the subject, but one of the first things learned when studying statistical analysis is that correlation is not the same thing as causation. The increase in defaults is also associated with higher rates of job loss and dislocation, higher gas prices, and of course, falling real estate values. As far as I can tell, increases in FHA default rates follow the same pattern in the same areas as all other types of loan defaults.
I agree with Krista that these programs are a cause of some inflation in real estate values. However, by that reasoning FHA should do away with seller assistance for closing costs as well, or taken to its logical conclusion we should get rid of FHA altogether. Any program which makes it easier for people to buy homes is going to contribute to price inflation.
Aside from HUD’s very successful loss mitigation program, one of the greatest advantages in terms of default rates that FHA loans possess is that the underwriter theoretically analyzes the reasons why bad credit occurred and why that situation is unlikely to happen again. In other words, the underwriter determines that the borrower has corrected whatever personal situation contributed to their past credit problems.
Subprime loans, on the other hand, have never required such analysis. Subprime lenders ended up giving loans for 100% of the value of the home as long as you had a paltry 580 credit score (sometimes even lower) and a certain number of credit lines showing on the credit report – regardless of the reason for the bad credit or whether the problem still existed. These loans vastly outnumbered FHA loans during the real estate boom and, I believe, far outdistanced seller assisted down payment programs in causing higher real estate prices.
Now, after all that seemingly enthusiastic defense of seller assisted down payment programs, I must say that some of Krista’s comments and concerns combined with information I have gleaned elsewhere have convinced me that there is a better way to achieve the FHA goal of helping those unable to meet conventional lending guidelines. Those who just don’t have the capacity in today’s economy to save up a significant down payment.
One of the reasons I have now changed my opinion is pointed out in Krista’s article. Non-profits have a surprising tendency to be associated with abuse from within the ranks. I won’t go into details here but hers is not the only report I have seen of abuses and strange flows of cash from the participants. Even from the top most well respected participating non-profits. And definitely from the swarm of non-profits that aren’t in the limelight, but are owned or controlled by home builders or mortgage lenders. All this aside from the fact that the first gut reaction any mortgage originator or real estate agent with long experience has to these programs is to wonder why an action that would be regarded as mortgage fraud if the seller did it directly suddenly becomes “clean” when laundered through a non-profit agency. I believe this creates an aura around the transaction which contributes to a lack of respect for the rules.
Sure, I could tell you that the answer to this is simply to have the non-profits monitored more closely, but why bring in more inefficient regulators if there is another solution to the problem of getting buyers into homes. And I think there is.
There is also the problem of the increased mortgage fraud which tends to be associated with these programs. I believe this is primarily caused by the ease iwith which the seller and buyer can access the down payment money involved. Without these programs house flippers and other fraudulent sellers would either have to actually give straw buyers their down payment money two months in advance of closing the transaction, or would have to fraudently support the existence of the money with faked bank account statements. Why take those risks when it can all be done at the closing table with a paltry $500 or less in extra costs?
After a great deal of thought and analysis, I have come to the conclusion that the answer to these problems lies in one of the original FHA Modernization proposals. That answer is to lower the buyer contribution to 1.5% of the sales price. This amount is enough to show that buyer has at least a small amount of flexibility in their budget and ability to save, while not punishing those the FHA program exists to help in the first place. I also don’t believe that there would be any significant increase in defaults between a 1.5% down payment and a 3.5% down payment as long as other underwriting standards were maintained and layered risk was considered by the underwriter. This would also substantially increase the risk of discovery for those fraudulent house flippers who were endangering the FHA program through the use of seller assisted down payment programs in combination with mortgage fraud and thus make a significant dent in another problem weighing down the FHA program.
So, the answer to the question I asked in the title to this article is “Yes”, but not for any of the reasons HUD used as justification for banning the programs. I look forward to hearing other opinions on this and would like to thank Krista Railey for inspiring me to re-examine this issue.
Tagged with: FHA DAP • fha down payment assistance • fha dpa • seller assisted down payment programs
Filed under: Down Payment Assistance
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carl…thx for your comments..i have a question…it relates to the 203k program..back in the 90’s..there was a 203k “investor loan” that was put on moritorim..by hud/fha….fraud was the reason this happened..prior to the stoppage this was very successful program..at thie time i was creator and the “original”203k consultant..at the time working with malone mortgage…the program could have been saved and should..a full court press with hud/fha should start to bring this program back….the requirements were basic..15% down..no owner occupant..use of the 203k system..buyer could assume exisitng financing and …blighted, inner city projects, project 1-4 units could be rehabed and sold or rented…thx again would appreciate your thoughts…john
if it were not for the fact that a 1 out of 400 loans in default is a non issue, and the ML-implode site has not discussed any connections it may have with hedge funds that shorted thru and created our banking mess…in the way a “non profit” out of boston targeted countrywide for having the nerve to help poor people buy homes, but forgot to mention that it was in bed with Paulson & Co(the hedge fund that created this bank crash, not related to Harry P) who has been working the FAS 157 and Basel 2 rules that have just increased the cost of owning a home for the next generation that all the felons in the world could not match…the real question is to ask if the ghost of George Wallace is a contributor at ML-implode. The FMWatch people have been screaming that “those” kind of people have no business getting loans and that in effect we should bring back share cropping…I dont see much difference in what is laid out at ML-implode and the racist nonsense spouted out in the 50’s and 60’s. Having been in the real estate business for well over 25 years, it is clear that racism has played a part in keeping poor people from enjoying the tax benefits of home ownership. In the old days, people were denied access to funding for homes by using phony declining market area maps. Then it was credit discrimination. Now we are told that credit scores dont discriminate…nonsense…I have seen people with almost the same issues and one gets a 710, the other gets a 500…why, well there is a problem and it comes from collection agencies, now that they can place information in peoples credit profiles…it is clear that these agencies target poorer people for multiple hits on the same issues and create the illusion of credit problems, where in more “mainstream” communities, magically this does not seem to happen on
credit profiles…My first wife(we had no kids together) was what I would call a closet liberal racist…a ralph nader nimby, who would use the word “tolerate” when describing non white people,as if her existence was blessing these poor souls…that is the tone one gets when reading through ML-implode…that how dare these poor people demand equal access to the american dream….don’t they know they are inferior…that is what I get from reading between the lines at ML-implode…real estate values have to do with “marketing, marketing, marketing”…not value and not location…give me an area that is unaffordable, and I can show you an over brokered area…real estate is an important part of the american step ladder…when lenders were avoiding lending to businesses as required by law, they just made Home Equity Lines of credit an easy substitute…it would be great if ML-implode wrote about the real issue that has caused this problem…members of the largest hedge funds and trading houses who sold and resold options and repo agreements to the same position to various people at the same time…take a look at the delphi bankruptcy to see how that type of activity created the mess we have today…25 billion in derivatives on only 2 billion in debt…ten people showed up for every dollar of debt, each claiming THEY had the rights to that debt…ML-implode would do itself a favor and cover the REAL reason we have had a mortgage meltdown…and stop trying to blame it on poor people who are actually paying debts ONTIME at a historically HIGH rate..when the MONEY STORE used to make loans to “unqualifiable non mainstream” borrowers, they had about a 35% non performing issue..and ended up with yoyo houses that kept sliding into new issues with each new generation..even in the worst locations , subprime non performing today is less than 25%…but folks like ML-implode dont want to look back at facts..just want to
help some hedge funds make some money killing off the banking business…I am not looking to make slanderous remarks about ML-implode, but the problem in this real estate market is not that some denny’s waitress cant pay her mortgage and the world is now coming to an end…look up the derivatives issue with the delphi bankruptcy and then you will see how the mortgage traders(not the smaller originators that ML-implode complains about) crashed and burned by selling the same derivatives to different people, never expecting the music to stop…so there are those who could argue that the scam/fraud of selling the same derivative to different people would never have been exposed to the light of day if not for the downturn in the market and the failure of various loan pools…but that’s a bit like saying the pick pocket would never have been caught if the old lady did not hit him on the head with her purse and knock him down..enough said…the problem is NEVER the down payment…how many vets have VA loans…after WW2 what was the default rate…??? where were those down payments…there is no basis to argue that down payment is any type of problem…people dont need to have “skin” in the game to be responsible…they are either going to pay the bills or not…they are going to take a second job and work to pay the bills or not…I do a fair amount of short sale and loan modification work. I insist that the clients lose the suv and cable tv…and get some extra income…yes there are those who come to me with bumper stickers that say work is for idiots who dont know how to fish…and I usually show them the door…When the lending rules began to get enforced in the mid 90’s, it was not expected to work. much good has been done rebuilding the economic base of many inner cities of this nation by providing the funding that had been lacking along the way…look at what happens to a major bank when it does not have access to capital..it get’s folded…it is a miracle that these poor people had found ways to keep the homes in the area they lived serviceable. Once they had access to capital like the rest of america, things moved forward…I hope we don’t go back to the way things were…when there was not much hope…I hope ML-implode gives some thought to the lives that will be destroyed by this crusade against poor people…
Kudos to you Karl for a well written article. While I don’t agree with everything, I do agree that a solution that does not adversely impact market prices, mortgage insurance prices or eligibility for responsible borrowers that save their down payment is sadly needed. However, assistance should not be a burden to taxpayers or the MI fund.
Alex, I apologize but I can only read so much without a paragraph break. However, I will say credit does not solve a disconnection between prices and wages. The plight of the socioeconomically disadvantaged is not solved by credit, but moreover, through wage growth. Debt is not wealth nor is it financial security.
H.R. 6694 does not favor minorities or the economically disadvantaged who are not statistically favored by credit scoring. For many members of the community, the ability to produce an acceptable credit score is a greater barrier to home ownership than saving a down payment and/or qualifying for a bona fide down payment grant or community second.
I don’t know how you equate exposing so-called “non-profits” that generate millions in profits via down payment grant scams (note: IRS refers to them as scams so sick your lawyers on the IRS please) as being a crusade against the poor, but I suggest you consult your calculator and redo the math. Based on my math, an organization(s) generating $9 M to $21 M brokering down payment grants that doesn’t pay taxes or report income is the very epitome of a “cash cow” and the polar opposite of “non-profit.
Meanwhile, the “grants” are merely being added to the sales price so that the seller can give the funds for the down payment to the non-profit. What part of that isn’t bogus? Why doesn’t the seller just save the grant processing fee, and give the funds for the down payment directly to the buyer???
Oh, I know…. because the seller can’t as it is prohibited by law.
Is it okay for a 17 year old to buy beer as long as they give the money to someone over 21 to buy it for them?
No, it is not.
Then why is okay for a seller, who is prohibited from giving the buyer the down payment, to give the down payment to a third party to disguise the fact that the down payment is coming from them who is a prohibited source?
How is that not fraud???
Anyway, as always, I appreciate a lively debate, and appreciate your perspective and intelligence that you bring to the debate.