According to a report in Realtor Magazine, HUD spokesman Lemar Wooley has stated that the proposal is still on track. As I suspected from the fact that the original Mortgagee Letter 09-15 was fairly fuzzy on the details, it appears they just got a little ahead of themselves.

According to Realtor Magazine:

The technical details are still being finalized and will soon be published in a mortgagee letter and posted on our Web site,” Lemar Wooley, a HUD spokesperson, told REALTOR magazine Wednesday afternoon.

There are many problems to be worked out – such as how the money can be used as a down payment, how they intend to deal with the fact that some people may have unsurfaced tax problems that interfere with paying the money back, exactly who will loan the money and how they will do it and so forth.

In the meantime, hold your breath. Maybe they’ll get it right the first time, unlike FHASecure and Hope for Homeowners.

Usually the process of revoking a Mortgagee Letter would involve issuing another Mortgagee Letter with updated rules. Looks like someone at HUD may have gotten ahead of themselves!

For the time being, there is no monetization of the $8000 tax credit. Even if they should re-instate it, it will be months before lenders would be able to get geared up to do it.

Sorry for the unnecessary excitement.

P.S. For anyone who want to see what the mortgagee letter actually said, I have linked the original post to a copy of the now non-existent Mortgagee Letter 09-15.

Entities that can offer tax credit advances with second liens.

• Federal, state, and local governmental agencies and nonprofit instrumentalities of government.
• FHA-approved nonprofits.

Additional information about these entities:

• Government agencies and instrumentalities of government are described in handbook HUD-4155.1 REV-5, paragraphs 1-13 A and B.
• FHA-approved nonprofits can be found, per each Homeownership Center jurisdiction, at: http://www.hud.gov/offices/hsg/sfh/np/np_hoc.cfm

How the secondary financing works:

• The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the borrower. The second lien may not exceed the total needed for the downpayment, closing costs and prepaid expenses.
• The tax credit advance must provide that if the borrower does not repay the amount borrowed by the designated deadline, that principal and interest payments begin automatically.
• If payments on the tax credit advance are required, they must be included in qualifying the borrower and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to pay.
• If payments on the tax credit are deferred, the deferment must be for a minimum of 36 months in order for the payment to not be included in the qualifying ratios.
• The tax credit advance second mortgage must not provide for a balloon payment before ten years.

In a speech this morning HUD Secretary Shaun Donovan announced that FHA has come up with a way to allow first time home buyers to use the $8000 first time home buyer tax credit as a down payment at the time of purchasing a home. They will no longer have to wait until the following year and their tax refund to get the money.

Here are the exact words used by Secretary Donovan:

“We all want to enable FHA consumers to access the tax credit funds when they close on their home loans so that the cash can be used as a downpayment. So FHA will permit trusted FHA-approved lenders and HUD-approved nonprofits, as well as state and local governmental entities to “monetize” the tax credit through short-term bridge loans. We think the policy is a real win for everyone, ensuring that borrowers can tap into the numerous organizations that are already part of the FHA network to receive this additional benefit. FHA will be publishing the details shortly.”

At this time there has been no official HUD Mortgagee Letter released on this program, but it appears that HUD is going to amend the rules to officially allow borrowers to obtain a short term loan so that the money will be available at closing.

This has enormous implications for the housing market. As soon as more details are available, I will make them available on this website.

Here is the complete text of Secretary Donovan’s speech:

Prepared Remarks for Secretary of Housing and Urban Development Shaun Donovan at the National Association of Realtors Real Estate Summit – Advancing the U.S. Economy

Washington, D.C.
Tuesday, May 12th, 2009

Thank you so much. It’s great to be here for the National Association of Realtors Real Estate Summit. Thanks so much to Charles McMillan for the introduction. Let me also recognize: Dale Stinton, NAR Executive Director; Jerry Giovaniello, Senior Vice President of NAR; and Joseph Ventrone, NAR Vice President and former HUD staffer.

The theme of your summit is advancing the U.S. economy. Tha’s been President Obama’s mission every day since taking office, and I know we are all looking forward to brighter days ahead.

Let me give you an update on the President’s housing plan, Making Home Affordable, which will help 7 to 9 million homeowners stay in their homes, targeting those who have made every possible effort to stay current on their mortgage payments. First, we have taken action Administration-wide to reduce interest rates, which are now at historic lows. Second, we will assist 4 to 5 million homeowners who can’t otherwise take advantage of today’s historically low mortgage interest rates. Lastly, we have committed up to $75 billion to help an additional 3 to 4 million homeowners who are at risk of foreclosure modify their unaffordable mortgages into affordable ones.

I know that all of your livelihoods depend on the stability of the housing market so let me step back for a moment and share with you just how far we’ve come with the plan in such a short span of time. Since the President announced his modification plan on February 18th, rates on 30-year mortgages dropped to record lows, below 5%, and refinancing applications have surged. A typical homeowner can now refinance and save around $2,000 a year, the equivalent of a major tax cut. And the plan’s website has received almost 16 million page views. Servicers have received hundreds of thousands of applications, and tens of thousands of American families have modified their loans or refinanced.

14 of the largest servicers, representing over 75% of the market, have also formalized their commitments to implement the Obama modification plan and have already begun modifying loans. They have all committed not to foreclose on any one unless the household has been given a real opportunity to qualify for a modification. We are confident that banks and servicers will move as quickly as possible to modify these loans to avert additional foreclosures in the coming months.

Over the next month or so, we also expect to see substantial increase in loan modifications, which we anticipate will happen quickly and will help decrease the foreclosure sales numbers over the next few months. I do think that we have some early signs that the market overall is stabilizing. Since January, what we’ve seen is both home sales moving up and down around a relatively stable number and we are seeing the first signs that the rapid decline in home prices is starting to abate. Although I think it’s too early to say we are out of the woods until we get a couple more months of data, I am optimistic that housing markets will recover by the end of this year, if not earlier.

And we are taking action to further help the housing market recover. I’m excited to announce here at NAR that FHA’s policy on the “monetization” of the first-time homebuyer tax credit will soon be published. I know that you’ve been waiting anxiously to hear FHA’s position on the matter. We, like you, believe that this new tax credit is not only a tremendous opportunity for first-time homebuyers, but also an enormous benefit for communities struggling to deal with an oversupply of housing. According to estimates by the National Association of Home Builders, this new tax credit will stimulate 160,000 home sales across the nation – 101,000 of which will be first time buyers who will receive the credit. Another 59,000 existing homeowners will be able to buy another home because a first time buyer purchased their home.

We all want to enable FHA consumers to access the tax credit funds when they close on their home loans so that the cash can be used as a downpayment. So FHA will permit trusted FHA-approved lenders and HUD-approved nonprofits, as well as state and local governmental entities to “monetize” the tax credit through short-term bridge loans. We think the policy is a real win for everyone, ensuring that borrowers can tap into the numerous organizations that are already part of the FHA network to receive this additional benefit. FHA will be publishing the details shortly.
I know that as an organization you are all very concerned about the viability of FHA, and I want to thank the National Association of Realtors for your support and ongoing partnership with FHA. As we announced in our budget last week, I’m proud to say that we will not be asking the American taxpayer to support FHA’s single family program in the FY 2010 budget. HUD will be requesting expanded loan commitment authority for both FHA and Ginnie Mae with the expectation that FHA loan volumes will continue to be high while broader credit markets and the private sector recover from the credit crisis.

FHA volume has grown consistently. As recently as 2007, FHA volume for its flagship mortgage insurance program was $60 billion. By 2008, the volume had grown to $181 billion. For FY 2009, we are expecting $290 billion in forwards. For our FY 2010 budget, we are asking Congress for the authority to endorse an even higher volume – up to $400 billion in authorization for FHA insurance. That increased authority will allow HUD to endorse approximately two and a quarter million mortgages.

In addition to increased volume, the tightened underwriting standards in the conventional mortgage market are resulting in a substantial increase in borrower credit quality in the FHA portfolio. Over the period from February 2008 through March 2009, the average credit score for FHA-insured borrowers increased from 626 to 678. That change alone creates a more stable base of borrowers that will help to contain any increase in foreclosure activity on FHA-insured loans in the future.

Despite sufficient revenue for the single family program, FHA needs to change. We view FHA reform as key to changing the way that HUD does business. In this budget year and into the future, we will work with Congress to make sure that FHA has the right program mix and pricing structure, is actuarially sound, and has the organizational infrastructure to continue to expand homeownership opportunities to those families traditionally not well served by the private market place.

FHA’s market share – which was at just 1.9% in the fourth quarter of 2006 and reached 23.7% in the fourth quarter of 2008 – means that we must continue to ensure that FHA can play its critically important countercyclical role, serving as a backstop to the private mortgage market. FHA is working to realize its full potential to respond to the current mortgage crisis and cope with growing demand by investing in new technology and devoting additional resources to personnel. FHA was awarded additional funding of $4 million in the FY 2009 omnibus to enhance information technology and we are developing a modernization plan.

Our FY 2010 budget requests funding for IT investments to replace obsolete systems, and invests in infrastructure that can support our core systems in the future. New technology is needed to help improve fraud detection, underwriting, and risk management. This year, HUD will also be able to substantially increase hiring and address some of its personnel shortages. Thanks again to the NAR for being vocal on the Hill about FHA’s technology, infrastructure, and personnel needs.

The HUD budget also requests $100 million for the Housing Counseling Assistance program, an increase of $35 million over the level provided in the FY 2009. The housing crisis has illustrated that many families need help with the complex homebuying process and need a trusted place to turn when they face foreclosure.

Many families have also proven to be vulnerable to aggressive and misleading marketing of risky loan products and foreclosure rescue scams that are not in their best interest. In this environment, the need and demand for mortgage and foreclosure counseling efforts could not be greater. Along these lines, we are also requesting $37 million for an agency wide initiative to Combat Mortgage Fraud and Predatory Practices, which will enhance our ability to detect fraud and monitor lender originations in FHA.

This investment is part of President Obama’s commitment to helping consumers shop effectively and safely for homes and mortgages. That’s why we are committed to implementing the mortgage reforms under RESPA that are scheduled to take full effect on January 1st, 2010. We will implement the new RESPA rules as part broader reforms to the mortgage process that includes ensuring that RESPA and TILA are coordinated. This administration believes in providing consumers with clear and transparent information when they make the biggest purchase of their lives. I also know that YOU need clarity on RESPA and how it will be implemented and enforced. HUD is committed to working with you to answer your questions and make the implementation of the new RESPA rules as clear as possible. The updated RESPA rules will help consumers shop for the lowest cost mortgage, avoid costly and potentially harmful loan offers, and save an average of $700.

As many of you know there has been discussion and even litigation around the “required use” provision of the RESPA rules. The previous administration drafted this “required use” provision in a way that was confusing and flawed and neither protected consumers nor provided needed guidance to industry participants. Therefore, after an evaluation of more than 1,200 public comments, HUD is withdrawing the new “required use” definition and announcing our intent to propose revised language relating to this narrow provision of the final RESPA rule. I want to be clear that the Obama administration stands by the consumer protection intentions of the “required use” provision. Needed consumer protections are too important to allow confusion over one specific provision to hold up needed RESPA reforms. And while we work to propose a clearer, stronger provision, the existing “required use” provision will remain in place.

Obviously, as we look forward into the future, we must examine all of the factors in the housing industry that led us into this crisis in the first place- RESPA included. We will have serious, and at times difficult, conversations about putting into place common sense structures so that we don’t repeat the mistakes of the past and we may not agree on everything. But I do fundamentally believe that there are ways to make our current system simpler and more transparent that can benefit consumers, financial institutions, and the real estate industry.
Lastly, I’m happy to say that one of your own leaders will now be one of ours: Dave Stevens. Dave is our nominee for Assistant Secretary for Housing/Federal Housing Commissioner and I believe that Dave is one of the best in the mortgage business with experience ranging from mortgage originations, to secondary markets, to managing a national real estate firm. Dave brings a hands-on systems approach to mortgage origination, and is anxious to see first- hand the status of FHA’s systems and programs and to quickly put in place process and technology improvements in all facets of FHA’s operations. He will also help FHA become an important partner with you in driving energy efficiency and achieving savings that will make it possible for average American families to weatherize their homes. I look forward to having Dave aboard.
We have made much progress since President Obama came into office, but there is a long road ahead and our budget and our reform of FHA is just the beginning of our transformation process as an agency and as a country.

As HUD and the Obama Administration continue to aggressively respond to the housing and economic crisis, I hope that we can count on the realty community to help boost consumer confidence. As realtors, you play a unique role in your communities as counselors to American families looking to buy or sell their homes. You have your fingers on the pulse of the national real estate market, and you have the ability to spread important information to your clients about Making Home Affordable, mortgage and foreclosure counseling, and the positive trends in the market that we’re starting to see. Your leadership and counseling has the power to influence your local real estate market and local consumer behavior, I look forward to being partners with the realty community in your efforts to stabilize the housing market.

While we are without a doubt in a crisis, I know that together we can find and implement solutions that will help American families struggling to stay in their homes. We rise and fall together and together I know that we can meet our nation’s challenges and put our country’s economy back on solid ground.

I’m now happy to take any questions you may have.

When I first took the classes to get a real estate license and later a broker’s license, and then when I started training to become a loan officer, nothing was drilled into my head more firmly than the rule that any payments from the seller back to the buyer to cover down payment money were fraudulent and illegal. Now suddenly this particular money back from the seller was not a kickback as long as the money was funneled through a non-profit organization.

Yet at the same time I saw many deserving families who were ecstatic about becoming homeowners and who were ultimately very successful homeowners. They put up with a whole lot of extra scrutiny to qualify for an FHA loan instead of a subprime loan because owning a home was important to them. In fact, they went through a lot more than most of the high credit score, conventional loan borrowers who sold their previous home and made their relatively painless down payment. As a matter of fact, my personal experience with seller assisted down payment programs is that this is the group of borrowers who most appreciate the opportunity to buy a home and fight tooth and nail to keep it and foreclosures are very rare. This experience shades my view of the program.

On the other side of the coin, past loans where seller paid down payment assistance was involved do have higher default rates. They have had higher percentages of straw buyer fraud than other loans. They have had too many instances where the down payment and transaction fee were just added on top of the listed price. But are these issues with the seller paid down payment assistance programs or are they underwriting and quality control issues.

I don’t know if seller paid down payment programs are the answer or not. Maybe they are, or maybe some program similar to the VA 100% loan program would make more sense.  I do believe that lack of a down payment isn’t the huge factor causing foreclosure that some of it’s critics suggest. I believe the problem is layering of risk – specifically high debt to income ratios. I know of lenders who have studied their own numbers and come to the conclusion that the difference between the default rates on FHA loans with seller paid down payment assistance and FHA loans without it would essentially disappear with some tighter underwriting standards.

I don’t believe the bill which is presently being pushed to restore seller paid down payment assistance has the right guidelines to make the program work. I’m going to discuss this in more detail over the next few posts, but in the meantime let me direct you to some viewpoints on each side of the argument:

• LA Times – Down-payment aid program resurfacing
• Subtly Misleading LA Times Article Distorts In Favor of Seller-Funded Downpayment Programs
• LA Times Glosses Over Critical SFDPA Issues
• Are Seller Assisted Down Payment Programs Bad For FHA?
• FHA Down Payment Assistance On The Chopping Block?
• FHA Mortgage Hysteria From The Wall Street Journal
• FHA Down Payment Assistance – Down But Not Out?

As you can tell by the titles, a few of these articles are from some time ago before seller paid down payment assistance was discontinued, but the same arguments have been going on for ages. My own opinion of this issue has changed over time, I’d love to hear your thoughts about it.

I guess the perfect evidence that this is the same bill is the fact that Nehemiah issued a press release on January 20, 2009 stating that:

According to Nehemiah Corporation of America, the Congressional Budget Office (CBO) confirms that FHA Seller-Financed Downpayment Reform Act of 2009 (H.R. 600) is similar to the previous DPA Bill (H.R. 6694) in that it would not cost the federal government any money for the next five years. This is due largely to the self-funding mechanism that sets premiums based on an individual’s credit scores.

Also according to the press release:

Creating opportunities for homeownership will be the cornerstone to strengthening a crumbling housing market and breathing life back into the economy,” said Mr. Syphax. “With credit scarce and homeownership harder to achieve than ever, the consequences of removing a program that created 50,000 homeowners a month is unfathomable and will likely further devastate the housing market, not to mention communities across the country that have come to rely on these programs. Congress must ensure that the pending bailout of Wall Street does not undercut the important role that consumers play in any economic recovery, not to mention the liquidity programs like downpayment assistance provide at no cost to taxpayers.

It’s for times like these that the government initiated the Federal Housing Association during the New Deal, and its role is as germane now as it ever was,” continued Mr. Syphax. “Washington needs to follow H.R. 600’s lead and see what is so plainly obvious to the CBO. DPA can provide the liquidity and access to homeownership needed to push billions of otherwise lost dollars into the housing market and won’t cost taxpayers, Treasury or the U.S. government a thing. Language is already drafted through a bi-partisan Bill and it has been vetted by the CBO. Now Congress just needs to use it!

I have discussed seller assisted down payment programs at length elsewhere on this site, so I won’t burden you again with a full analysis right now. I know that as prices were going up, I helped many, many people become homeowners using this program. It has been a good thing for those people I personally know. On the other hand, making homes easier to buy with very little sacrifice and preparation, using this program as well as others, contributed to the housing bubble that we are experiencing now. There may be other, more effective methods which can be developed to help people buy up the homes sitting on the market now. Methods which contribute more toward a housing system with a strong foundation which doesn’t experience these bubbles and crashes.

Regardless, whether you support or oppose seller assisted down payment programs, the time has arrived to start paying attention again.

Copyright 2009 – Carl Pruitt|FHA Loan Advice|FHATrainingSource.com

“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.

But they aren’t the only game in town.

There are literally thousands of federal, state, county, local and charity based grant programs available all over the country. During the last few real estate boom years, sellers had no patience with waiting while potential buyers jumped through all the hoops necessary to qualify for these programs, but times are different now. Those sellers who once had no patience have now had their home for sale by owner, listed and expired with 3 different real estate agents and on the market for over a year. They will jump at any buyer they can get and do whatever they can to help sell that buyer their home. They will now wait 45 days for a buyer to get qualified for down payment grants.

Just a quick glance at some programs available in my own immediate area gives a good example of what is available in other areas.

In Dekalb County, GA the DeKalb County Community Development Department has the DeKalb County First-Time Homebuyer Program will give first time buyers up to $8000 if they meet income requirements and go through a counseling program.

Those same buyers may be eligible for as much as $5,000-$20,000 in additional funds through the Georgia Dream Homeownership program, under the Georgia Department of Community Affairs.

In Northeast Georgia, the Community Foundation for Northeast Georgia, the IMPACT! Group, The Brand Banking Company and a network of local builders are partnering to form the Northeast Georgia Down Payment Assistance Program for consumers who buy certain homes in Northeast Georgia. Many other local banks will be following suit. They need the builders to pay back their construction loans.

The National Association of Realtors provides a resource for locating local down payment assistance programs on their website. Their site is being updated in response to this situation and will be down until October 8, 2008.

There are many other similar programs all over the country. Some of them provide outright grants and others provide second mortgages which must be paid back upon selling the home. For FHA loans, the grant programs are the ones you are looking for.

Mortgage applications have dropped precipitously over the last few weeks for other reasons, so it will be interesting to watch how the ban will affect home sales if it lasts very long. Although we do need to let the air out of this real estate/credit bubble, watching people hurt financially due to all this uncertainty in the mortgage market is painful for everyone.

As would be expected, detractors of the down payment assistance programs were out cheering today, while supporters were touting a recent report from the Congressional Budget Office on “The FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008″ (H.R. 6694) which reportedly confirms that seller-financed DPA will generate $65 million over the next five years and save taxpayers $13 million next year.

Although the behind the scenes deal that had been arranged to save down payment assistance programs like Nehemiah, Ameridream and Futures was pushed to a cold back burner due to the current credit market crisis, word on the street is that it will be discussed again once a bailout bill has been worked out.

Check back for more details later.