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The comment period for HUD’s rule banning the use of seller assisted down payment programs is still underway but in the meantime, as I noted in my previous post today, House Financial Services Committee Chairman Barney Fran, D-Mass., recently told The Washington Post (registration required) that the House has agreed to accept Senate provisions that ban seller funded downpayment assistance on FHA loans and impose a 12-month moratorium on the charging of risk-based premiums by the FHA. The White House has also dropped opposition to the bill, so it is now on the fast track to passage.
As I spend time reading all the websites that seem to rejoice over reciting every detail of the downfall of the mortgage industry, I see many comments bringing attention to HUD’s efforts to get rid of seller paid down payment assistance. I usually find that these comments are being made by those with no access to any real information other than the misleading and often inaccurate numbers issued by the political appointees at HUD.
I’m often amazed when supposed experts issue opinions on subjects that I actually know something about. It is frightening how often the so-called experts are completely wrong. Here is a recent example.
I usually try to limit political comments in this blog since it is primarily intended to be a training and guideline update source designed to help loan officers originate and close FHA loans. However a June 21, 2008 editorial in the Wall Street Journal entitled “The FHA Time Bomb” has such a smörgåsbord of misinformation and misdirection that I feel compelled to comment.
HUD continues to use higher default rates associated with loans using DPA as their rationale for killing off the non-profit down payment assistance programs. However, you can’t use HUD’s raw statistics to say DPA causes a higher foreclosure rate, only to show that DPA is associated with a higher foreclosure rate. The reason is that these raw figures aren’t adjusted to account for other factors such as credit, debt ratio, time on the job, local economic conditions etc.
Looks like there is hope after all. I had feared that FHA mortgage reform would die a slow death once the FHA limits were raised as part of the recent fiscal stimulus package. But it looks like FHA reform is actually moving ahead.
According to Congressional Quarterly, (in an article highlighted on the KnowledgePlex website since viewing the original requires a subscription) the major stumbling block to moving forward with the bill has been the House of Representatives’ addition of an affordable housing trust fund to their version of the bill. An agreement has been reached to move ahead without either establishing nor pre-empting the fund.
The real estate market is crashing around us. Refinances get harder to finish every day. Usually because the borrower’s home is worth less than it was when they bought it two years ago. Subprime lending is a faint shadow of what it used to be. Every day FNMA and Freddie Mac or the mortgage insurance companies tighten up the reins on us just a little bit more.
Today, Countrywide – the biggest or next to biggest lender in the country most of the time – actually had to make an announcement that it wasn’t going to file bankruptcy in order to stop its stock from falling further!
Worst of all, today Freddie Mac announce that it had lost $2.02 billion in the third quarter and “absorbed both a $1.2 billion provision for credit losses as well as a $3.6 billion charge in mark-to-market activity for its portfolio assets.”
This afternoon the U.S. District Court for the District of Columbia has issued an injunction on behalf of Partners in Charity Inc., Futures Home Assistance Program, Sovereign Grant Alliance, Genesis Foundation, Home Down Payment Gift Foundation, Freedom Home Baptist Church, Inc. and the Dove Foundation, Inc. against the HUD rule to eliminate seller funded down payment assistance programs. This injunction opens the door for sellers to continue use of down payment assistance programs until a final resolution on the rule is determined.
I am normally a huge fan of the Competitive Enterprise Institute and everything they do to support the cause of freedom in the world. John Berlau, their director of the Center for Entrepreneurship has recently published a commentary which has made its way through the major papers and is available here or here.
In the commentary, Mr. Berlau argues against expanding the scope of FHA and places FHA programs in the same basket as subprime loans by throwing out a few statistics and some anecdotal evidence from particular areas. In the end, although Mr. Berlau does highlight some important areas to watch, he has some of the facts skewed just enough that it puts his conclusions at issue. The commentary states:
For the past three years, delinquency rates on the oh-so-safe mortgages insured by the FHA have consistently been higher than even those of the dreaded subprime mortgages. In the last quarter of 2006, for instance, the delinquency rate for subprimes had increased to 13.33% in the National Delinquency Survey compiled by the Mortgage Bankers Association. But in the FHA category, the rate had risen to 13.46% — “a new record.”
Nationally, FHA-backed loans do have a lower foreclosure rate than subprimes do, but one that’s nearly twice as high as the rate for all mortgages. And in certain regions, FHA-insured loans account for a disproportionate share of mortgage woes.
Please note the logical inconsistency there. Why would FHA foreclosures be lower than subprime mortgages if the delinquency rate is higher? There are several possible reasons which will indicate that FHA loans are a very different bird than subprime mortgages.
