Advertisements

There is a great conversation going on about a Friday, August 21, 2008 post over on the Blown Mortgage blog regarding seller funded down payment assistance programs. I encourage everyone to go and take a look at it before reading the rest of this column. The conversation is centered around a guest post by Josh Lewis entitled “RIP FHA Down Payment Assistance Programs, Not So Fast“.

As I expected would occur on a blog which keeps a necessary sharp eye on the dirty underbelly of the mortgage business, most of the commenters disagree with Mr. Lewis’ opinion that down payment assistance programs should be saved.

In truth, I too think that some of Mr. Lewis’ numbers are a bit off, but the discussion highlights an issue I have written about repeatedly on this site. Namely, that the statistics being cited by those who oppose down payment assistance are at best useless, while most people completely miss the point on why down payment assistance programs should be saved and thus how to solve some of the problems.

In the column Mr. Lewis basically makes the point that loans utilizing down payment assistance comprise a significant portion of the total FHA loans being insured and thus getting rid of the program, which has helped so many while the economy is in a downturn, will be a “punch in the gut” to the housing market while it is already down.

The disagreeing commenters throw up the usual arguments about the higher default rates associated with down payment assistance programs as they are implemented now, along with the classic “skin in the game” argument that those who put some money into the transaction will not default. Again, I encourage you to go and take a look at the post if you haven’t already.

Interestingly, one of the commenters brings up an excellent, although potentially confusing, post on Calculated Risk entitled “Default Statistics, Or Mortgage Math Is Hard” which explores the nature of mortgage statistics.

Although this was not its intended purpose, the Calculated Risk post cited above successfully supports something I have been arguing for some time now. Most mortgage analysis above the level of the individual underwriting of files is based on such an incomplete set of facts that the conclusions are practically worthless. For evidence of this I’ll cite the whole mortgage/credit crisis we’re in right now in spite of the best efforts of all the wise and wonderful credit analysts.

To say that down payment assistance programs are “associated with defaults” is not the same thing as saying DAPs are the cause of those defaults. Those opposed to the DAPs compare the default rates on loans without seller assisted down payments to those that did include assistance as evidence to show that causality. I mean, it makes sense that if those other loans made at the same time had a lower default rate, then the seller assisted down payment is the only difference, doesn’t it? Unfortunately, that is not the case. There are countless other differences that haven’t been taken into account. Most significantly – mortgage fraud. But there is more.

The theory has always been that FHA underwriting was supposed to be “common sense” underwriting. With the advent of automated underwriting, some lenders have deviated from this standard quite a bit.

I personally have had many years of FHA experience both with and without down payment assistance. (By the way, I was just as successful before down payment assistance programs and with a near 5% down payment requirement for FHA loans as with a 3% down payment which came out of the sales price. My defense of down payment assistance has nothing to do with my wallet.) My own personal observation is that most of the defaults can be associated just as strongly with lax underwriting standards in other areas such as debt ratios, job stability, length of rental history as they can be with DAPs. These other items don’t make it into the analysis beyond a few studies that attempt to work in the credit score as a factor.

If a loan goes through automated underwriting with down payment assistance, a 50% debt ratio, and no previous history of even paying rent, I’m not going to agree that having the borrower putting down their own measly 3% down payment would stop a foreclosure when that borrower gets laid off and takes a month to find a new job. Many loans like this were made over the past few years and the defaults will get blamed on seller assisted down payment programs.

Does it not make common sense that a loan which is deficient in one aspect should be required to have extra strength in another? For example, when a borrower needs down payment assistance should they also be allowed to have a payment at the maximum allowed debt ratio? If they default, which factor caused it?

As one of the commenters noted, would we even be worrying about this if there weren’t so many other problems with the economy that are causing defaults among all types of borrowers?

FHA exists in order to provide mortgage alternatives to those borrowers who are too risky for the conventional mortgage world. Given the nature and objectives of the FHA program, is it the best policy to throw the baby with the bath water in order to make it a completely “safe” program if there is a better alternative?

Most people aren’t aware that the default statistics of all FHA lenders, including each individual mortgage broker office which participates, are monitored and lenders whose default statistics are too high are supposed to be dropped from the program. By default, I am referring to the very earliest sign of a problem – late payments. Maybe if the political appointees at HUD put a little more energy into enforcing that policy and thereby pushing lenders to use common sense when originating mortgages, we wouldn’t even be having this discussion.

FHA Down Payment Assistance - What You Can Do To Save It


Related posts:

  1. FHA Down Payment Assistance – Down But Not Out?
  2. FHA Guidelines: FHA Down Payment Assistance On The Chopping Block?
  3. FHA Down Payment Assistance: An Opinion From Someone With Facts
  4. FHA Down Payment Assistance Ban Update
  5. News Flash – FHA KOs Down Payment Assistance Programs!

Tagged with:

Filed under: Down Payment Assistance

Like this post? Subscribe to my RSS feed and get loads more!