FHA seller-funded downpayment assistance programs (wherein the seller of a property makes a donation to a non-profit, and then this same non-profit gives this money to the buyer for their down payment) have been on Death Watch for years. HUD and FHA have tried to eliminate them at various points, only to be stopped by legal challenges from the assistance providers themselves.
Looks like these programs will finally be killed, as reported by the Washington Post:
The fate of these seller-funded down-payment-assistance programs has been in limbo for weeks. The Senate version of the housing bill would have banned them. The House version would not. Negotiators crafting a compromise bill have agreed to the Senate’s position, which also is supported by the Bush administration.
"We’re going to yield to the Senate on that," said Rep. Barney Frank (D-Mass.)
The root of the problem with these programs is, and has always been simple:
- They default at a higher rate.
- They have, at face value, been a legal end-run on FHA guidelines which requires borrowers to bring 3% of their own funds to the table.
- Also, in practice, the sellers aren’t really paying anything, the sales price was simply inflated to cover the cost, and the buyers wind up with a larger loan.
Now, the use of these programs was perfectly OK, and many very good homebuyers used them to great advantage, so none of this should be taken as an indictment of a homeowner that used seller funded assistance to buy a home. (full disclosure, a handful of our personal clients used such programs over the years. Mortgage bankers are not to judge, only approve or deny a loan based on the allowable programs and guidelines.)
BUT as is often the case, a program that may be good for an individual family, may be a disaster when writ large across the entire spectrum of FHA borrowers (who skew toward lower credit quality in the first place.) And speaking of disasters writ large:
…seller-funded down payments present the single biggest challenge to its solvency. Borrowers who take part in these arrangements go to foreclosure at nearly three times the rate of borrowers who put their own money down, according to the [FHA]
The FHA’s solvency is at risk, and for them to execute their new role as the backstop for the home lending universe (a mission they did not ask for, but are going to get out of this credit crunch, sure as the world) these programs need to go away, and should have a long time ago. The taxpayers are the ultimate bagholders here.
No word yet on when the ban will take effect, but in all likelihood they will still be available for the balance of 2008. More on this as it develops.
In the meantime, if you are an aspiring homeowner, start saving, because the last true Zero Down option is having it’s epitaph chiseled.