RIP FHA Down Payment Assistance Programs, Not So Fast
Posted by: admin in mortgage industry
Here’s another guest post, this one comes from Josh Lewis. Josh and I have sparred over many topics in the mortgage space and through that conversation I’ve learned a lot from Josh. I have tremendous respect for him and his understanding of the mortgage industry.
Josh Lewis has assisted California homeowners as a Certified Mortgage Planner, Certified Liability Advisor and licensed real estate broker since 1995. Josh is a recognized expert on mortgage planning, equity management and the cyclical trends in real estate. You can learn more at his website www.JoshLewis.net or contact him via email at info@JoshLewis.net.
Lost in all of the hoopla and back patting after the passage of the recent housing bill is an important provision that makes it illegal as of October 1 for sellers to fund the down payment for buyers of their homes by funneling the money through a non-profit third party. These down payment assistance programs (DAP’s) have been a huge support and source of liquidity in the current market. FHA originations are at their highest levels in over a decade an currently 2/3rds of all FHA loans make use of down payment assistance programs to effectively create an FHA 100% financing program.
Banning DAP’s has been on HUD’s radar for several years due to the fact that loans with seller funded assistance default at nearly 3 times the rate of traditional FHA loans where the buyer provides their own funds to close. This isn’t exactly an apples to apples comparison because HUD will continue allowing down payment assistance from 3rd parties not related to the transaction which can mean family members, employers and government entities among others.
When comparing FHA loans with 3rd party down payment assistance and seller funded down payment assistance the default rate is pretty similar. Seller funded assistance results in a 94% success rate while 3rd party assistance yields a marginally better 95% success rate.
At the end of the day, it’s great that the government is looking out for the bottom line and seeking to minimize losses from FHA loans in a declining housing market. However, there are a few important things to consider. First, we must recognize that this will have a further negative impact on an already weak housing market. Second, we must remember that the GNMA bonds that all FHA and VA loans are placed in have only resulted in a loss one time in their history when HUD made an ill timed attempt at a negative amortization program during a housing downturn.
These are full doc loans with a proven system of mortgage insurance that protects against losses even in periods like the early 90’s when home prices took a pounding. With that in mind a bill has already been introduced in Congress to authorize the use of seller funded DAP’s with some precautions. The new program will allow assistance to anyone with a credit score above 680 (which correlates to a higher likelihood of repayment mitigating the higher default rate of loans with seller assistance.) Borrowers with scores from 620 to 680 would also be able to use seller assistance but would be subject to higher mortgage insurance premiums to cover the losses from a higher default rate. The bill leaves open the possibility of opening the program to those with scores below 620 but doesn’t specifically authorize it.
The bottom line is that FHA currently funds nearly 20% of all loans in the US. If 2/3rds of those loans disappear with the banning of DAP’s you’ll see almost 15% of the liquidity sapped from an already credit starved market. If half of these borrowers manage to scrounge up a down payment from somewhere else, you are still looking at 7-8% of current buyers being taken out of the market.
If we’re going to outlaw DAP’s, how about we wait for a healthy market that can handle a punch to the gut. Until then, I recommend supporting HR 6694 to allow down payment assistance with proper safeguards to protect the long term viability of FHA loans.
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