Rob's Rant

There has been a great deal of discussion of "Down Payment Assistance" programs lately.  There has been a rules change at IRS, and an attempted rules change at FHA.  These "DPA" programs are also part of the discussion of the FHA Modernization Act currently making its way through Congress. 

I would like to take the time to briefly spell out for you what the drama is about these programs, and what their future appears to be.

First, a little history.  From the beginning of mortgage lending, buyers who obtained financing had to provide some of their own money as a down payment, with their lender providing the rest as financing.  The old rule was generally 20% buyer's cash, 80% financing.

In the 1930s, as part of New Deal legislation, President Roosevelt established the Federal Housing Administration (FHA).  FHA was designed to standardize and stabilize the housing market nationwide, as well as allow more Americans to own homes.  To accomplish these admirable goals, FHA would sell Insurance to buyers, called Mortgage Insurance (MI).  This MI would insure the lenders against loss by insuring the amount less than 20% that the buyer put down.  So now a buyer anywhere in the country could put down just 3%, and the lender would lend 97%.  The buyer would purchase Mortgage Insurance from the Federal Government for the 17%.  This kept the lender's exposure still at 80%.

In 1994, the first Down Payment Assistance program was established in the Nehemiah Corporation (Source: Nehemiah Corporation website).  The purpose of Nehemiah Corporation was to increase homeownership among Americans.   This program really took off in the early 2000s.  Also several other companies came along with similar goals and strategies.  The most prominent of these other companies in the greater Phoenix area is AmeriDream, Inc.  But there are several.

How do they help more people get into homes, you ask?  By giving down payment money to the buyer.  FHA guidelines allow the 3% to come from many sources.  Buyers can receive gifts from family members, employers, or CHARITIES.  Nehemiah, AmeriDream, etc. have been set up as 501 3(c) charities so they are able to give the money to the buyer.  The charity puts up the 3% down, the transaction closes, and then the charity is replenished from the seller's proceeds, plus a processing fee.

You may read this and think, "No way! The Seller is giving the money to the Buyer in a paper-transaction."  Technically, the Seller isn't doing so because the transaction is already complete when the DPA receives its funds from the seller--which it proceeds to use for a future transaction.  Keep in mind we are talking about rules and laws, not necessarily common sense here.  Because of the timing of the gift, legally the DPA charities are permitted to state (correctly) that they are not giving the seller's money to the buyer (which is against FHA guidelines) but rather that they are giving money to the buyer, but then the seller is making a donation to the DPA after the fact.

So now we have a mechanism by which buyers can put down none of their own money--or the money of anyone they know, like their parents, their Church or other charity know them, or their employer.

In the height of the lending boom in the mid-2000s, there was really not much demand for this type of transaction.  Buyers were able in many cases to simply finance 100% of the sales price, and either buy Private Mortgage Insurance for the 20% difference, or borrow an 80% 1st and a 20% 2nd (the fabled 80/20 loan).  And so sellers had no reason to forgo 3% plus a processing fee, when they had a dozen full-price offers asking for no contribution whatsoever (remember those days?)

Fast forward to last year.  Lenders were getting skittish about low-down programs.  80/20 loans were dead, as were 100% loans with MI.  Heard about the foreclosure crisis?  The vast majority of the loans in foreclosure are low-down and zero-down loans.  And FHA decided to eliminate the DPA loophole.  FHA doesn't want zero-down loans on its books any more than the lenders do.  And recall, FHA was always supposed to be 3% down, not zero down.

The DPAs sued FHA.  They were granted an injunction on 10/31/07, to last until 2/29/08.  At which time, the judge would let everyone know if DPAs could continue, or if FHA was allowed to stop them from providing gift funds to buyers.  On 2/29, the judge ruled that FHA was not permitted to just drop these charities because FHA did not follow Government Agency procedures for rules changes.  He did not rule on whether or not FHA was right to eliminate this program, only that the procedures weren't followed.

On 6/16/08, FHA again announced a rules change eliminating the DPA loophole.  There is a mandated "comment period" allowing consumers, industry people, Congressmen and women, etc., to make their thoughts & opinions known to the Agency before the change is made final.  This "comment period" will end on 8/15/08.

It appears likely that, barring any procedural errors like last time, these DPA charities will be disappearing very soon--possibly as early as 8/16.  And since there will almost certainly be a new HUD Secretary as of 1/20/09 (new President, new Secretaries), count on the current Secretary eliminating this as soon as he is able.

Here is a Link to the actual rules change, if you are interested. 

http://edocket.access.gpo.gov/2008/pdf/08-1356.pdf  

Please take notice I have tried to simply present the FACTS today.  In my next post I will give a little analysis and opinion.  Keep an eye out!