Down Payment Assistance Bites The Dust

By Marcie Geffner, Bankrate.com

A countdown clock on a Web site operated by Nehemiah Corp. of America is ticking off the days, hours, minutes and seconds until a new government ban will terminate virtually all seller-funded down payment assistance programs in the United States. But the clock may be stopped, now that a bill has been introduced in Congress that would reverse the ban.

The clock will tick off its last second Oct. 1, the last day when homebuyers will be able to use seller-funded down payment assistance with any mortgage backed by the Federal Housing Administration, or FHA, a division of the U.S. Department of Housing and Urban Development, known as HUD.

The ban is part of the Housing and Economic Recovery Act of 2008, which President Bush signed into law July 30. The act states that a borrower's down payment for any loan backed by the FHA can't be provided before, during or after the sale by:

The seller.
Any other person or entity that financially benefits from the transaction.
Any third party or entity that is reimbursed, directly or indirectly, by the seller or any other person or entity that financially benefits from the transaction.
An "entity that is reimbursed ... by the seller" clearly refers to seller-funded down payment assistance programs, which collect "donations" from home sellers and then "gift" those donations to buyers, who use the funds to purchase the seller's home. The seller also pays a fee, typically of several hundred dollars, to the organization.

More than 1 million buyers and sellers have utilized these programs, according to industry figures. The two largest organizations, Nehemiah in Sacramento, Calif., and AmeriDream in Gaithersburg, Md., have processed more than 300,000 and 250,000 transactions, respectively, according to company statements. Since 1999, AmeriDream alone has processed more than $26 million worth of the payments in chunks averaging about $3,600 per "gift." Numerous smaller down payment assistance organizations also operate throughout the United States. Both Nehemiah and AmeriDream also sponsor homebuyer counseling programs.

Nehemiah is still taking applications from buyers and accepting donations from sellers, according to CEO Scott Syphax. The housing recovery act specifies that seller-financed down payments can still be utilized as long as the borrower receives credit approval from the lender prior to Oct. 1.

Act now to tap seller-funded down payment
Homebuyers will have very few, if any, opportunities to buy a home without a down payment after the ban on seller-financed down payments becomes effective.

Conventional loan programs that allow seller-funded down payment assistance are "few and far between" and have accounted for less than 3 percent of Nehemiah's transaction volume, Syphax says.

An FHA-backed loan with a seller-funded down payment was "the last of the 100 percent loans available," says Peter Thompson, a senior loan officer with Professional Mortgage Partners in Downers Grove, Ill. "The conventional homebuyer programs have pretty much all done away with doing this. This is something that has been specific to FHA loans for quite some time."

Indeed, seller-funded down payments have become so closely associated with FHA-backed mortgages that more than 33 percent of loans backed by the agency last year included such assistance, according to FHA data. The agency is still working out the details of how the ban will be implemented, says HUD spokesman Lemar Wooley.

Buyers who want to use a seller-funded down payment may decide to "move up their time frame to (buy a home) a little quicker," so they can take advantage of Controversy swirls around seller-funded down payments
The FHA has tried for some time to ban seller-funded down payments in connection with FHA-backed loans. The agency argues that sellers' "donations" result in artificially inflated house prices and that homebuyers who use such assistance are more likely to default on their loans. Two federal government reports in 2005 concluded that these programs made homeownership more expensive for homebuyers who used them. The IRS has revoked some of the providers' status as tax-exempt nonprofit organizations.

Proponents say these programs create opportunities for minority and low-income families to become homeowners.

Thompson believes the ban will push some well-qualified buyers who only lack a down payment out of the housing market, though he also thinks it would make sense to take a closer look at these programs to make sure people aren't abusing them.

Seller-funded down payment assistance "is one of the things that is getting more people into the housing market when this is what we really need to get the economy going," he says. "It doesn't seem like the timing (of the ban) makes sense."

FHA may raise cost of mortgage insurance
The housing recovery act also makes two other important changes to FHA loan programs. As of Oct. 1, the same day when seller-funded down payment assistance will be ended:

The minimum down payment required for an FHA-guaranteed loan will be increased from 3 percent to 3.5 percent.
A brand-new risk-based pricing structure for FHA mortgage insurance will be discontinued.
The FHA had pushed hard for its plan to charge riskier borrowers higher mortgage insurance premiums. HUD Secretary Steve Preston said in a statement that without such flexibility, the FHA will have to increases prices for all borrowers or eliminate its refinancing program for subprime borrowers.

Program providers plan to fight back
Homebuyers may want to monitor H.R. 6694, a bill introduced by Rep. Al Green, D-Texas, that would require the FHA to accept seller-financed down payments and authorize the agency to apply a risk-based pricing structure for FHA mortgage insurance on loans that utilized such down payments. The pricing would be adjusted on the basis of the borrower's FICO credit score. The bill has two co-sponsors, Reps. Gary Miller, R-Calif., and Maxine Waters, D-Calif., and has been referred to the House Financial Services committee.

"The recent housing bill may have slammed the door on working families, but we are heartened that Congress has begun to take steps to re-open it," AmeriDream president Ann Ashburn said in a statement in support of the bill.

Nor has Nehemiah given up on reinstatement of the seller-funded down payment assistance model, Syphax says. Yet even he hints that perhaps these programs shouldn't be brought back in exactly the same format as they previously existed. He says the programs were "tremendously effective," but "could and needed to be improved."

"We will be fighting to bring back the program as we always thought it should have been and that we have been asking HUD for over a decade to help us create, which is a program with higher standards, more services provided to homebuyers and one where there is effective data capture, so we can continue to learn how to improve the program even further," he says. "That's what we're fighting for."

Provisions of Housing and Economic Recovery Act 2008

National Association of REALTORS®
Summary of Key Provisions of H.R. 3221 - The Housing Stimulus Bill (as of 7/30/08)



H.R. 3221, the “Housing and Economic Recovery Act of 2008,” passed the House on July 23, 2008, by a vote of 272-152. On Saturday, July 26, 2008, the Senate passed the bill by a vote of 72-13. The President signed the bill on July 30, 2008. The bill includes the following provisions:

* GSE Reform – including a strong independent regulator, and permanent conforming loan limits up to the greater of $417,000 or 115% local area median home price, capped at $625,500. The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).
* FHA Reform – including permanent FHA loan limits at the greater of $271,050 or 115% of local area median home price, capped at $625,500; streamlined processing for FHA condos; reforms to the HECM program, and reforms to the FHA manufactured housing program. The downpayment requirement on FHA loans will go up to 3.5% (from 3%). The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).
* Homebuyer Tax Credit - a $7500 tax credit that would be would be available for any qualified purchase between April 8, 2008 and June 30, 2009. The credit is repayable over 15 years (making it, in effect, an interest free loan).
* FHA foreclosure rescue – development of a refinance program for homebuyers with problematic subprime loans. Lenders would write down qualified mortgages to 85% of the current appraised value and qualified borrowers would get a new FHA 30-year fixed mortgage at 90% of appraised value. Borrowers would have to share 50% of all future appreciation with FHA. The loan limit for this program is $550,440 nationwide. Program is effective on October 1, 2008.
* Seller-funded downpayment assistance programs – codifies existing FHA proposal to prohibit the use of downpayment assistance programs funded by those who have a financial interest in the sale; does not prohibit other assistance programs provided by nonprofits funded by other sources, churches, employers, or family members. This prohibition does not go into effect until October 1, 2008.
* VA loan limits – temporarily increases the VA home loan guarantee loan limits to the same level as the Economic Stimulus limits through December 31, 2008.
* Risk-based pricing – puts a moratorium on FHA using risk-based pricing for one year. This provision is effective from October 1, 2008 through September 30, 2009.
* GSE Stabilization – includes language proposed by the Treasury Department to authorize Treasury to make loans to and buy stock from the GSEs to make sure that Freddie Mac and Fannie Mae could not fail.
* Mortgage Revenue Bond Authority – authorizes $10 billion in mortgage revenue bonds for refinancing subprime mortgages.
* National Affordable Housing Trust Fund – Develops a Trust Fund funded by a percentage of profits from the GSEs. In its first years, the Trust Fund would cover costs of any defaulted loans in FHA foreclosure program. In out years, the Trust Fund would be used for the development of affordable housing.
* CDBG Funding – Provides $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.
* LIHTC – Modernizes the Low Income Housing Tax Credit program to make it more efficient.
* Loan Originator Requirements – Strengthens the existing state-run nationwide mortgage originator licensing and registration system (and requires a parallel HUD system for states that fail to participate). Federal bank regulators will establish a parallel registration system for FDIC-insured banks. The purpose is to prevent fraud and require minimum licensing and education requirements. The bill exempts those who only perform real estate brokerage activities and are licensed or registered by a state, unless they are compensated by a lender, mortgage broker, or other loan originator

Next foreclosure wave sparked by walkaway homeowners?

Some believe housing recovery is still years away
By Tom Kelly, Wednesday, July 23, 2008.

Inman News

Where's the bottom? Are Phoenix, Denver, Sacramento, South Florida and Las Vegas still in a tailspin? Is it time to make a run at a second home you felt you could never afford?

Perhaps we have been too driven and proud of the fact that 70 percent of all families in this country own their homes. In order to get there, lenders, real estate agents and consumers dipped into a "too easy" bucket where the value of ownership sunk to the same level of the cost of getting in the door -- zero.

Sadly, greed became confused with privilege. We are now feeling the results of too much credit being offered to poor or borderline borrowers, overeager investors betting on dreams of continued double-digit appreciation, and impassioned move-ups wanting more housing than they could realistically afford.

The housing specialist first to label and predict a "foreclosure tsunami" for several areas of the country now predicts another round of foreclosures by homeowners who can afford to make their payments yet choose to walk away from their homes. When and if they do in any significant volume, it could lead to a housing meltdown.

"Virtually everyone missed the fact that housing appreciation is far more powerful to keep people paying than the legal consequences of default," said Tom DiMercurio, a veteran of 38 years in the foreclosure business and former president of Fidelity National Asset Management Solutions. "For many folks in different states and different stages in their life, defaulting on their home loan makes economic sense."

DiMercurio was the brains behind BuyBankHomes, a site that provides foreclosure information to interested parties such as consumers, investors and real estate agents. He also started Denver-based The Mercury Alliance, which offers conventional REO sales, management services, plus Internet auctions, and Paradigm Default Services, an operational platform for lenders and real estate brokers.

A decade of cheap money and incredibly flexible loan programs offered by many lenders sparked overbuilding by lenders, a flip-and-run mindset for speculators, and unrealistic expectations for first-time home buyers blinded by the low payments of a short-term loan. While the equity gained by rising home prices can cover many ill-conceived loan mistakes, a flat or sinking market only compounds problems for lenders and owners.

Credit is now tighter and borrowers are being screened and actually scrutinized for the first time in years. Yet, given the developments of the past 15 months, the key to getting a critical flow back into the housing picture may mean revamping the entire once-conservative loan-qualifying process.

"I also believe, that given the size of the growing number of people that have been and are continuing to be foreclosed, there will be no growth in the number of home buyers/borrowers -- unless a foreclosure will be looked upon as a 'late,'" DiMercurio said. "In order to have any kind of loan growth in the future residential market, something less than even subprime credit must be made satisfactory to lenders. And it won't be easily substituted with down payment since values are also in the tank."

Values are not in the tank everywhere, but homes certainly are not rising quickly in value and they are taking longer to sell. Multiple listing service figures that show a drop in new listings must be filtered with the number of would-be sellers not wanting to compete in a slow or flat market.

Some sellers, especially those in some select second-home markets, continue to believe that they are in the driver's seat. A recent offer on a $739,000 home with three bedrooms and two baths in 1,440 square feet near Lake Tahoe did not even draw a counter from the seller when a potential buyer offered $669,000.

The buyer did his homework and made what he felt to be a generous offer. In seven sales in the immediate area from May 2007 through March 2008, the highest paid was $453 per square foot and the lowest price was approximately $370 per square foot. The buyer truly wanted the home and offered more than the highest price per square foot.

All real estate is regional. Blips and dips in one neighborhood can resemble a flat line just a few blocks away. But a return to a national "feel good" housing atmosphere likely is years away, not months. The components are varied and complex and certainly will not be sorted out this year. How is that even possible anyway when some people believe defaulting on your home loan makes economic sense?

Understanding What Causes Interest Rate Movement

The Federal Reserve and Mortgage Rates

Understanding What Causes Interest Rate Movement



Consumers are often misled when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. Often the media is the culprit causing the confusion. In the last few years, the Fed has taken action that caused mortgage interest rates to move in a direction other than what consumers expected, because the media provided weak reporting on the subject.

The Federal Reserve affects short-term interest rate maturities, the Fed Funds rate, and the Overnight Lending rate. These factors have a direct impact on the Prime rate. If you took only this into consideration, you may mistakenly conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. However, mortgage interest rates are dictated by the trading of mortgage-backed securities, which trade on a daily basis. The real dynamic at the heart of interest rate movement is the relationship between stocks and bonds.

Stocks and bonds compete for the same investment dollar on a daily basis. There is literally only so much money to be invested. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling of mortgage-backed securities.

Unfortunately, selling mortgage-backed securities to fuel stock market rallies causes interest rates to go up, not down.

Historically, there have been many times when the Federal Reserve has increased interest rates. Stocks then sell off in fear that the increase will affect corporate profit margins, and the liquidated stock assets need a place to park until the next rally comes along. The safe haven is found in mortgage-backed securities which cause mortgage rates to drop.

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