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Questions Over FHA Down Payment Assistance Programs Hit Mainstream

Industry participants that have been around for some time are likely familiar with the ongoing debate over seller-funded down payment assistance programs, a Federal Housing Administration program that allows borrowers to get into a home for little -- if any -- money down. The program has become nearly the last bastion of zero-down, only-$500-puts-you-into-a-home! lending for borrowers with damaged credit in the wake of the subprime mortgage meltdown, and it's one that has some government officials very worried. FHA Commissioner Brian Montgomery came out firing against DAP, as it's commonly called, in a June 9 speech in which he said that a failure to eliminate seller-funded down payment assistance would likely push the Depression-era housing agency into insolvency. "No insurance company can sustain that amount of additional costs year after year and still survive," he argued. "Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate." More than a third of FHA's current loan volume is of the DAP variety. Seller-funded downpayment assistance allows property sellers, including largely home builders, to donate funds to a non-profit agency, which then "gifts" the funds to a borrower as a down payment on a new home. The non-profits make a tidy processing fee, while critics -- and even government agencies such as the IRS -- have for years blasted the practice as a legalized scam. Tuesday's Wall Street Journal ran a front page story bringing the DAP issue front-and-center for the financial markets, replete with copies of numerous fliers from builders touting the no-money-down mortgages. Some of the builders that spoke with the Journal for the story said that the programs are the only way they're able to attract buyers. "The bottom line...is these promotions work," John F. Eilermann Jr., chief executive of McBride & Son Enterprises Inc., the parent company of Vantage Homes, said in an email to the Journal. Eilermann also is reported to have said in the email that "creative marketing" around DAP programs is what helped boost 2007 sales volume despite a quickly-deteriorating housing market. That sort of logic is troubling to some industry participants that see remnants of the spark that set off the subprime explosion, according to one senior bank executive that spoke with HW. "If the only buyers the builders can bring in right now are those that require down payment assistance, and they have to get 'creative' with marketing to make it happen, you have to wonder if those are the borrowers we should be putting into homes in this sort of market," he said, under condition of anonymity. "It's an odd world where the FHA is the riskiest lender, but the truth is that we'd never lend under that sort of criteria." Fueling the problem is the clear fact that DAP-funded mortgages are defaulting at three times the rate of mortgages in which the borrower put up their own funds as a downpayment, stats that many say proves just how risky the program really is. "[T]he DAP programs simply keep contract sales prices inflated, channel fees into the pockets of 'nonprofits' who provide no other service than laundering money, and result in lower insurance premiums than FHA should be getting for loans with riskier profiles," said well-known blogger Tanta on the Calculated Risk blog, herself a long-time industry participant. "These schemes also have the effect of artificially inflating nominal house prices, since the sale price is not the same as the amount netted, at the end of the day, by the seller," notes Felix Salmon in his highly-read economics blog at Portfolio.com. "I'm sure that a lot of politicians and realtors reckon that house prices need all the artificial inflation they can get at the moment, but my feeling is that over the medium to long term, no good can come of [DAP programs]." That's not to say that seller-funded down payment assistance is wholly reviled; those who have borrowed under the program (and not defaulted), as well as the nonprofits that provide the funds, have argued strongly for years that the programs are needed to help minorities gain access to homeownership. "Losing one third of the FHA’s business that uses downpayment assistance will deny annually over one hundred thousand qualified moderate income, minorities, first-time homebuyers and women-headed households from becoming homeowners," said Ann Ashburn, president of AmeriDream, Inc., a large down-payment assistance provider. She argued that denying key groups the ability to purchase a home would further destabilize an already-wobbling housing market. The housing bill currently being considered in the Senate would eliminate the long-controversial programs; a House version would not. That difference is sure to be a hot area of negotiation on Capitol Hill if the Senate passes its version of the bill, as expected, next Tuesday.

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