Down Payment Assistance Officially Dead, For Now
It's official. Down payment assistance -- DAP or DPA to most industry participants -- has gone the way of the Tyranosaurus Rex, independent Wall Street investment banks and the even textbooks that once suggested Pluto as the outermost planet in our solar system. That is to say that DPA is no more, effective today.
The Housing and Economic Recovery Act, signed into law this past July by President George W. Bush, included a provision that banned downpayment assistance programs beginning on Oct. 1.
Nonprofit groups, including giants such as Sacramento-based Nehemiah Corp. of America, are now either out of business or looking to other lines of business while they continue to lobby Congress to reinstate the controversial FHA program. Efforts to pass a bill that would reinstate DPA stalled in a House committee, however, as concern over a historic financial bailout package pushed down payment program concerns to the back burner in the past few weeks.
Nehemiah hosted a media teleconference Wednesday that saw company president and CEO Scott Syphax vow to fight for the restoration of the program.
"It ain’t over yet," said Syphax. "Regardless of the outcome in the next 48 hours or so, we will continue to press forward on behalf of the interests of working-class families and the communities they reside in across the country.’”
For DPA supporters, the ban eliminates a vital program that benefited minority, low-income and female head-of-household buyers, and they say they expect new home sales in particular to suffer further as a result. Many new home builders relied on the DPA program to funnel money through to borrowers that could not afford a down payment and would otherwise not buy a home.
"Credit continues to tighten, loans are nearly impossible to come by and everyday purchases such as a $5 gallon of milk make for a financial environmnent that is far from conducive to saving for a downpayment," said president and CEO of the National Urban League Marc Morial in a press statement. "These [DPA] programs are more necessary now than ever."
Yet critics have repeatedly noted that borrowers with so little upfront investment into their home often have less reason to stay in the property and keep the mortgage from delinquency. FHA commissioner Brian Montgomery went so far in June to suggest that DPA mortgages may bring the government program to its knees.
"Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments,” Montgomery said at the time.
Former HUD officials have echoed similar sentiments about the program. "The inescapable fact is that seller-funded down-payment assistance is particularly susceptible to losses," former HUD official Howard Glaser told The Wall Street Journal in June. "Too often today's seller-funded loan is tomorrow's foreclosure."
The DPA program also created a dishonest atmosphere for both sellers and appraisers, who sometimes adjusted the contract or appraised value to accommodate for the funds paid into nonprofit organizations, according to an outspoken blogger known as Tanta on the Calculated Risk Web site.
"Those who claim that DAP loans provide a benefit to borrowers without funds are making no sense even if you grant that making loans to people without even minimal skin in the game is a good idea," she wrote in one of the site's posts from last year.
"The 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."
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