Saturday, November 14, 2009

Seller-Funded Down Payments Still Plague FHA

Posted in the Wall Street Journal by Nick Timiraos:

Seller-funded down payment “gifts” appear to be of the sort that keep on giving.

It was a little over a year ago that FHA finally prevailed in a years-long effort to rid itself of gift programs that allowed home sellers to fund 3% down payments for borrowers who took out FHA-backed home loans. But the recently released independent audit for the FHA, which shows that the agency’s reserves for unexpected losses have fallen to razor thin levels, shows that seller-funded down payments continue to account for an outsized share of losses.

From 2002-2008, these gift programs essentially allowed folks to buy homes with no money down. Nonprofit agencies provided the required down payments to home buyers, and the sellers typically made a donation to the nonprofits. (See any one of three Page One stories that the Journal did over the years: U.S. Backed Mortgage Program Fuels Risks, Scrutiny of Down-Payment Gifts Threatens Charitable Movement, and Home Buyers’ Down Payments Are Now Paid by Some Builders.)

The problem with the loans, of course, is that buyers who have no skin-in-the-game are more likely to default on their mortgage. “Those facilities created too many homeowners in the FHA portfolio that were not equipped for the financial responsibilities of homeownership,” the agency said in its report to Congress.

The FHA said on Thursday that it’s now badly depleted reserves would be more than $10 billion higher without them—enough to put the agency’s capital reserve ratio at the minimum 2% required by law.

There’s been a lot of criticism of the FHA coming from Congress in recent weeks, as it appears taxpayers may now have to foot the bill. But some folks have short memories: Seller-funded down payment assistance programs existed because they had big support from both parties, including from Rep. Maxine Waters (D., Calif.), Rep. Gary Miller (R., Calif.) and Texas Democrat Al Green, who earlier this year introduced a bill to bring back seller-funded down payments.

Recall that in 2004, the Republican Party platform called the down payment “the most significant barrier to homeownership” and supported various “efforts to reduce that barrier.” As recently as early 2008, Congress was prepared to lower the minimum down payments for FHA-backed loans to 1.5%, down from 3%, and some were pushing to eliminate down payments from the FHA altogether.

Rep. Scott Garrett (R., N.J.) introduced a bill last month to raise minimum down payments to 5%. That may sound like a small step, but consider: the FHA’s annual report showed that nearly seven in eight loans made for home purchases in 2009 had loan to value ratios of 96% or higher, meaning buyers had 4% or less equity in the house. That makes housing officials—and the real-estate industry—leery of taking any such measures that might limit too many home sales.

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