No down payment? Still no problem -- at least for now

Desperate Southern California home builders are in full liquidation mode, as signs dotting the backroads of Hemet attest.

To a small degree it may be working -- a report from industry research firm Metrostudy says finished vacant inventory of new homes declined in the second quarter. Still, the supply of vacant developed lots stands at a 10-year high.

Yet, it is curious to see that some builders are still resorting to the no-money-down lure. D.R. Horton, which specializes in entry-level housing, and Lennar Corp. have been quite brazen in their campaigns. But there's a good reason: The big builders have relied on these incentives -- known as down-payment assistance -- to boost sales through the housing boom and now bust.

In Horton's case, 21% of loans made through its mortgage arm in the second quarter were with seller-funded down-payment assistance. Typically, these loans, which are backed by the Federal Housing Administration, involve a nonprofit group that gives a 3% down payment to the buyer. The group is then reimbursed by the seller/builder.

But the clock is ticking. When the new federal housing bill goes into effect in October, builders will be banned from using these down-payment "charities" -- much to their chagrin. Donald Tomnitz, Horton's chief executive, derided this aspect of housing bill on a conference call with analysts earlier this month, saying the DPA programs are something his industry "so vitally needs."

Maybe so. But during the boom, new-home buyers were among the biggest category of borrowers utilizing subprime, 100% financing. They now are reportedly suffering the consequences, i.e. foreclosures, at an alarming rate.

-- Annette Haddad

Top photo: Road sign along Sanderson Avenue in Hemet

Photo credit: Annette Haddad

Second image: Lennar ad

Questions? Comments? Email: annette.haddad@latimes.com

Comments

[D]

It doesn't matter to the builders if the house eventually goes into foreclosure, they've already made their money.

[the problemwithcaring]

I am all for Down-payment Assistance Programs (DAP) - but people should get the $$ directly from the city and state governments programs-- which often require repayment at the sale of the house, and require people to actually live in the houses. They also focus on low- and moderate income folks - those most deserving.

I don't think the issue of these programs "propping-up" inflated housing values will matter pretty soon. All the DAP "lipstick" in the world won't be able to dress up this pig of a housing market.

[TakeFive]

Builders offering 0% down.

Indy Mac offering 3% interest (just on loan mods, for now).

Banks with bloated inventories that need to be cleared.

Prices coming down.

Sounds like were headed for a real estate boom.

[Lou]

When will these idiots learn that no money down is basically inviting people to walk away from their home if the value goes down?

[waitingitout]

Why anyone other than builders would think DAP is a good idea is beyond me. If you give someone a house for free, they're going to treat it like a free house - and the evidence is clear that borrowers who receive DAP loans default far more often than those who actually have to put their own money down. Check out Calculated Risk - they have more info on this than anyone could possibly want to ingest.

Seriously, just cut out the middle man, sell the homes to FHA, and have the agency move its headquarters to Hemet.

[Anonymous]

I love that their industry "vitally needs" this. Um, why exactly am I supposed to care about their industry and its vital needs? So the kids of the CEOs can have 100 million inheritances instead of 50 million inheritances? Is this industry going to make sure that my vital needs are met? These people are pigs and their industry should fail if it can't make it without all the deceptive and destructive practices their industry embraces (including DAPs).

[Nelcisco]

D is right about not mattering to builders, its obvious they have absolutely no clue about what it takes for financing or they just don't care. They need to be held accountable for their print advertising, I'm held accountable.

I just had a loan blow up at escrow because one of the conditions was that their liquid assets they had at the beginning of the file was spent paying their bills, same file I told them I can put them on a down payment assistance program so they can go in with "0 DOWN", found some homes with their RE agent, come to find out buyers will cover closing costs but not down payment. Ameridream and Nehemiah are not a charity organization, yes they'll come up w/ the down at closing but the seller has to agree to come up with it later and pay them back with a fee if as well.

So.... no free lunch folks, not anymore, not in this market, I've tried it and all it does is pisses borrowers off for wasting their time and hopes of getting a house.

Builders, learn about what it really take to buy a house then say what you need to say!

[Nelcisco]

I meant sellers will cover closing not buyer

[amir]

Builders are desperate. Or they bank on the government coming to their aid when the chips are down. With our current 'Capitalist profits/socialize losses' regime they might be right.

[arroyogrande]

US reps Al Green (TX), Gary Miller (CA), Maxine Waters (CA), and Christopher Shays (CT) are trying to bring Downpayment Assitance Programs back, although with some provisions for "risk based pricing":

"AmeriDream Applauds Bipartisan Legislation to Preserve Charitable Downpayment Assistance"
http://www.earthtimes.org/articles/show/
ameridream-applauds-bipartisan-legislation-to-preserve
-charitable-downpayment-assistance,490787.shtml

"The bill, H.R. 6694...reauthorizes and reforms charitable downpayment assistance funded in part by sellers...The program was eliminated by legislation signed by President Bush on July 30, 2008."

My thoughts...why not just end the charade and force the FHA to make 0% down loans, instead of trying to obscure the fact by having the sellers "kick back" cash to the buyers for the down payment? With "risk based pricing", I'm *sure* that US taxpayers won't have to shoulder the losses on FHA 0% down loans...right?

- arroyogrande

[sterile_financing]

I've often wondered what the Dr in DR Horton stood for.

Now I think I know - buy a new house from the "good" Dr and he will throw in a "free" financial spaying/neutering (delete as applicable).

[Nick]

DPA isn't so bad, as long as it's all above board, and the loan isn't in any way backed by taxpayers. If a bank wants to give out a "guaranteed fail" loan, they can price in the risk accordingly; in this case, probably with more than 20% up front and with a high interest rate. By having the DPA be above board (ie: public record), it also wouldn't artificially inflate the recorded sales prices.

The problem is that DPA is used in coordination with a FHA loan, or allowing the GSE's to purchase such loans, which is basically writing a check against the IRS's accounts receivable. There is no excuse, whatsoever, for the government backing loans which are not "high quality", and DPA assisted 0% down loans are about as low quality as you can get. That part is a disgusting lapse of ethics from our lawmakers (in a long line of such lapses).

[Steve]

To summarize nothing will change in the mortgage market.

[Doug in Toronto]

No money down home financing doesn't exist in Canada. No bank will look at you without a minimum 5% down, preferably more. Anything less than 10% down forces you to insure the mortgage with CMHC (Canada Mortgage and Housing Corp - a government agency), and will cost you an extra 0.5-0.75%. Another point: until people stop thinking their homes as either ATM's or temporary residences to be flipped (with zero dollars down), this problem will go on. Put some skin in the game: show that you're prepared to stay for the long haul, and you've got a chance with a lender. Buy it to flip it with no cash of your own? I wouldn't lend you anything either.

[Todd in WeHo]

Buying a home with no down payment needs to go away. Nothing down to buy a house is just like leasing an automobile--you only feel rich but it's all smoke and mirrors.

[Nick]

To be fair, no bank in the US would consider loaning you money with 0% down either now, and very few would do it during the bubble if they weren't being securitized (or if the bank needed to hold a percentage of the loan on its balance sheet). The banks aren't that dumb; note that the DPA program is only in coordination with FHA loans, which start at only 3% down. If we could just get rid of the idiotic FHA lending programs, the whole problem goes away.

[Jack]

Down payment assistance really does work, if it is done the right way. Have there been some abuses with the use of down payment assistance? Absolutely. Is the solution to correcting these abuses to totally ban these programs? Absolutely NOT!

That is the wrong medicine at the wrong time. Rather than banning these programs, meaningful regulations should be introduced that fixes what’s broken.

I have seen many blog posts on this subject and all seem to agree that somewhere between 30-40% of all FHA mortgages are presently associated with down payment assistance. Why is no one doing the math? What is going to happen to home prices if that many qualified home buyers, who have no other place to turn, exit the market? I have seen estimates of 10-20% home price declines. Everyone's home values will go down as a result. I don't know about you, but my home value has already gone down more than 20%, I certainly don't want to see it go down another 10%. That will just add to the foreclosure mess.

The current foreclosure mess is a result of greedy lenders and mortgage brokers pushing a host of subprime mortgages on unsuspecting home buyers. The interesting part is that down payment assistance providers did not follow that parade. They only provide assistance to home buyers who use FHA insured, fixed rate mortgages. These are not the type of loans that we are all reading about.

Rather than getting rid of down payment assistance, the solution is simple, reinstate a reformed version of down payment assistance that still serves qualified home buyers and eliminates the abuses. The good news is that a bill (H.R. 6694) has been introduced to do just that, but it will take a real grass roots effort to get this passed. I visited a website yesterday that is an excellent resource on this issue. (www.dpagroundswell.com) Check it out, it is actually a pretty informative site.

Jack

[Cal]

It was definitely unfair of Annette to compare FHA + DAP to the subprime loans during the boom. FHA is a completely different beast.

Where DAP fails is the seller assisted part, it makes for far too much monkey business in the transaction. To reduce fraud you really want to buyers to jump through at least a few hoops to prove they want a home. A minimal downpayment or going through all the steps to get a charity assisted DAP has shown a reduced likelihood of default. The people screaming that these loans can't go away are the new homebuilders who abuse the heck out of it and the LO who want to keep the lending guidelines as loose as possible.

3% down isn't the end of the world, if it was then we are really screwed.

[AmeriDream]

Check out this video www.supporthomeownership.com/news/default.aspx. There's an effort in Congress by both Democrats and Republicans to reauthorize downpayment assistance programs with new reforms under a bill called H.R. 6694. You can learn more about H.R. 6694 and voice your support for it at www.supporthomeownership.com and send a letter to Congress. Non-profit downpayment assistance programs work and are vital to homeownership and the economy. These programs help FHA's target population of individuals and families (low-to moderate-income, minorities, women or first-time homebuyers) become homeowners. These homebuyers must meet HUD's rigorous loan qualifications in every respect, but are unable to save the needed downpayment. HUD has been spreading misinformation about non-profit downpayment assistance programs for years. HUD doesn't want you know they have a 94% success rate. There is still time to have Congress bring back downpayment assistance programs with reforms but Congress needs to hear from you. Click this link http://takeaction.ahaanow.org/ahaa/issues
/alert/?alertid=11521436&PROCESS=Take+Action to
voice your support.

[Tudogg]

http://www.mortgageprocessor.org/mortgage-loan-processing/2008_08_14_mortgage-processors.html

Status of Downpayment Assistance

The most common question coming to me these days is in regards to downpayment assistance. Everyone wants to know when it’s ending, if it’s ending, where things stand… Let me give you a briefing of what I know at this very moment.

Title I, Section 2113 of HERA includes the following statement which leads to the cease of seller-funded downpayment assistance on FHA mortgage transactions:

“(C) Prohibited Sources- In no case shall the funds required by subparagraph (A) consist, in whole or in part, of funds provided by any of the following parties before, during or after closing of the property sale:
(i) the seller or any other person or entity that financially benefits from the transaction.
(ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).
This subparagraph shall apply only to mortgages for which the mortgagee has issued credit approval for the borrower on or after October 1, 2008.”

Upon reading the above paragraph, the first question that comes to mind is this- How does one define the term “credit approval date?” This has been answered and clarified by HUD on the recent MBA call. “Credit approval” is defined as the last loan approval date through TOTAL Scorecard with Accept/Approve findings or for manually underwritten loans; it is the date that the underwriter signs and dates the MCAW or Loan Transmittal form.

Therefore, to clarify, if you have an FHA loan in process and it includes DPA, the loan needs to be fully approved through automated underwriting with final findings before October 1st or if your loan is to be manually underwritten, your underwriter must have the file fully credit approved as demonstrated by his/her signature and date on the MCAW or Transmittal form by October 1st. As long as the loan is credit approved before October 1st, it may still close after October 1st with DPA and will be insured by HUD.

It’s important to note the risk of “banking on your automated approval” without obtaining a final clear to close approval from underwriting. I’ve already been receiving emails from originators trying to “buck the system.” Make sure that ALL of your loan files that include DPA are fully approved by your underwriters before you bank on your automated approval being golden. Any change to income, credit criteria, can require findings be rerun and will kick you from being allowed to include DPA on the transaction.

So what are you to do out in the sales force if a majority of your business involves the use of downpayment assistance for purchases? I suggest familiarizing yourselves with the homebuyer funding options available in your market area. Visit HUD’s Local Home buying Programs website where you can access information by state. You can also contact your local state and government agencies to inquire about homebuyer funding programs in your area.

Downpayment assistance providers haven’t quite thrown in the towel yet either. On July 30th, several members of Congress presented H.R. 6694 -FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008. The bill proposes to require particular credit scoring in order to incorporate the use of DPA funding with qualifying purchase transactions. It hasn’t seen any action since its original presentation but this will be one to watch. (My personal opinion is that it will not pass and thus, DPA will cease as of October 1st).

You can voice your support or opposition to H.R. 6694 by visiting any one of the major DPA websites such as Ameridream, Nehemiah or Preferred Program.