Last ditch attempt to preserve seller-funded gifts
Legislation would amend housing bill's FHA provisions
By Inman News, Monday, August 4, 2008.Legislation introduced in the House by Al Green, D-Texas, would scuttle plans to eliminate seller-funded down-payment assistance as an option for loans guaranteed by the Federal Housing Administration, but allow FHA to implement risk-based premium pricing.
The Bush administration has sought to end the practice of allowing seller-funded "gifts," saying they artificially inflate home prices and triple the likelihood a loan will default. Supporters, who say minorities will be disproportionately affected if the programs are abolished, had thwarted the Department of Housing and Urban Development's previous attempts to end the practice (see story).
But beginning Oct. 1, the sweeping housing bill signed into law last week by President Bush, HR 3221, will prohibit FHA from recognizing seller-funded "gifts" from nonprofits that are largely funded by home builders as a valid form of down-payment assistance (see story). Borrowers would still be able to use gifts from family members, charities and employers to meet FHA's new 3.5 percent minimum down-payment requirements.
A bill introduced Thursday by Green, HR 6694, would allow FHA to continue to recognize seller-funded down-payment assistance when borrowers have a FICO score of 680 or greater. Borrowers with FICO scores of between 620 and 680 would also be able to rely on seller-funded gifts of up to 3 percent of their loan principal, but would have to pay increased mortgage insurance premiums.
Green's bill -- introduced the day after Bush signed HR 3221 into law -- would also allow borrowers with FICO scores of 619 or less to rely on seller-funded down-payment assistance beginning in fiscal year 2010, if HUD determines that the loans can be insured without incurring taxpayer expense.
FHA loan guarantee programs have historically been self-sustaining, with mortgage insurance premiums covering claims. The Bush administration has said that because of their higher default rates, loans relying on seller-funded gifts threaten to put the program in the red.
In another attempt to avert the need for a taxpayer subsidy, HUD has sought to implement risk-based premium pricing, saying it would allow FHA to operate more like private mortgage insurers.
Traditionally, all FHA borrowers have paid 1.5 percent of their loan balance up front, and 0.5 percent a year for insurance. Under risk-based pricing, the upfront premium would range from 1.25 percent to 2.25 percent, depending on credit score. HUD says the difference amounts to no more than $7 a month on a $150,000 mortgage.
Although HUD went to a risk-based pricing model on July 14, HR 3221 places a one-year moratorium on its implementation, beginning Oct. 1, 2008 and ending Sept. 30, 2009.
As a carrot to the administration, Green's bill would allow FHA to implement risk-based pricing -- with a provision that borrowers who pay higher premiums eventually receive partial refunds if they stay current on their loans.
HR 6694 is co-sponsored by Democrats Rep. Maxine Waters of California and Christopher Shays of Connecticut, and California Republican Rep. Gary Miller.
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Submitted by Stephen Graham on August 4, 2008 - 1:55pm.
I feel that FHA should implement the insurance of 100% loans, thereby eliminating the need for DPA; or alternatively, charge more MI to those individuals who use DPA to cover projected losses from this program.
We should all be concerned that the elimination of 100% will all but remove first-time home buyers from the market.
Submitted by Lenn Harley on August 4, 2008 - 1:55pm.
Seems to me that if a home owner wishes to reduce their net proceeds by 3% or even 10% to pay the down payment for a home buyer, it is none of the government's business.
Lenders can manage risk by making sure that the buyer has the ability to make payments following settlement.
Better yet, get rid of the "due on sale" clauses and let buyers assume the loans when the seller has no significant equity. Many times there would be no need for a down payment.
The "due on sale" clause is, at this point, a big bottleneck requiring a newly originated loan on every just about every transfer.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
Submitted by Ken Lampton on August 4, 2008 - 6:43pm.
In my opinion, Down Payment Assistance programs are a scam that need to be eliminated immediately.
Submitted by joe spake on August 4, 2008 - 6:54pm.
Its a rare occurence, but I agree with Bush on this one. In reality the Seller involved in a charitable DPA generally raises the sales price to cover their "charitable contribution". The charitable DPA company charges the seller a fee to collect the Seller's contribution and "gift" it the buyer. There are governmental programs at the state and local levels that provide down payment assistance without putting money in a middle-man's pocket, and current FHA rules allow sellers to contribute up to 6% of sales price, without the use of a charitable DPA in the transaction.
Submitted by Benjamin Dona on August 5, 2008 - 6:33am.
This is definitly one part of the new housing bill that should be reversed.
Florida Home Loans | Southwest Florida Blog
Submitted by Pamela Mackenzie on August 5, 2008 - 10:01am.
As long as the FHA allows sellers to pay points for the buyer, the federal government should allow DPA programs.
We are not talking about people buying very expensive homes here and inflating the prices. We are talking about people who are buying entry-level housing. The 3% grants that buyers get from DPA programs can be as low as $3,000 in some cases, and those grants DO NOT inflate the price of the home.
If you are talking about DPA assistance on a $500K or greater home, then I can see your point about artificially inflating the price of a home. But I think most of the cases we are talking about are significantly below that.
Pam MacKenzie
Real Estate Editor
The Courier News, mycentraljersey.com
Submitted by Barry Preusz on September 13, 2008 - 11:18am.
By allowing DPA's the government can stimulate the economy and the housing market without using taxpayer dollars. The fears of price inflation and increased defaults appear with nearly every home buying incentive.
http://www.realestatehomesutah.com/
Submitted by (Fort Worth Real Estate Guy) on October 19, 2008 - 5:54am.
Call congress we need this back. I hope the lame duck congress will vote this back in.
Mike Pannell
Nu Home Source Realty LLC
817-509-1400
http://www.nuhomesource.com
http://www.fortworth-texas-real-estate.com
http://www.dallas-county-texas-real-estate.com