NEW FHA MOVES COULD STOP SELLER CONTRIBUTIONS TO BUYER'S DOWN PAYMENT!
"THIRD PARTY" PAYMENT OF SELLER DOWN PAYMENT CREDIT WOULD END THIS YEAR - FHA COMMISSIONER!
Many experts agree that a good portion of today's mortgage and housing market crisis involved buyers outspending their ability to pay future house payments. Also a culprit: home buyers viewing low or no down payment mortgage loans as a way to buy a more expensive home than they can realistically afford.
Those using FHA government-insured loans can finance their home purchase with only 3% down, plus closing costs. FHA rules allow a seller credit for up to 3% of the purchase price to cover the closing costs. Using a loophole allowing down payment contributions from not-for-profit institutions, buyers can also get a seller contribution for the entire FHA-required down payment, if the seller makes this contribution through a third-party entity. Or, they can get down payment funds gifted by relatives, local government agencies, or a charitable organization.
Two large intermediaries - Nehemiah Corporation of America, and AmeriDream, Inc., would receive seller down payment contributions, deduct a $400 to $600 average processing fee, and pass the balance of the money to the home buyer, as a "charitable" grant. Buyers, therefore, can purchase a new home for virtually out-of-pocket expense. The transaction is still legal under current rules, although both intermediaries are no longer considered, not-for-profit, charitable organizations by the IRS.
If this scenario sounds too good to be true - that's because it is!
According to the U.S. Department of Housing and Urban Development (HUD), buyers using these intermediary-held funds show foreclosure rates two or three times higher than those where buyers or their families came up with the required 3% down. A Government Accountability Office 2005 survey further indicated that receiving a seller down payment credit might have actually INCREASED the sales price of the home, as sellers wanted to be fully reimbursed for the money they provided, and raised their sales price by an amount equal to their contribution to Nehemian or AmeriDream.
Homes selling for inflated prices - over their true estimated market value - contribute to larger FHA losses when buyers default, and can't keep up with their mortgage payments.
Down payment credits are typically prohibited in non-FHA loans, but they have become typical for those backed by FHA. The government agency estimates that as many as one in three FHA loans have involved a seller down payment contribution over the last few years.
Now, the FHA wants to end seller contributions to buyer's down payments. They cite excessive loan default ratios, high numbers of foreclosures, and severe losses that threaten their solvency. Within the past year, the IRS has cracked down supposed "charitable" organizations funneling seller down payment contributions, including AmeriDream and Nehemiah, revoking their status as not-for-profit entities.
Earlier this month, FHA Commissioner Brian Montgomery announced plans to prohibit seller down payment contributions by the end of the 2008. Under his proposals, gifts by bona-fide local government agencies, charities, employers, and relatives would still be permitted.
Since many sub-prime conventional lenders folded beginning in mid-2007, the FHA is now the only option for buyers with low down payments saved for home purchases. FHA loan programs offer 30-year, fixed-rate loan programs at competitive interest rates for low to moderate income buyers, many of whom are minorities. Since mid-2007, applications for FHA loans have doubled. FHA has also been the most active source for sub-prime mortgage re-financing, when these old loans reset at higher interest rates.
As you might imagine, the FHA plans are bringing considerable resistance from companies offering down payment assistance. Scott Syphax, President and CEO of Nehemiah, challenged the department's foreclosure and loss statistics, saying HUD's database is "corrupt." HUD declined comment on Syphax's charge.
Previous attempts to block down payment assistance companies have, to this point, failed. Federal Courts blocked implementation of rules to block down payment assistance companies last October, mainly on technical grounds.
If new FHA rules are eventually implemented, however, it could impact some home buyers' ability to purchase their new home, while, at the same time, reducing likely default and foreclosure among those with the smallest amount of saved financial resources to fund their new home purchases.
For more info, see Kenneth R. Harney's article in today's Chicago Tribune.
DEAN MOSS & DEAN'S TEAM CHICAGO
