The Los Angeles Times covered the re-emergence of the controversial seller-financed downpayment assistance legislation that allows homebuyers to buy a home without any money down. And that is the least of the problems associated with this piece of legislation that guarantees the continued existence of nearly everything wrong with the current housing market: appraisal fraud, home debtorship, nationalized housing losses paid for by taxpayers, increased foreclosures depressing housing prices and unsound, risky lending practices.
But pay that no mind, according to the LA Times, who find some hard-hitting quotes about the “1 million homeowners helped” and loans being “pretty good” even as FHA reserves are being wiped out left and right by bad loans, in part made in the past under this program. They even tie in a nice, heart-warming tale of a family who has “benefited” from this program for extra measure.
But at least the government had the good sense to eliminate this program as soon as it became apparent to anyone with a pulse that the default rates were cutting the knees out from under FHA and its reserve fund. Now, however, some Congressmen with questionable motives are pushing to bring the program back.
Our good friends over at ML-Implode.com are on a mission to put this piece of bad legislation down once and for all. They rightfully argue that the program does nothing but invite more weakness in to an already crumbling market.
The LA Times has written a powerfully misleading, yet insidiously subtle piece posing as an “impartial” news article regarding FHA seller-funded downpayment assistance programs.
As we’ve covered extensively on this site (such as here, or here, and here, and here…), last year’s housing bill outlawed seller-funded downpayment loans through the FHA. The loans work by channeling the downpayment funds from the seller to the buyer, typically along with marking up the home price by a similar amount. The program administrator (such as Nehemiah or Grant America) transmits and fronts the funds. The buyer presents them to the FHA as their 3.5% required downpayment.
You can read more on their position here:
H.R. 6694, before Congress currently, would revive a recently-banned practice known as FHA “seller-funded downpayment assistance” (SFDPA) lending. In SFDPA, a third party arranges for the seller to make a “donation” to the buyer (through the third party) equal to the FHA mandatory 3.5% downpayment, which is then used for the purpose of the downpayment, in direct violation of HUD policy. This means that the buyer does not make a true downpayment born of personal sacrifice, undermining its purpose. In the end, this is the same sort of “100% financed” lending that was a major contributor to the collapse. In specific:
- The home price is typically inflated (see our article for FHA and GAO studies), inflating valuations in general.
- As a consequence, the borrower is likely to immedately start out with negative equity. Negative equity has been found to be the leading cause of foreclosure (See Fitch report)
- The borrower made no personal sacrifice to take on the loan, and is likely to feel less of a committment to it, especially if their situation worsens.
- Under H.R. 6694’s risk-based premiums (RBP), those with traditionally lower scores (minorities and low-income households) would be disadvantaged and charged more, just like subprime.
- Since FHA has now been expanded to cover loans in excess of $650,000 in “high cost areas” (the max becomes $625500 in January 2009), the loan principals can be quite high, sufficient to penetrate most of the market.
- SFDPA is a breeding ground for “straw buyer” fraud, which is now known to have been rampant amongst failed loan categories (especially subprime). SFDPA “legitimizes” the markup-and-downpayment-launder process which is central to most straw buyer scams (ref. FBI report).
Frankly, we agree. The SFDPA program is bad for taxpayers and bad for the housing market. Please join in adding your voice to say no to bad taxypayer-financed loans by visiting ml-implode.com and showing your support.Click to See the Latest Mortgage Rates»