Las Vegas real estate, mortgage, appraisal blog

In a written statement in a hearing before the Committee on Financial Services Subcommittee on Housing and Community Opportunity in the United States House of Representatives, Margaret Burns Director, Office of Single Family Program Development for HUD had this to say about homeowner downpayment assistance programs:

As you may know from previous public statements and testimony offered by the FHA Commissioner, our agency has been concerned with seller-funded downpayment assistance for some time now. While well intended, the programs have had a significant negative impact on FHA's business for the last several years. Loans made to borrowers who rely on these types of seller-funded gifts perform very poorly. The foreclosure rates on these loans are more than twice those of all other home purchase loans insured by FHA. Moreover, FHA experiences higher loss rates from the sale of the properties associated with these particular foreclosures, a reflection of the overvaluation that occurs with these programs. The higher foreclosure rates represent a financial burden for FHA and taxpayers, but of greater concern, they hurt the families who lose their homes and the neighborhoods in which those homes are located.

The core problem with these programs is not that the borrowers they serve are riskier or less credit-worthy; it's that the programs disrupt the natural negotiations between buyers and sellers in a way that results in inflated sales prices and thus higher mortgage amounts. Seller-funded downpayment assistance programs flourish in weak real estate markets. In weak markets, low buyer demand means that sellers are less likely to get full asking price for their homes and are therefore willing to participate in programs that will help them sell for a higher price. As such, the property overvaluation associated with seller-funded gift programs occurs in markets that are least able to adjust to and accommodate pricing variations.

For example, in fiscal year 2006, more than 50 percent of FHA's purchase mortgage business in both Ohio and Indiana was for borrowers who relied on nonprofit seller-funded gifts. In these states, home values have been stagnant or declining. In soft housing markets, borrowers with no or negative equity who face any kind of financial hardship have fewer options to recover and can slip into foreclosure fairly quickly, despite the best efforts of FHA's loss mitigation programs. High foreclosure rates in these communities contribute to additional deterioration in home values and a vicious cycle of property depreciation.

Burns went on to discuss studies that supported her stand and mentioned the programs the FHA has initiated to help buyers purchase homes.

FHA sought legislative authority to eliminate its own 3 percent cash investment requirement: to offer cash-poor, but creditworthy, borrowers a safer, more affordable alternative to the seller-funded gift programs. It was our view that a modernized FHA would reduce borrowers' reliance on seller-funded gift programs, an outcome that would be good for borrowers and taxpayers. Because congressional efforts have yet to result in FHA being permitted to offer better and more flexible financing options, we determined it was time for our agency to stop recognizing this particular type of assistance.

As you have heard Commissioner Montgomery state many times, FHA financing is the most consumer friendly on the market today, helping families access prime rate mortgages. FHA financing has none of the harmful features that are common in the subprime market, features that have been the subject of much congressional discussion and debate. FHA does not permit prepayment penalties or negative amortization; FHA requires lenders to escrow for taxes and insurance; FHA underwriting ensures the borrowers' capacity to repay meets a suitably high threshold; and FHA requires evidence of a borrower's income and employment. In essence, FHA makes it possible for first-time homebuyers to obtain home financing that is safe and fair and affordable.

That is our objective at FHA - to help borrowers who otherwise wouldn't qualify for prime rate financing. We want these families to receive the tremendous protections offered by FHA, both through FHA's underwriting and in the form of our successful loss mitigation program. And we continue to work with this Committee to enact needed reforms that would help our traditional borrowers, such as risk-based pricing and "Zero Down" financing.

But now, we find ourselves in a position where we can no longer sit back and wait for that alternative. If we did nothing, some would appropriately question FHA's capacity to manage risk and FHA's own data shows that the poor performance of the loans to borrowers using seller-funded gifts must be addressed as soon as possible.

It seems that her statement has fallen on deaf ears, however, as a recent post in a New Jersey news source says that a compromise to keep downpayment assistance is being pursued diligently.

Chairman of the House Financial Services Committee, Barney Frank, has discussed publicly the fact that he has negotiated an agreement with HUD Secretary Steve Preston that will provide for the continuation of privately funded down-payment assistance.

The agreement allows HUD to impose risk-based pricing on downpayment assistance transactions which provides Secretary Preston the fiscal protection he seeks for the FHA insurance fund.

According to an Inman News article published Tuesday, Chairman Frank is quoted as saying "The FHA loved the ban on down-payment assistance (but) hated the ban on risk-based pricing," Frank said at Saturday's hearing. "That seemed to me to offer an opportunity. So (HR 6694) will replace both bans with middle ground -- and it will pass the House, I can guarantee you. What you want to do now obviously is talk to your senators. We think it will go through there -- it has the approval now of the Secretary of HUD."