Here is a report on the seller-assisted down payments, where the seller donates an amount of money (equal to the buyer’s down payment) to a “non-profit entity”, who then gifts it to the borrower.
From NMN:
WASHINGTON-It was well known inside HUD that a special program where nonprofit housing groups arranged downpayments for low-income homebuyers was bad news for the Federal Housing Administration mortgage insurance fund. Department of Housing and Urban Development officials tried to stop the seller-funded downpayment assistance program several times over the past decade – only to be blocked by the courts or supporters in Congress.
The homebuyer assistance program allowed sellers to fund the downpayment and then turn around and inflate the home price to recoup the expense. The seller also paid a fee to the nonprofit for qualifying buyers and arranging the transactions. HUD saw it as a scam, though the DPA providers denied it.
It was well documented that DPA buyers generally paid too much for the properties and ended up in high LTV loans that were generally three times more likely to default than other FHA single-family loans.
And default they did. The latest FHA actuarial report calculates the damage the seller-funded downpayment program inflicted on the FHA Mutual Mortgage Insurance Fund with startling findings. If the government had never endorsed SFDP loans, the economic value of the fund would be $13.2 billion as of Sept. 30 – instead of $3.6 billion – a difference of almost $10 billion. In other words, FHA would be in much stronger financial shape today.
The government began insuring SFDP loans in 1998. Over the years the program grew steadily, accounting for nearly 20% of coverage from fiscal 2004 through fiscal 2008.
Congress finally banned seller-funded downpayments and FHA stopped insuring the loans on Oct. 1, 2008.
“On the positive side, following the elimination of this type of high-risk loan … the performance of the FY 2009 and future FHA books of business will be much improved over what would have been the case if these loans were still being endorsed in significant amounts,” the actuarial report says.
The actuarial report also points out that credit scores on FHA single-family loans have improved recently. The average FICO score in September hit 689, up 10% from September 2007.
Lenders originated a record $328 billion in FHA loans in FY 2009 and 44% of the loans have FICO scores above 680 and only 13% have FICO scores below 620, generally considered subprime. In FY 2007, when FHA endorsements totaled $55.5 billion, only 19% of the loans had FICO scores above 680 and 47% of the loans had FICO scores below 620.
“The improved credit quality of FHA’s recent originations debunks the myth that FHA is being overrun by subprime loans,” said Brian Chappelle, a mortgage banking consultant in Washington. The founding partner of Potomac Partners noted that loans with FICO scores above 680 perform four times better than loans with FICO scores below 620.
FHA still has $30.7 billion in reserves (and set-asides of $27.1 billion) – but that’s after auditors made a $4.9 billion positive adjustment in recognition of the improved credit quality for FHA’s current originations.
“No one can dispute that FHA defaults are increasing. However, the cause is the worst housing market since the Great Depression and not that FHA is insuring poor quality loans,” said Mr. Chappelle.
High FICO means squat. Many were able to get into an Alt-A NegAm the during the bubble years.
Wow. 10 BILLION. That is not small change.
Wouldn’t this also have resulted in lost federal tax revenue?
Seller sells home. “Donates” $5k to charity who then in turn gifts it to the buyer of said seller’s house to use as a downpayment. Then seller is able to deduct an additional $5k when they itemize on their tax return because of the “charitable donation”. Result=they have a lower federal tax liability.
Result=they have a lower federal tax liability.
Except that the first $500K of capital gains from a home sale is exempt from taxes. I bet the impact on federal tax liabilities was pretty low.
Erin,
CalculatedRisk documented the abuse of these programs extensively. The ones donating the money were the builders themselves, who in turn jacked up the price of the house an equivalent amount.
Mr Chapelle
The worst housing market since the great depression could have been prevented by having buyers put more skin in the game. I know you make your living writing FHA loans to defaulted properties so fewer defaults hurt you, but maybe the housing market will be better if we make people prove how much they want the house.
Higher average FICO scores are simply the result of FHA market share increases.
Higher FICO scores in this case actually indicate a higher probability of default as they indicate that rational borrowers are taking advantage of the FHA put option.
I have a FICO score way over 800, and if I can find a house I want within the FHA’s zero-down loan limits, I’ll use FHA so that I can stick the house to the dirty Feds if the market goes south again.
tj is right, there is extensive documentation that “affordability” products were just an excuse to jack prices up even higher.
Sleazy congresscritters keep proposing these programs, makes you wonder what kind of a cut they are getting….
Just think about all of these actions taken to keep home prices high next time someone campaigns on the concept of affordable housing.
“The improved credit quality of FHA’s recent originations debunks the myth that FHA is being overrun by subprime loans,”
B.S. The reason that credit quality has improved is because housing prices declines have slowed and the recent originations have less reason to walk away from their underwater home. If prices were still dropping at 20% per annum, these people with no skin in the game (small down payments) would be walking away in size.
I think that the easiest way to fix this is to price mortgages based on your LTV. If you put down 50%, you get a mortgage rate close to treasury rates. Alternatively, if you put 0% (or 3%) down you get a rate of, say, treasury +1000 basis points. The down payment reflects two things: the buyer’s skin in the game and the risk to the lender of incurring a loss. The higher the down payment, the lower the probability of loss to the lender. The problem is that we, as Americans, don’t want to sacrifice and save for a down payment. If there is no sacrifice, then it is very easy to walk away from something that you have no investment (literally and emotionally) in.
Exactly T-Dub–The more down–the less important documnetation or credit scores become. With prices as low as they have become, a 50% LTV or more, should simply require an appraisal and a signature–If the buyer defaults, the bank WILL profit from liquidating the property.
Credit quality has improved but based on even the improved loss rate would it be profitable in the private sector? Will it still need a government bailout. If you improve your score for 20 to 25 out of 100 it is still an F.
I have a FICO score way over 800, and if I can find a house I want within the FHA’s zero-down loan limits, I’ll use FHA so that I can stick the house to the dirty Feds if the market goes south again.
There was a good thread on piggington that showed this would result in more loss to you versus a 20% conventional loan if you held the house for 5+ years. Remember that for FHA you need to pay up front MI, monthly MI and a higher interest rate. It ended up being cheaper to just go the conventional route and eat the DP.
@JordanT–I think that you are missing the point here. By putting only 3% down (or 0% if you can get a seller’s credit) the house becomes a very inexpensive call option on home prices. If the house appreciates, W.C. Varones keeps the profit. If the price drops, FHA (and the taxpayers) eat any losses beyond 3%. Heads: Varones wins, Tails: the taxpayer loses. FHA is the only game in town for low down payment financing.
Note my comments above regarding pricing mortgage rates and people’s respective skin in the game.
sorry a little off topic:
Remove Ben Bernanke
http://sanders.senate.gov/petition/?uid=5d1836fe-d883-42bc-af09-4e593a6cab76
Maybe we could start a thread on this?