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Congressional Research Service Gives Thumbs-Down To FHA Seller-Funded Downpayment Assistance

There has been a remarkable shortage of official reports on Seller-Funded Downpayment Assistance (SFDPA) and H.R. 600 that were not commissioned either by HUD or by the DPA providers themselves. We have obtained a report dated March 11th, 2009 commissioned by Congress and prepared by the Congressional Research Service (CRS) that offers a refreshingly lucid discussion of the facts surrounding the debate over reinstating Seller-Funded Downpayment Assistance as an allowable source of funds for borrowers' downpayments on FHA-insured loans.

Several points frequently glossed over by the DPA providers are brought to the readers' attention, including fallacies about the Housing and Economic Recovery Act of 2008 (HERA), P.L. 110-289, as enacted on July 30, 2008. Here's a key excerpt:

  • "Enactment of the law does not mean that sellers may not provide downpayment assistance to borrowers obtaining FHA-insured home loans. It simply means that any contribution by the sellers will not count towards the 3.5% contribution required of the borrower. Nonprofits may still provide gifts that would pay borrowers’ required downpayments, but the source of these gifts may not be the sellers. As noted below, current HUD rules provide that the seller or other interested third parties may contribute up to 6% of the property’s sales price toward the buyer’s actual closing costs."

The report dissects H.R. 600 and examines both the positive and negative aspects of re-legalizing Seller-Financed Downpayment Assistance as proposed under H.R. 600. Questioned at length in the report is whether or not HUD could feasibly charge the higher premiums projected to be necessary to protect its insurance fund from rising delinquencies associated with SFDPA. Also offered is this simple solution for allowing regulatory changes to reinstate SFDPA in contrast to the current proposal in H.R. 600:

  • "If the seller were permitted to contribute to the borrower’s downpayment, the services of a nonprofit would no longer be needed to facilitate the transaction. The downpayment assistance could be a matter of negotiation between the seller and borrower and become a part of the sales contract. Instead of assisting the buyer indirectly through a nonprofit, the seller could assist the buyer directly. This would add transparency to seller-funded downpayment transactions."

The report lends credence to our long-running argument that there is absolutely no economic reason for FHA seller-funded downpayments which involve a third party pretending the transaction is "charitable" in exchange for money. Since honest, above-board equivalents are possible, there is not a single argument for the practice and plenty against it.

Click here to read the full report.

The FHA testified before Congress on April 2, 2009 that loans with seller-funded downpayments, which comprise 95% of all DPA loans and 12% of the FHA's volume (during 2008) were responsible for 30% of FHA's foreclosures over that time period. This, of course, would not include foreclosures stemming from every loan made over the 2008 calendar year, which would include a mad rush to get files in before the October 1st cutoff deadline (after which the loans were outlawed). Last September, homebuilder-sponsored radio ads could be heard from coast to coast, urging buyers to come take advantage of the loans while they were still legal. The fate of those loans—which we are sure were originated and underwritten with the utmost prudence—is yet to be seen.

Readers may be also interested in our campaign against SFDPA.

Note: There is an earlier report dated August, 2008 which appears on the WikiLeaks web site. What we present here is an updated report received from a source who claims it has now been submitted to the Housing Financial Services Committee. Hopefully, they will read it!

For those unawares, the following description of the Congressional Research Service (CRS) appears on the WikiLeaks site:

"The CRS is a Congressional "think tank" with a staff of around 700. Reports are commissioned by members of Congress on topics relevant to current political events. Despite CRS costs to the tax payer of over $100M a year, its electronic archives are, as a matter of policy, not made available to the public.

Individual members of Congress will release specific CRS reports if they believe it to assist them politically, but CRS archives as a whole are firewalled from public access."

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