In tomorrow's Federal Register, HUD will publish its renewed proposal to abolish seller-funded down payment assistance programs (SFDPA's), and offer a 60-day window for public response. A preview is available on their web site here; the official Federal Register publication will be available here tomorrow, on 2008-06-16.

HUD's press release and the Commissioner's Statements on the issue provide more background.

"If, after reviewing the comments, HUD issues a final rule, it would be effective 180 days from the date of publication with regard to all insured mortgages involving properties for which contracts of sale are dated on or after the effective date."

This is the agency's second attempt in less than a year to eliminate what many industry professionals perceive to be a "wash" of prohibited gift funds through a third-party in exploitation of both IRS and FHA rules. HUD/FHA previously issued a final rule on 2007-10-01 entitled "Standards for Mortgagor’s Investment in Mortgaged Property", but court challenges by Nehemiah Corporation of America and Ameridream, Inc. resulted in the U.S. court's enjoining (suspending) HUD's rule, and ultimately vacating it on 2008-03-05.

"The court found, among other things, that HUD violated the Administrative Procedure Act by failing to allow comment on critical factual material and by failing to offer a rational explanation for the final rule."

A few months later, HUD is back with the facts and rationale...

From the proposal, as posted on HUD's web site, we glean that for 2007 "more than 35 percent of all home purchase loans insured by FHA" had these particular type of DPA's. It goes on to cite some truly disturbing facts about FHA's portfolio:

  • "The early default rate of loans with nonprofit downpayment assistance has consistently been more than twice the rate found on loans with borrower-funded downpayments"
  • "The [ever-defaulted rate] shows that, for loans endorsed from 2000 to 2005, between approximately 24 and 29 percent of loans with seller-funded assistance had experienced a 90-day delinquency, compared to approximately 11 to 16 percent of loans without downpayment assistance."
  • "The [current] default rate for loans with nonprofit downpayment assistance... was 11.19 percent and that for borrower-funded purchase loans was 6.22 percent."

This renewed proposal appears to have teeth. Third-party research and actuarial data missing from the vacated 2007 rule are covered in depth this time around. According to one such report cited in the proposal, "for loans with seller-funded down payment assistance, the appraised value and sales price were higher as compared with loans without such assistance." Looking at the numbers, this statement caught our attention:

"The expected lifetime claim rate on loans with nonprofit downpayment assistance in the FY 2005 insurance cohort is close to 17 percent, and for FY 2007 is above 28 percent."

Single-Family, 1-4 unit properties insured under the 203(b) program account for 90% of the MMIF, FHA’s largest insurance fund. Excluded are "condominiums and section 203(k) purchase-and-rehabilitation loans, along with some minor targeted programs." Based on actuarial projections, it is proposed no increase in premiums could offset the required credit subsidy rate (CSR) for the portfolio:

"HUD is at the point where continuing to support loans with SFDPA will require budget appropriations for all of the FHA MMIF loans."

HUD is in trouble, and SFDPA's are either [part of] the problem, or the root, as HUD presents it. The proposal reads, "The FHA insurance fund is teetering on credit insolvency." We sum the remainder of the proposal as thus:

"If seller-funded DPA's aren't banned, FHA will have to ask for a budget appropriation of $1.4 billion in 2009 - the first time in the agency's history since it was founded in 1934."

Please follow the links above to HUD's site and the Federal Register for the actual proposal and directions for public response.

There has been quite a bit of discussion on our Forums about FHA programs and issues. Visit the topic most relevant to this development here. Your commentary is both welcome and encouraged.

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