FHA worsens foreclosure crisis?
Homeowners trying to avoid foreclosure may be encouraged that Congress is moving forward with its foreclosure assistance plan, but while FHA may eventually play a larger role in the foreclosure bailout business, are they contributing to the problem?
There’s been a lot of criticism recently of FHA loans being made in conjunction with down payment assistance programs, such as Nehemiah, or Ameridream. While FHA requires a 3% down payment from the borrower when purchasing a home, these non-profit entities allow the cash-strapped buyer to essentially “borrow” the down payment.
Example: you have a $100,000 home. Normally, the borrower’s required to contribute $3,000. The purchase price is raised, the seller makes a “contribution” to the third party non-profit, and then they “gift” the down payment back to the borrower.
FHA has been trying to stop this practice. Why? FHA commissioner recently stated: “…FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments.”
Gee, that’s a problem. Most critics have attributed this correlation solely to the fact that the borrowers “have no skin in the game.”
Well, that’s part of it. Here’s how I see it: these programs are failing at a high rate for MULTIPLE reasons:
* These programs are normally offered to median-and-below purchasers.
* They typically have weaker credit than the average borrower
* The “gift” funds are ADDED to the purchase price, giving the new homeowner instant
NEGATIVE equity
In addition, as I recall, these programs appeared a little while after lending requirements were loosened, and borrowers were able to exceed the traditional 28/36 ratios, where borrowers were not allowed to spend more than 28% of their incomes on mortgage payments, and 36% on all debt payments. So on top of the things I’ve mentioned above, you have borrowers spending more of their income than ever on mortgage payments and unsecured debts.
Should it be any surprise that borrowers who use these programs are more likely to end up facing foreclosure?
You can’t have it “both” ways. It’s reckless to take a borrower who has very little savings, weak credit, extended ratios and put them into a home that has negative equity from day one. “You’ve finally achieved the ‘American Dream.’ Best of luck hanging onto it.”
It’s one thing to “expand opportunities for homeownership.”
It’s quite another to increase those borrowers at extreme risk of foreclosure.
These programs do have value, but at some point the standards are going to have to be adjusted, so we’re not setting people up to be the next foreclosure victim.
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July 18th, 2008 at 2:37 pm
[...] jacking up the appraisal so the seller could “gift” the money to the borrower. So, the downpayment assistance programs which helped drive the market are going to [...]