FHA Down Payment Assistance Axed

The U.S. Department of Housing
and Urban Development (HUD) has recently announced that starting October
31, 2007, they will cease down payment assistance programs for loans with
down payment funds provided by specialized non-profit organizations. These
non-profits are set up to aid borrowers unable to provide the minimum 3%
required for Federal Housing Authority (FHA) loans.
HUD cites statistics that the down payment assistance programs have
foreclosure rates that are two-times as much as other programs. Of loans
made in 2000 and 2001 with assistance from non-profit down payment
programs, the foreclosure rate is around 15%, while the typical FHA rate is
6%. If the high number of foreclosures on these loans continues, the FHA
reports the down payment assistance program, as currently constituted, will
have to operate in the red.
HUD's announcement comes in the wake of 223,538 September foreclosures,
a 100% jump over September of last year.
The decision to discontinue this type of assistance has been met with
opposition. Demand for FHA loans has increased significantly in the
preceding months, as the subprime mortgage crisis has created a void for
certain products. FHA loans have once again became en vogue for borrowers
with lower credit scores and who lack sufficient down-payment and
closing-cost funds.
While gifts from parents are still permissible, seller arranged down
payments through these non-profits will be prohibited. Several of these
non-profits are challenging HUD's decision in federal court, contending
their exclusion from the market will hurt lower-income homebuyers.
"We fear that HUD is basing their decision to eliminate the down
payment assistance programs off of a black-and-white statistical scenario,"
says David Zitting, President and CEO of Primary Residential Mortgage, Inc.
"Yes, there may be higher foreclosure rates for loans that were completed
by utilizing these programs, but it is highly unlikely that the actual
assistance program was the main cause, but more that it was more of a
negative layering effect within the overall credit package. When you layer
negative issues, like poor payment performance on other consumer debt,
outstanding collection accounts (above $1000), short tenure on job or poor
job stability -- then, in turn, you add a feature that doesn't require the
borrower to invest dollars into the transaction; this is for a recipe for
foreclosure."
"We believe that further study should be made to truly determine what
percentage of loans with down payment assistance programs actually went
into foreclosure that weren't married up to these negative layering
characteristics," says Zitting. "I would bet that the loans in that bucket
perform very closely to regular FHA loans that did not utilize the
assistance program. It is our opinion that HUD should reconsider their
decision to eliminate the down payment assistance programs and allow
potential new homeowners to utilize these resources if they can demonstrate
that the other characteristics of their ability to borrow are stable."