NAR Strongly Supports Housing Bill and Clarifies Rumors Concerning Downpayment Assistance Provisions
Contrary to an email members may have received, the Housing bill being considered in Congress this week does NOT eliminate all downpayment assistance programs from eligibility for FHA insurance. The legislation would only prohibit seller-funded downpayment assistance, or assistance from someone who financially benefits from the transaction. Other forms of assistance - such as family members, government-sponsored programs, or gifts from non-profits would still be permitted. The Housing bill also contains many reforms that are critical to housing markets, including FHA reform, GSE reform, a homebuyer tax credit, and permanent increases to the FHA and GSE loan limits. This bill will help millions of American families avoid foreclosure and safely and affordably achieve the dream of homeownership.
FHA is the only mortgage program that has allowed seller-funded downpayment assistance. However, FHA's recent default rate is troubling. Due to the current performance of its loans, FHA must receive a federal subsidy for the first time in its history, or raise premiums on borrowers in order to remain solvent. This is primarily due to loans with seller-funded downpayment assistance, which have a default rate 3 times higher than other FHA loans. Loans that receive downpayment assistance perform less well than loans without downpayment assistance. A recent GAO study found that loans with seller-funded downpayment assistance experienced more than double the risk of delinquency than loans with other types of downpayment assistance, and almost three-times the risk of loans with no downpayment assistance. (Additional Action Needed to Manage Risks of FHA-Insurance Loans with Downpayment Assistance, United States Government Accountability Office, November 2005.)
Recent studies have demonstrated that seller-funded downpayment programs often result in inflated home prices. These studies showed that homes sold using this type of downpayment assistance typically sold for 2-3% higher than comparable homes without downpayment assistance. (Seller-Funded Down-Payment Assistance Changes the Structure of the Purchase Transaction and Negatively Affects Loan Performance, United States Government Accountability Office, June 22, 2007.) When a borrower takes out a mortgage on a home with an inflated price, not only are they at greater risk for foreclosure, but the resulting inflated price can have ramifications to the housing market in that community. Home sales prices are used as comparables to determine the price of other homes. Inflated prices overstate the market demand and can lead to exaggerated home sales prices in the neighborhood. This can magnify what housing affordability problems already exist in these communities. In addition, inflated home prices impact the risk to the FHA fund by increasing the "severity of individual claims on the FHA Insurance Fund and FHA losses on claims paid on such mortgages."(HUD Proposed Rule, "Standards for Mortgagor's Investment in Mortgaged Property", Federal Register, May 11, 2007, Page 27049.)
The effective date for the prohibition of seller-funded downpayment assistance programs is October 1, 2008. We hope that in the remaining months, Nehemiah and other such providers will be able to develop a business model that does not rely on seller-funded downpayment assistance, but instead will provide downpayment assistance that will help homeowners without putting them at risk for foreclosure.
|
