Again we're going to be fighting over down payment shenanigans in Washington, it seems. One of the few bright spots — maybe the only bright spot — of last month's housing bill (H.R. 3221) was the fact that it did away with down-payment assistance programs (often called DPAs or DAPs) indirectly funded by the seller of the home.
To my mind, DAPs are flat-out nasty. They're just a shiny way to launder money. What they produce, in effect, are sellers bumping up their sales prices to cover (1) their own "down-payment gift" to the buyer, and (2) the fees paid to the nonprofit charity (ahem) who funnels this money from seller to buyer.
In these cases, since the buyer comes to the table with zero funds of his own, the mortgaging bank is effectively loaning one hundred percent of the sales price. The buyer has no "skin in the game," as it were. So when times get hard for Mr. Homebuyer and the mortgage payment starts to seem a little too burdensome ... well, you know where it goes from here. You've watched the news.
So seller-funded DAPs got the legislative axe last month, as mentioned above. Within moments, it seems, a few Congressfolk got together and popped the cork on H.R. 6694. Which, as you might guess, seeks to reinstate DAPs. And now we get this website:
RallyforHomeownership.com
Cute, ain't it? Oh, they're all about home ownership, they are. They suggest that you and I — all of us who value the Dream of American Homeownership — contact our Senators to let them know we want them to support H.R. 6694. Here's a grand snippet from their "Why?" page:
DPA Program Is Specifically Designed to Meet FHA Borrower Needs - Charitable DPAs programs aid borrowers who have sufficient credit to qualify for government-backed loans but have insufficient capital to meet the three percent downpayment requirement for an FHA loan. Charitable DPAs bridge the gap by providing this downpayment as a gift to the buyer, helping those who otherwise could not become homebuyers. The DPA program was developed and designed to work with FHA’s specific mortgage requirements to expand homeownership opportunities and serve the population of homebuyers that it is FHA’s mission to serve - minority, low-income, and working families with limited access to capital.
Why, indeed. Look — I don't care if a borrower's FICO is 849 and his wallet's crammed full of Amex Black cards. If he can't scrounge up three percent of a home's sales price FROM HIS OWN SAVINGS to put toward the purchase of said home, then he shouldn't be buying that home. And the bank has no business lending him the money to do it — especially when Joe Taxpayer seems to be the patsy at the other, far end of the "Who gets to eat this?" deal. Am I so completely off-base with this?
Some people are simply not ready to be homeowners.
Since the website above doesn't clearly make its ownership known, a few kind souls at Ticker Forum got involved in a discussion and went digging a bit. Turns out ownership belongs to the Genesis Foundation of Valparaiso, Indiana ...
... who just happens to pop in this Fort Worth Weekly article (hat tip Etz3l):
But what is making Dauphinot maddest is the increased use of “down payment assistance” programs that give mostly first-time buyers a “charitable” gift of the down payment money needed to close the loan under Federal Housing Administration loan rules.
Here is how it worked on a recent loan deal, coincidentally, just down the street from Felipe Garcia’s house in Edgecliff Village. According to documents sent to the buyer and obtained by the Weekly, the asking price on the home was $85,000. But the proposed buyer had bad credit, and the lender wanted a hefty down payment. So the Genesis Foundation, based in Indiana, was brought in to “give” the buyer the $7,200 down payment in return for a $595 fee that was rolled into the loan. In return, the company selling the house gave Genesis a tax-deductible “gift” of equal value and paid Genesis a $750 transaction fee.
It’s illegal for a home seller to give down payment money to a buyer, under federal lending rules. But in this case, the down payment technically came from a charity. In reality, it was just a way to move the money from one pocket to another. The new purchase price for the house was $93,000. So, in the end, the FHA (which requires at least a 3 percent down payment) was backing a higher loan with no real down payment. And instead of an $85,000 loan, the buyer now had a $93,000 loan.
“When these loans don’t get paid, the taxpayers are going to have to cover them,” said Dauphinot, who has been in the business for 30 years. “Everyone likes to portray these foundations as groups that are helping out the poor and getting them into home ownership. But it is all about getting around laws and inflating prices in the market. That house went from $85,000 to $93,000. The borrower now has a bigger loan to cover. That’s not helping the poor.”
Here is how it worked on a recent loan deal, coincidentally, just down the street from Felipe Garcia’s house in Edgecliff Village. According to documents sent to the buyer and obtained by the Weekly, the asking price on the home was $85,000. But the proposed buyer had bad credit, and the lender wanted a hefty down payment. So the Genesis Foundation, based in Indiana, was brought in to “give” the buyer the $7,200 down payment in return for a $595 fee that was rolled into the loan. In return, the company selling the house gave Genesis a tax-deductible “gift” of equal value and paid Genesis a $750 transaction fee.
It’s illegal for a home seller to give down payment money to a buyer, under federal lending rules. But in this case, the down payment technically came from a charity. In reality, it was just a way to move the money from one pocket to another. The new purchase price for the house was $93,000. So, in the end, the FHA (which requires at least a 3 percent down payment) was backing a higher loan with no real down payment. And instead of an $85,000 loan, the buyer now had a $93,000 loan.
“When these loans don’t get paid, the taxpayers are going to have to cover them,” said Dauphinot, who has been in the business for 30 years. “Everyone likes to portray these foundations as groups that are helping out the poor and getting them into home ownership. But it is all about getting around laws and inflating prices in the market. That house went from $85,000 to $93,000. The borrower now has a bigger loan to cover. That’s not helping the poor.”
Sums it up ever so nicely, doesn't it?
I'd be pumping H.R. 6694 if I were them, too.
But I'm not. I'm just a guy who somehow managed, with his wife, to piece together a three percent down payment on our first home way back when we were earning in the low- to mid-$20k range per year.
And a guy who knows dumbassery when he sees it.
So I believe I'll be better served if I simply write to my Congressfolk and indicate my complete and utter disdain for DAPs and, in particular, H.R. 6694.
Labels: Homeownership, Mortgages
