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Stop "FHA Subprime"

Thursday, February 26, 2009

STOP HR 600: STOP 'FHA Subprime!'The folks over at the Implode-O-Meter have launched a campaign to try to stop HR Bill 600 which seeks to reinstate "seller funded downpayment assistance", otherwise known as "FHA subprime", and I'm doing my part to help spread the word.

Despite those who desperately want the housing market mess to quickly heal itself so the rest of the economy can begin to climb out of the gigantic hole that it is now in, bypassing downpayments for home purchases really shouldn't be a part of it.

Looking back, of all the things that contributed to the housing bubble and bust, getting around the "skin in the game" requirement for borrowers through a variety of nefarious loan program ranks near the top of the list.

For all the easy money that washed over the world a few years ago, there was never a housing bubble in Germany. Why? In part, at least, because the buyer always had to come up with a sizable downpayment.

There's no reason to allow anyone to be able to buy a house anywhere without coming up with some of their own money. That's a character-building part of one's life that everyone should have to go through - saving for your downpayment.

While we are in desperate need of an end to the housing crisis in the U.S., we're in even more desperate need of character-building.

Here's the write up from Implode-Explode Heavy Industries (love that name!)

The contentious practice is called "seller-funded downpayment assistance" (SFDPA). It is used to allow home buyers getting Federally-backed mortgages to bypass the need for a downpayment, supposedly for charitable reasons.

On the surface, it sounds benign, but it is actually fraud and money laundering inflicted on the Federal Housing Administration (that is, taxpayers), the housing market in general, and in a sense, even the buyers!

One of these companies, Global Direct Sales (which runs the "Grant America Program") has sued us in an attempt to stop us from revealing the existence of SFDPA and discussing it frankly. SO FAR A FEDERAL JUDGE HAS BLOCKED THEIR ATTEMPTS TO SILENCE US. (Read More about our battle here. Help us to fight this NUISANCE lawsuit which is a blatant attack on free speech!)

How SFDPA works:

Someone wants badly to sell a home. FHA has subsidized programs to help home buyers. The "problem" is that even with FHA's programs, a 3.5% down payment is still required (to show committment on the part of the buyer). Sellers realize if they could cut the downpayment to zero, they can make home buyers out of virtually anyone, and hence unload homes easier. Intermediaries like Realtors, as well as home builders, realize this would have the potential to increase their sales and transactions. Even some in Congress are in on the scheme, as they can appear to provide constituents with "free homes". After all, home ownership is a right, isn't it??

Enter SFDPA.

Third party, private companies have established programs that allow sellers to cover the downpayment FOR the borrowers, by promising to repay the money after the sale. While initially the downpayment is covered by the SFDPA company, the seller's money is then channeled through one or more entities which have a nonprofit or otherwise "exempt" status (like an Indian tribe) to repay them. The buyer has already presented the LENT money to the FHA as if it were their own, covering the required downpayment. Effectively, the seller has paid the buyer's downpayment, with the FHA being none the wiser.

The FHA has no reliable way of knowing which loans were made this way.

The GAO has found that transactions using SFDPA usually have been marked up by about 3%... in other words, USUALLY THE SFDPA DOWNPAYMENT MONEY COMES FROM SIMPLY MARKING UP THE HOME VALUE!!!

Why is this bad? Well,
  • it distorts home prices, and creates an incentive to keep exaggerating prices upwards endlessly
  • it means ALL the money for the purchase actually comes from the FHA (taxpayers), as it is rolled into the loan principle (in other words, the FHA nets NOTHING of real value)
  • since the markup in value is not "real", it means the buyer immediately has a zero or negative equity position, relative to true market prices
This is bad all around -- for everyone, that is, except the seller and the intermediaries INCLUDING THE SFDPA COMPANIES, WHO MAKE HUNDREDS OF DOLLARS IN "FEES" OFF EACH TRANSACTION. These companies have netted millions off of SFDPA, given the popularity of the programs with builders and Realtors (in other words, those who want to see homes sell, no matter what).

So why in the world is there a bill to get this practice started again? PERHAPS BECAUSE ITS CONGRESSIONAL SPONSORS LIKE THE DONATIONS THE SFDPA COMPANIES, REALTORS, AND BUILDERS KEEP SENDING IN, to help insure this particular loophole is kept open, and other "housing-friendly" giveaway legislation is put forth. The main sponsors are:
Does SFDPA Help Homebuyers?

Some argue that SFDPA should be allowed because it helps people get into homes. But this makes no sense:
  • If no-money-down loans were a good idea, why wouldn't the FHA just provide 100% financing itself, and cut out the middle-men? [In fact, the FHA has tried and been blocked in the past... by the SFDPA companies!]
  • If the loans were actually charitable, wouldn't the money come from charities, instead of the home sellers? [The IRS agrees. Sellers contractually COMMIT to "donate" the money to cover the buyers' downpayment]
  • Think about what is going to happen to these loans in a market of falling prices, with greater job loss, forcing more people to sell & move [All of the performance statistics for these loans, as disturbing as they were, were from good times!]
  • Haven't we learned as a society that loans with "no skin in the game" are inherently unsound and a bad idea, as they simply lead to foreclosures? [Some people apparently havent -- or they don't care!]
Why Did The Bill Number Change?

Since the 110th Session of Congress ended with H.R. 6694 still pending, it had to be re-introduced for the 111th. It received the number H.R. 600. However, there is some "apparent" difference. H.R. 6694 specifically instituted fees to attempt to cover the risk of SFDPA lending. However:
  • The fees were essentially subprime "risk premiums," increasing as FICO scores went down. But these practices have already been reviled as "subprime" and discredited by the failure of FICO scores to provide for true risk mitigation.
  • Proponents argued that the FHA would "make money" on the program because of the risk premiums, but neglected to point out that the fees would be simply refunded after a history of on-time payments.
  • If the loans went into default, the FHA would likely lose money. Since home values start off inflated, it is unlikely the "risk premiums" would cover losses (and FHA is already operating at a loss for the first time in its 7-decade history).
The end result: SFDPA borrowers would be treated just like subprime borrowers, and the FHA (taxpayers) would still likely lose lots of money overall.

HR 600 does omit the section of HR 6694 that set up the premium structure. However, it still requires the FHA to set up a premium structure for borrowers with a FICO score under 620 and authorizes the FHA authorizes FHA to charge up to 3% upfront and 1.25% for annual premiums up to a fico of 679. So in other words, more of the details have been moved from the legislation itself to future FHA rules. We believe this is simply a tactic to deflect criticism -- especially of the use of FICO scores as risk-control criteria -- not to actually change the nature of the SFDPA legislation.

The law is substantially the same -- the renewed SFDPA would provide no-money-down, subprime-like loans at great peril to the FHA and taxpayer. It would continue to inflate home values, and likely lead a great many home buyers into foreclosure.


How you can help:
  • Write to and call the bill sponsors expressing your opinion, and to your congressmen to get them to apply pressure to stop the bill.
  • Donate to us in our legal fight to keep our free speech on this subject, and defend the pocketbooks of all taxpayers.
  • Spread the word -- put STOP "FHA SUBPRIME" buttons on your web page, and link to this page.


Nick said...

You gotta admit it's a pretty sweet scam, though... how else are you going to get paid to launder money and bribe Congress, legally? I mean, bribing Congress is easy, of course, but getting paid to launder money shows a certain creative defecation on the law and the US taxpayers.

Anonymous said...

Sounds like the Sopranos:
Paulie Walnuts gets out of jail and a huge party is thrown for him at the Bada Bing!. Tony and Ralphie get an idea from Brian Cammarata the next day: to defraud the HUD fund with bogus housing deals. Tony recruits Assemblyman Zellman and a friend of his, Maurice Tiffen, the formerly idealistic head of a non-profit low income housing program, to put the plan into action.

doug said...

Here's what I learned today at DPA non-profit Nehemiah's website:

Recent National Delinquency Studies (NDS) issued by the Mortgage Bankers Association demonstrate that FHA loans are not the source of the foreclosure crisis. By extension, DPA which was only associated with FHA loans, are therefore not a part of the problem either. Consider the following presented in the two most recent MBA NDS reports.

2nd Quarter NDS issued September 2008 - "The foreclosure starts rate differed greatly by loan type. For prime loans, foreclosure starts on fixed rate loans were 0.34 percent, an increase of five basis points." "FHA foreclosure starts decreased one basis point to 0.95 percent." In contrast, "Prime ARM foreclosure starts were 1.82 percent, a 26 basis point increase. For subprime loans, fixed rate foreclosure starts increased 27 basis points to 2.07 percent and subprime ARM foreclosure starts increased 31 basis points to 6.63 percent."
3rd Quarter NDS issued December 2008 - "For prime loans, foreclosure starts on fixed rate loans were 0.34 percent, unchanged from last quarter ...". "FHA foreclosure starts were unchanged at 0.95 percent ...". "... prime ARM foreclosure starts fell five basis points to 1.77 percent. For subprime loans, fixed rate foreclosure starts increased 16 basis points to 2.23 percent and subprime ARM foreclosure starts decreased 16 basis points to 6.47 percent."
The above data illustrate two points -
First, if SF-DPA were contributing to high foreclosure rates, the NDS reports would not have reported a decline in foreclosure starts in the second quarter of 2008 or no-change in foreclosure starts in the third quarter, particularly given HUD's own claims that in recent years, 40% of FHA purchase money originations were accompanied by SF-downpayment assistance.
Secondly, this data clearly illustrates the source of the foreclosure crisis. It is not associated with FHA insured-mortgages or downpayment assistance. The mortgage crisis is clearly being driven by the excesses of subprime lending.

My take is - the current ban on DPA activity just makes getting started harder. There still remains VA, CalVet, Habitat, etc. - seems like there is always some agency that is working to help people overcome the challenge of getting into a home. DPA just touched the largest group.

This whole thing kinda smells like blame shifting - wouldn't want to acknowledge that unfettered use of CDS and faulty risk models were the root cause of our economic bubble and current difficulty. From what I've learned on this blog and several others, the whole mess was a top-down engineered prosperity vehicle for investment bankers worldwide.

Anonymous said...

owning a home isn't a right? the next thing they're going to tell me is that owning a car isn't a right...

fpinczuk said...

I actually witnessed and signed off on the scam when I sold my home in East Stroudsburg PA back in 2001. This was my first home, and after getting another job in another stated it was time to sell. The real estate agent presented the couple that ended up buying the home as first time home owners. They were in their 50's and it came up that they would need "seller's assistance", simply they inflated the selling price to come up with the down payment. I unfortunately was not educated enough into the process to fully understand the impact. And frankly told by my real estate rep that it was very normal!

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