by Nancy Osborne, COO of ERATE®
May 16, 2008 - With foreclosure rates escalating to record levels throughout the country and the growing correlation being made between a borrower having equity in their property, so called “skin in the game”, and how that factors heavily into their willingness to stay in a property or flee from it, alarm bells should be ringing now that Congress is proposing that FHA take on some $300 billion in mortgage financing and expand the existing program. Little to zero down payment loans will now be shifted directly onto the taxpayer's collective shoulders as FHA loans require only a paltry 3% down payment and there is actually a sanctioned way of obtaining a zero down payment loan by getting the needed 3% from a non-profit housing assistance organization (perhaps one even set up by a home builder) or directly from a seller or from a buyer's family and friends. With a real estate market that's already in a steep decline, desperate sellers and builders may be more than willing to make the questionable 3% concession to potential buyers in order to get the property sold.
The Federal Housing Administration (FHA) tried to stop the practice of seller-contributed down payments in 2007 and they were blocked by advocates for low income housing. It is interesting to note that through the first half of 2008 over 35% of loans which were insured by FHA had down payments which were seller funded. The non-profits housing groups, which are permitted to assist borrowers with the down payment, in many cases work directly with and have close ties to home builders. Unfortunately it is the taxpayer who shoulders the ultimate burden if these loans go into default because FHA insured loans are backed by the government, AKA U.S. taxpayers. Data shows that the rate of default where a buyer has financed a no-down payment loan is up to 3 times the norm for FHA loans. Additionally those sales transactions involving non-profit down payment assistance have been shown to have appraised values which are higher than those of comparable sales occurring without it.
The Federal Housing Administration (FHA) has historically permitted friends and family of buyers to gift the 3% down payment but it has only been within the past decade that home builders have now followed suit by channeling this assistance through non-profits they have helped set up in order to by-pass potential conflict of interest claims. Fortunately the IRS has become aware of the potential problem and has begun to investigate whether many of the so-called independent non-profits truly qualify for their non-profit status or if they are simply a vehicle set up for the purpose of generating profits to their founders.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.