DPA's Negatively Impact FHA Liquidity

The Federal Housing Administration's mutual mortgage insurance fund would lose money for the first time ever if the agency doesn't curtail seller-funded gift programs, according to an FHA official.The Department of Housing and Urban Development doesn't normally comment on proposed rules, especially one as controversial as the proposal put forth in May that would all but prohibit downpayment "gifts" from sellers or anyone else who would benefit from the transaction. But at the Mortgage Bankers Association's Government Housing Finance Conference in Washington last week, the FHA's Judith May said that "if downpayment assistance programs continue without change, the (insurance fund's) credit subsidy rate would go positive" within eight years. Ms. May, who is director of the office of evaluation in HUD's Office of Finance and Budget, told the conference that loss rates on FHA-insured mortgages with downpayment assistance are already three percentage points higher than those on loans without help from the seller. And she said that an independent actuarial review of the fund "predicted a much higher loss ratio in the future" if the current trend is allowed to continue. "That means the fund would no longer make money," Ms. May explained. "For the first time since the FHA was created in 1934, the program would cost more than it brings in." Downpayment assistance providers on a panel with Ms. May disputed the FHA's figures. But even if the study's dire forecast is true, they argued, it would be a mistake to simply toss DPA out the window, if only because the program currently accounts for a big chunk of the FHA's loan volume. "Amend it, don't end it," said Scott Syphax, president of the Nehemiah Corp. of America, Sacramento, Calif. The comment period on the proposed rule expires July 11.