Downpayment assistance ended five years ago on Sept. 30, 2008, eliminating more than 25,000 homebuyers per month from the collapsing housing market. Was that a good idea?
That day will live in infamy as the day that Congress and the Bush administration ended downpayment assistance on loans insured by the Federal Housing Administration.
Add to that direct decision, the ripple effect of the sellers not being able to sell, significantly accelerated the housing market collapse. It seems that the only segment of the real estate market to benefit from the end of
As DPA providers lobbied the Department of Housing and Urban Development and Senate Banking Committee members and their staff (the staff controls more than you would think) to alter the programs instead of eliminating them, they were concocting a First Time Home Buyer Tax Credit to soften the impact on the housing market that was sure to come.
Borrowing money from China to fund a downpayment did in fact soften the initial blow to the housing market. However, it proved insufficient. It never seemed to be a good idea to transfer more risk and cost to the taxpayers by using federal tax credits to fund the borrower downpayments further worsened the overall market.
As a result, the housing market collapsed across America because of the lack of buyers willing and able to qualify for a home loan. As prices plummeted, as job growth ended, unemployment exploded. It became nearly impossible to sell a home.
Conflicting studies from both FHA and the downpayment assistance industry abound regarding the default rate on FHA loans with downpayment assistance. But according to research conducted by the industry’s trade association, HAND, “while loans with down payment assistance did result in a slight increase in default rates as compared to FHA loans with buyer paid downpayments, the primary driver of defaults in the past five years has been the substantial decline in jobs and the drop in home prices that resulted in the typical FHA market consumer to lose mobility generally available in past market shifts.”
The historic run up in subprime loans and the associated increase in housing prices between 2003 and 2007 had the greatest negative impact on the overall housing market and thus the FHA insurance pool than downpayment assistance. You just can’t promote the idea that it is OK for a loan applicant lie about income, assets, and the ability to re-pay and expect a positive outcome. W-2 borrowers should always be required to document the loan file.
Recently, some policy makers are getting into sync with the realities of the marketplace. Evidence of this include the Sept. 4 bulletin from the Consumer Financial Protection Bureau that placed data furnishers and the credit reporting agencies on notice that their current process for managing consumer credit disputes was insufficient, and that it did not meet the “duty for a reasonable investigation of the consumer credit dispute” as required under federal law.
The Federal Trade Commission’s December 2012 “Report to Congress under Section 319 of the Fair and Accurate Credit Transactions Act of 2003” found “the number of errors on credit reports are eye opening,” according to Howard Shelanski, director of the FTC’s Bureau of Economics.
He went on to say, “The results of this first-of-its-kind study make it clear that consumers should check their credit reports regularly. If they don’t, they are potentially putting their pocketbooks at risk.”
And, FHA’s release of Mortgagee Letter 2013-24 and separately 2013-26 change the landscape of the availability of FHA loans to consumers with small collections, accounts currently in dispute, and shorten the waiting period after a short sale or foreclosure when the event was the result a of job loss or 20% drop in income.
These reports, studies and position statements draw one to conclude that these three agencies realize that they should take an aggressive approach to remove the road blocks that prohibit the consumer from entering or successfully re-entering the housing market. Perhaps they will also embrace a return of downpayment assistance as well.
Joel Pate is a 28-year veteran of the real estate, mortgage and credit industries and has founded many successful ventures. He lives in Mobile, Ala. You can find out more about Joel and pre-underwriting homebuyer development at www.joelpate.com or www.scoreinc.com.
