While H.R. 3221 was intended to “rescue” the housing industry, the elimination of the DPA program will have the exact opposite effect of its intended purpose. Not only did it eliminate DPA programs, it also instituted a downpayment requirement increase from 3 percent to 3.5 percent. This combination is a recipe for disaster and will further hurt the already crippled housing market.

...I just thought you should know that there is a new website dedicated to saving downpayment assistance. The address is www.DPAGroundswell.org. This site contains an area where you can email comments/letters to your elected officials letting them know you want to help save DPA...FYI

This seems to be really interesting indeed. Thank you for explaining MBS. I don't have an idea what is it too.

Sarah -

Not a stupid question at all! MBS = Mortgage Backed Securities. VERY roughly, that's how an investor "buys" mortgages. Here is Wikipedia's explanation of MBSs.

It IS a great discussion, thanks to everyone who has contributed!

Sameer - "Furthermore, a gift from family involves social pressure not to default, thus increasing the cost of default." Fantastic point! (As is the perspective of the MBS buyer, I hadn't really considered that...)

This is a great discussion! At the risk of looking stupid, what is a "MBS" thats mentioned in the comment above?

Jay-- good point. However, the trouble with this line of reasoning is that the originating lender is hardly the one holding the bag once the loan defaults. Furthermore, given the MBS environment we have been living in, these loans are not being sold individually, they are being sold in tranches-- each tranch is labeled according to the terms of the loan, 0% down, 10% down, etc. The buyers of the MBS are not looking at the specific detailed terms of each individual loan. Therefore it is a scam -- not perpetrated upon the originating lender, but upon the purchasers of the MBS.

You're right, only a few people will default, but given the highly leveraged situation of these holders of MBS, a default rate that is even a tiny bit larger than the default rate that is predicted for a given tranch will result in disaster. Which then results in deleveraging, a credit crunch, a tight money environment, further declines in home values, and even more defaults.

When I bought my first house over ten years ago, I could only afford part of the down payment. So I received a gift from my father. He had to sign a document making it clear that this was a gift, not a loan. Have banks been allowing loans to comprise part of the down payment as well recently? Sheesh.

(Gifts from family and the government are different from a gift from the seller because a gift from the seller pollutes the arms length nature of the sales transaction. Furthermore, a gift from family involves social pressure not to default, thus increasing the cost of default. Yeah its a gift, but it was a gift so I could have a house, not so I could default on it and start renting again.)

This is a sad state that we have gotten our selves into, I don't think that there is anything that will be done that will fix this mess any time soon. The impact that this has had on so many people is devastating and the government, once again, is making things worse, instead of better. For us who are not in this sinking ship, we should be counting our blessings every night, to lose one's home is something that one doesn't get over in a variety of ways.

I'm glad to see all of the comments that have been posted so far regarding this issue, interesting reading, thanks.

Respectfully,

Dr Saxe

Sameer - You make very valid points in all your comments and I appreciate your thoughts.

As long as the lender is aware that the buyer is utilizing a DPA, then I don't see how it's a scam. People have, for ages, used "creative" ways to get down payments covered. One of the more common are getting "loans" from family (or outright gifts) for down payment.

Why is getting a gift from family (or a government program) any different than getting a gift from the seller?

Now if the lender were under the assumption that the down payment was coming out of the buyer's pocket, then absolutely that is wrong (fraud in fact). But I don't see the scam in seller-assisted DPAs -- if the lender is fully aware of it.

Is it smart? That is certainly arguable. I'm with you in believing that much of our current mess is due to people having nothing invested in their home up front, and other than a few FICO points, nothing to lose if they walk away.

But that's not to say that EVERY 100% loan was a bad idea, or that everyone that used a 100% loan will default. The fact is, most will make their payment on time every time just like the bulk of the population.

Chris-- what if the homeowner sells before 15 years for less than the purchase price? Does he still have to reimburse the city for the DPA?

The point of a down payment is to give the homeowner some "skin in the game" so that they actually care about not defaulting and losing the house. DPA is eliminating this involvement.

The point I alluded to earlier about zero-down payments inflating home prices... if someone can't afford to put down 20% on a home, then they are out of the market for that home. Thus the potential buying market for that home is smaller, and the market price is thus smaller. DPA contributes to people's ability to make zero-down payment loans, effectively, so it contributes to home price inflation in that regard as well.

Does DPA only apply to small down payments in the 3% range? I would have been under the impression that it applied to larger down payments as well. Your example also brings up the compounding effect, however.

Person A sells his $194k home for $200k. Then person B gets $200k comps, so his home is now "worth" $200k. So then he can turn around and sell his home for $213k. Now person C can go sell his home for $226k. It compounds pretty quickly.

I misread the DPA we were referencing - my 2 clients from my example above both used municipal DPA, not seller DPA. The down payment assistance they received is theirs to keep, as long as they live in the home for 15 years. Otherwise they need to reimburse the city from their proceeds if they sell early.

Sameer, your point about inflated comps is accurate, to a certain extent. But I think there's a huge difference between 3% (marginal assistance) and 20% (massive price changes).

If several people in a neighborhood sell their $194k homes for $200k using DPA, the neighborhood would comp out a couple thousand dollars higher. Maybe that affects another transaction by a slight amount. If the next buyer pays $2,000 more than he otherwise would have due to inflated comps, we're talking about $60 (3%) down and $12 per month on his mortgage. Inflated? yes. Fleecing the public? I don't think so.

If sellers were assisting with 20% down, it would be effectively selling a $200k house for $160k. That's a much more significant difference, and would probably be considered fraud.

Where's the line in the sand between facilitating a transaction and committing fraud? I'm not sure. But helping a low-income life-time renter afford home ownership while barely affecting the comps doesn't seem like a bad thing.

Jay-- you're right, I overstepped in my claim about inflated commissions. Sorry about that.

The DPA is still inflating the price. Basically you are taking a house purchased $194k with a zero-down loan and pretending that you're buying the house for $200k with a 3%-down loan. That inflates the true market price (assuming a zero-down purchase really meets the criteria for a market transaction, something I would dispute. But that's another story for another day) of $194k to $200k.

20% is a good number because it provides a good cushion against home price declines. Yeah prices might decline more than 20% (and they have, but mostly because prices got inflated due to an easy money environment), but generally that protects people from being underwater in their mortgage. Then they are less likely to walk away and leave the lender holding the bag.

I agree 100% that if a lender wants to allow a DPA loan, then the government has no business intruding into a consensual transaction between two parties. But there are two problems with this argument: 1) The vast majority of mortgages are backed by the government via Freddie/Fannie, and 2) the government has to bail out the banks and homeowners who get burned by this scheme, otherwise people will start whining.

Sameer wrote, "And really, what is so wrong with 20% down and a 36% DTI?"

Nothing is wrong with that, never said there was. But it's not the ONLY way to buy a home. What is magical about 20%? Why not 10%, or 30%?

As far as a DPA inflating commissions for me and my real estate buddies, let's do a little math...

Take a $200K home. Say the seller contributes 3% in a DPA. That's $6000. So in your example, that's the same as the home selling for $194K.

Assuming a 3% commission, the commission on a $200K home is $6,000.

The commission on a $194K home is $5,820.

So I'd make a whopping $180 extra. That's hardly enough to justify saying "DPAs lead to inflated commissions".

The problem with the "inflated price" argument is the buyer STILL has to come up with a down payment, even if the price in our hypothetical transaction here was $194K. If they can't come up with the $6000 to put 3% down on a $200K home, it's more than probable they couldn't come up with the $5820 to put 3% down on a $194K home....

If the seller wants to sell their home in this example for $200K and not $194K, the solution is simple, reject the offer that includes DPA. No one forces a seller to contribute in a DPA.

The buyer in a DPA program still has to qualify for the loan. These aren't NINJA loans (No Income, No Job or Assets). Those were a bad idea. But a government telling a home seller that they CAN'T help someone buy their home seems like a government way overstepping their authority.

Yes this is going to make it even harder for sellers to sell and buyers to buy. My thinking is if the banks are ok with it, why is the government involved in it? It just doesn't help things i do see the common sense theory however its going to bog sales levels even further. In Tucson as well as most areas 1st time buyers use these down payment asst programs almost 75% of the time.

At this point, it looks like you have to have the credit U/W through DU by 10/1 or have the MCAW signed on an FHA manual U/W by that date.

Hopefully this new bill will bring DPA back again after that.

Jay, I totally agree with you. Regulate the DPAs by all means but don't kill them! HUD's been trying to get rid of DPA programs for several years, going so far as to issue a HUD rule change last summer that summarily shut down the DPAs. The DPAs took HUD to District Court last fall in protest. The judge promptly ruled that HUD's case had absolutely no merit and allowed DPAs to continue. HUD couldn't win in court so they simply tacked their DPA ax onto a can't-lose housing stimulus bill.

Sameer, DPAs have nothing to do with comps and commissions. In a down market, selling to a first time buyer using a DPA is often the only way a seller can sell.

On your other point, people who imply that saving a 20% down payment should be the only way to buy a home are unaware of the realities of the market. The Valley's median home price is still above $200,000 while our average wage hovers in the low $30,000's range. If your net salary is only $500 something a week, it's near impossible to save $40,000+.

Jay-- perhaps you can explain why DPA is not a scam? If the seller is giving the buyer money to cover the down payment, then that is effectively the same as lowering price. Except that if you lower the price then the comps show a lower price. Thus with DPA you are contributing to inflated comps and inflated prices in the housing market generally. (And inflated commissions for you and your real estate buddies.)

And really, what is so wrong with 20% down and a 36% DTI? If the buyer can't afford it, they can rent. What's so wrong with renting? People who buy a house with no money down and interest-only loans are effectively renting anyway, except that you real estate agents get to make more money from the transaction.

That's sad to hear about as I know plenty of good people will be negatively effected by this. In Grants Pass Oregon where I live and work we have a similar program that I have clients use from time to time and it makes all the difference.

I'm with you, Jay. I've only had a couple of clients use down payment assistance, but they were both extremely excited about fulfilling their dream of homeownership, and both are still in their homes today.

One of them is, to this day, my favorite buyer-client I've ever had the opportunity to work with, and I think of her anytime my mind wonders why we do what we do. She was a single mother of 4, in her 40's, living well below the median income, and a life-long renter who never paid late. We used one of the municipal bond programs to get her into a home of her own (50% more space with a front and back yard at about the same monthly payment). Her smile and enthusiasm were payment enough. (fortunately too, because the commission was tiny!)

I don't think congress is looking at the big picture on this one...

While H.R. 3221 was intended to u00e2u0080u009crescueu00e2u0080u009d the housing industry, the elimination of the DPA program will have the exact opposite effect of its intended purpose. Not only did it eliminate DPA programs, it also instituted a downpayment requirement increase from 3 percent to 3.5 percent. This combination is a recipe for disaster and will further hurt the already crippled housing market.

...I just thought you should know that there is a new website dedicated to saving downpayment assistance. The address is www.DPAGroundswell.org. This site contains an area where you can email comments/letters to your elected officials letting them know you want to help save DPA...FYI

This seems to be really interesting indeed. Thank you for explaining MBS. I don't have an idea what is it too.

Sarah -

Not a stupid question at all! MBS = Mortgage Backed Securities. VERY roughly, that's how an investor "buys" mortgages. Here is Wikipedia's explanation of MBSs.

It IS a great discussion, thanks to everyone who has contributed!

Sameer - "Furthermore, a gift from family involves social pressure not to default, thus increasing the cost of default." Fantastic point! (As is the perspective of the MBS buyer, I hadn't really considered that...)

This is a great discussion! At the risk of looking stupid, what is a "MBS" thats mentioned in the comment above?

Jay-- good point. However, the trouble with this line of reasoning is that the originating lender is hardly the one holding the bag once the loan defaults. Furthermore, given the MBS environment we have been living in, these loans are not being sold individually, they are being sold in tranches-- each tranch is labeled according to the terms of the loan, 0% down, 10% down, etc. The buyers of the MBS are not looking at the specific detailed terms of each individual loan. Therefore it is a scam -- not perpetrated upon the originating lender, but upon the purchasers of the MBS.

You're right, only a few people will default, but given the highly leveraged situation of these holders of MBS, a default rate that is even a tiny bit larger than the default rate that is predicted for a given tranch will result in disaster. Which then results in deleveraging, a credit crunch, a tight money environment, further declines in home values, and even more defaults.

When I bought my first house over ten years ago, I could only afford part of the down payment. So I received a gift from my father. He had to sign a document making it clear that this was a gift, not a loan. Have banks been allowing loans to comprise part of the down payment as well recently? Sheesh.

(Gifts from family and the government are different from a gift from the seller because a gift from the seller pollutes the arms length nature of the sales transaction. Furthermore, a gift from family involves social pressure not to default, thus increasing the cost of default. Yeah its a gift, but it was a gift so I could have a house, not so I could default on it and start renting again.)

This is a sad state that we have gotten our selves into, I don't think that there is anything that will be done that will fix this mess any time soon. The impact that this has had on so many people is devastating and the government, once again, is making things worse, instead of better. For us who are not in this sinking ship, we should be counting our blessings every night, to lose one's home is something that one doesn't get over in a variety of ways.

I'm glad to see all of the comments that have been posted so far regarding this issue, interesting reading, thanks.

Respectfully,

Dr Saxe

Jay-- sorry for the double post, but I just realized something. You still didn't tell me why this isn't a scam. You made an argument that the magnitude of this scam isn't so large, but you didn't make an argument that it isn't a scam.

DPA is a way for people to "magically" turn a loan which requires a down payment into one which doesn't. Why don't they just negotiate for a no down payment loan? It's the same thing, except there is no scamming going on with a no down payment loan.

Sameer - You make very valid points in all your comments and I appreciate your thoughts.

As long as the lender is aware that the buyer is utilizing a DPA, then I don't see how it's a scam. People have, for ages, used "creative" ways to get down payments covered. One of the more common are getting "loans" from family (or outright gifts) for down payment.

Why is getting a gift from family (or a government program) any different than getting a gift from the seller?

Now if the lender were under the assumption that the down payment was coming out of the buyer's pocket, then absolutely that is wrong (fraud in fact). But I don't see the scam in seller-assisted DPAs -- if the lender is fully aware of it.

Is it smart? That is certainly arguable. I'm with you in believing that much of our current mess is due to people having nothing invested in their home up front, and other than a few FICO points, nothing to lose if they walk away.

But that's not to say that EVERY 100% loan was a bad idea, or that everyone that used a 100% loan will default. The fact is, most will make their payment on time every time just like the bulk of the population.

Chris-- what if the homeowner sells before 15 years for less than the purchase price? Does he still have to reimburse the city for the DPA?

The point of a down payment is to give the homeowner some "skin in the game" so that they actually care about not defaulting and losing the house. DPA is eliminating this involvement.

The point I alluded to earlier about zero-down payments inflating home prices... if someone can't afford to put down 20% on a home, then they are out of the market for that home. Thus the potential buying market for that home is smaller, and the market price is thus smaller. DPA contributes to people's ability to make zero-down payment loans, effectively, so it contributes to home price inflation in that regard as well.

Does DPA only apply to small down payments in the 3% range? I would have been under the impression that it applied to larger down payments as well. Your example also brings up the compounding effect, however.

Person A sells his $194k home for $200k. Then person B gets $200k comps, so his home is now "worth" $200k. So then he can turn around and sell his home for $213k. Now person C can go sell his home for $226k. It compounds pretty quickly.

I misread the DPA we were referencing - my 2 clients from my example above both used municipal DPA, not seller DPA. The down payment assistance they received is theirs to keep, as long as they live in the home for 15 years. Otherwise they need to reimburse the city from their proceeds if they sell early.

Sameer, your point about inflated comps is accurate, to a certain extent. But I think there's a huge difference between 3% (marginal assistance) and 20% (massive price changes).

If several people in a neighborhood sell their $194k homes for $200k using DPA, the neighborhood would comp out a couple thousand dollars higher. Maybe that affects another transaction by a slight amount. If the next buyer pays $2,000 more than he otherwise would have due to inflated comps, we're talking about $60 (3%) down and $12 per month on his mortgage. Inflated? yes. Fleecing the public? I don't think so.

If sellers were assisting with 20% down, it would be effectively selling a $200k house for $160k. That's a much more significant difference, and would probably be considered fraud.

Where's the line in the sand between facilitating a transaction and committing fraud? I'm not sure. But helping a low-income life-time renter afford home ownership while barely affecting the comps doesn't seem like a bad thing.

Jay-- you're right, I overstepped in my claim about inflated commissions. Sorry about that.

The DPA is still inflating the price. Basically you are taking a house purchased $194k with a zero-down loan and pretending that you're buying the house for $200k with a 3%-down loan. That inflates the true market price (assuming a zero-down purchase really meets the criteria for a market transaction, something I would dispute. But that's another story for another day) of $194k to $200k.

20% is a good number because it provides a good cushion against home price declines. Yeah prices might decline more than 20% (and they have, but mostly because prices got inflated due to an easy money environment), but generally that protects people from being underwater in their mortgage. Then they are less likely to walk away and leave the lender holding the bag.

I agree 100% that if a lender wants to allow a DPA loan, then the government has no business intruding into a consensual transaction between two parties. But there are two problems with this argument: 1) The vast majority of mortgages are backed by the government via Freddie/Fannie, and 2) the government has to bail out the banks and homeowners who get burned by this scheme, otherwise people will start whining.

Sameer wrote, "And really, what is so wrong with 20% down and a 36% DTI?"

Nothing is wrong with that, never said there was. But it's not the ONLY way to buy a home. What is magical about 20%? Why not 10%, or 30%?

As far as a DPA inflating commissions for me and my real estate buddies, let's do a little math...

Take a $200K home. Say the seller contributes 3% in a DPA. That's $6000. So in your example, that's the same as the home selling for $194K.

Assuming a 3% commission, the commission on a $200K home is $6,000.

The commission on a $194K home is $5,820.

So I'd make a whopping $180 extra. That's hardly enough to justify saying "DPAs lead to inflated commissions".

The problem with the "inflated price" argument is the buyer STILL has to come up with a down payment, even if the price in our hypothetical transaction here was $194K. If they can't come up with the $6000 to put 3% down on a $200K home, it's more than probable they couldn't come up with the $5820 to put 3% down on a $194K home....

If the seller wants to sell their home in this example for $200K and not $194K, the solution is simple, reject the offer that includes DPA. No one forces a seller to contribute in a DPA.

The buyer in a DPA program still has to qualify for the loan. These aren't NINJA loans (No Income, No Job or Assets). Those were a bad idea. But a government telling a home seller that they CAN'T help someone buy their home seems like a government way overstepping their authority.

Yes this is going to make it even harder for sellers to sell and buyers to buy. My thinking is if the banks are ok with it, why is the government involved in it? It just doesn't help things i do see the common sense theory however its going to bog sales levels even further. In Tucson as well as most areas 1st time buyers use these down payment asst programs almost 75% of the time.

At this point, it looks like you have to have the credit U/W through DU by 10/1 or have the MCAW signed on an FHA manual U/W by that date.

Hopefully this new bill will bring DPA back again after that.

I was in a meeting recently where this issue was being discussed. Most of the agents felt that it was a good thing to have these DPA programs go away because they (1) caused inflated purchase prices, (2) caused appraisers to overstate the comps, (3) potentially were abused by unethical people, (4) and put buyers into homes they could not afford, setting the stage for our high foreclosure rate in Ohio. When OH implemented a predatory lending law in 2007, which also targeted appraisers, the use of these programs dropped substantially.

Jay, I totally agree with you. Regulate the DPAs by all means but don't kill them! HUD's been trying to get rid of DPA programs for several years, going so far as to issue a HUD rule change last summer that summarily shut down the DPAs. The DPAs took HUD to District Court last fall in protest. The judge promptly ruled that HUD's case had absolutely no merit and allowed DPAs to continue. HUD couldn't win in court so they simply tacked their DPA ax onto a can't-lose housing stimulus bill.

Sameer, DPAs have nothing to do with comps and commissions. In a down market, selling to a first time buyer using a DPA is often the only way a seller can sell.

On your other point, people who imply that saving a 20% down payment should be the only way to buy a home are unaware of the realities of the market. The Valley's median home price is still above $200,000 while our average wage hovers in the low $30,000's range. If your net salary is only $500 something a week, it's near impossible to save $40,000+.

Jay-- perhaps you can explain why DPA is not a scam? If the seller is giving the buyer money to cover the down payment, then that is effectively the same as lowering price. Except that if you lower the price then the comps show a lower price. Thus with DPA you are contributing to inflated comps and inflated prices in the housing market generally. (And inflated commissions for you and your real estate buddies.)

And really, what is so wrong with 20% down and a 36% DTI? If the buyer can't afford it, they can rent. What's so wrong with renting? People who buy a house with no money down and interest-only loans are effectively renting anyway, except that you real estate agents get to make more money from the transaction.

That's sad to hear about as I know plenty of good people will be negatively effected by this. In Grants Pass Oregon where I live and work we have a similar program that I have clients use from time to time and it makes all the difference.

I'm with you, Jay. I've only had a couple of clients use down payment assistance, but they were both extremely excited about fulfilling their dream of homeownership, and both are still in their homes today.

One of them is, to this day, my favorite buyer-client I've ever had the opportunity to work with, and I think of her anytime my mind wonders why we do what we do. She was a single mother of 4, in her 40's, living well below the median income, and a life-long renter who never paid late. We used one of the municipal bond programs to get her into a home of her own (50% more space with a front and back yard at about the same monthly payment). Her smile and enthusiasm were payment enough. (fortunately too, because the commission was tiny!)

I don't think congress is looking at the big picture on this one...