…I just thought you should know that there is a new website dedicated to saving downpayment assistance. The address is http://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

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…)

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.)

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.

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.

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.