Here today, gone tomorrow. That pretty much describes HUD's one-day policy regarding FHA loans with nothing down.
The whole matter began on May 11th when HUD published a “mortgagee letter” which said that “federal, state, and local governmental agencies and nonprofit instrumentalities of government, FHA-approved nonprofits, and FHA-approved mortgagees may provide short-term or “bridge loans” secured only by the anticipated tax credit due the homebuyer as collateral.”
Translation: The $8,000 tax credit for first-time homebuyers could be applied toward the FHA down payment in the form of a short-term loan. For many entry-level borrowers, $8,000 would be the equivalent of financing with nothing down or pretty close to it.
To make sure the point wasn’t missed, the National Association of Realtors announced the next day that "Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, said that the Federal Housing Administration is going to permit its lenders to allow homeowners to use the $8,000 tax credit as a down payment.”
Everything Lives On The Internet
So far, so good, except for one problem. HUD removed the original policy letter from its website. As of this writing it remains offline, however we can tell you exactly and precisely what the HUD policy-for-a-day said for a very simple reason: We have the letter. You can see for yourself by looking at Mortgagee Letter 2009-15.
For decades HUD has had a basic rule: You can buy real estate with an FHA-insured loan but you must have some cash for a down payment. Not a lot of cash, not a bag full of doubloons, but at least 3.5 percent of the purchase price which comes from your savings or as a gift.
HUD has been adamant about this policy. For instance, while owners are allowed to offer as much as a 6 percent "seller contribution" to offset buyer costs, not one penny of that money can go to the down payment.
Seller-funded down payment assistance plans (DPAs) were used until last year to help buyers get a home with no money down, but such programs are now banned. With a DPA a seller gave money to a non-profit organization, the non-profit gave a grant to the buyer which could be used for the down payment and the non-profit also kept a few dollars for administrative work.
HUD opposed DPAs because by its accounting seller-funded assistance plans represented for 14 percent of all HUD loans — and 31 percent of all foreclosures.
If the HUD letter becomes our national policy for more than a day, it means that HUD will be allowing many buyers to purchase homes with little or nothing down. For example: if you purchase a home for $200,000 the required FHA down payment would be $7,000. ($200,000 x 3.5 percent). If that money is available in the form of a second-lien which can be paid from the first-time tax credit then the borrower is financing with no down-payment money.
The Obama Credit
Earlier this year the Obama Administration got Congress to go along with an tax credit of as much as $8,000 for first-time homebuyers — generally anyone who had not owned a home during the past three years. There are certain income limitations and to prevent flipping the home must be held for at least three years, but otherwise the program is intended to encourage first-time homebuyers to flood the market right now, this moment, and reduce the huge inventory of unsold homes now found in many markets.
But while the intent of the program is good, the concept is not without issues.
The real problem with the $8,000 tax credit — an outright gift in most cases from Uncle Sam — is whether it will actually bring more first-time buyers into the marketplace, more than would have been there anyway given falling home prices and swooning interest levels.
Is a first-time buyer credit actually needed? You might say yes if we were in a market with quickly rising prices, but the National Association of Realtors says home prices are down nationwide. It's latest study shows that prices fell in 134 of the 152 metropolitan areas it surveyed, results which should encourage buyer interest.
Well, what about soaring mortgage rates? Nope. You can get financing today with rates at or below 5 percent — real loans with fixed rates, no prepayment penalties and no negative amortization. These are among the best rates seen in at least 50 years.
If we're now going to create second-liens for as much as $8,000 then please tell us more: What's the interest rate? What happens if the borrower does not repay the debt? Do state governments and non-profit organizations really want to hold second mortgages for homes with 100-percent financing? And even if the answer is yes, where are they going to get the cash needed to pay home sellers? Will state governments or nonprofit organizations want to foreclose if owners cannot repay their debts?
For states and nonprofits, holding second loans even for short periods is remarkably risky. In a foreclosure situation such loans can only be repaid after all the claims of first mortgage holders have been satisfied. If the first loans cannot be fully repaid, then there is nothing left to pay the states and nonprofits. Their short-term loans would be worth zero.
Unusual Circumstances
Given that the main FHA reserve fund fell from $21 billion to $12.8 billion in just a year, should the FHA be pushing a concept which may lead to more risk and bigger losses? It's not an option that makes much sense except in one situation:
"Despite positive signs here and there, the economy remains broadly troubled," says James J. Saccacio, chief executive officer of RealtyTrac.com, the leading online marketplace for foreclosure properties. "As long as unemployment rates continue to rise more and more homes will be lost to foreclosure.
"One reason to allow the use of the $8,000 tax credit toward an FHA down payment," he continued, "is to maximize the appeal of homeownership, reduce real estate inventory, get lender properties off the market, strengthen local home values and get the economy re-started. If that's HUD's goal in allowing the purchase of homes with FHA financing and no money down, then perhaps it's an idea that might make some sense for the rest of 2009."
What will HUD's down payment policy be in the future? At this writing no one knows, but three options seem apparent: HUD can restore the policy, HUD can dump the policy as is now the case or Congress can act with quickie legislation to okay FHA deals with no-money-down from first-time purchasers. The last option may be necessary since the tax credit for first-time buyers expires this year.
____________________
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.