In order to utilize this law, non-profit housing support groups developed a strategy whereby they would provide the three percent down payment to a client, and then collect that same amount plus a processing fee from the seller. In effect, this has created a program that provided moderate income families with a home purchasing plan that included no down payment. The goal of FHA and VA home loan programs is to provide the opportunity for home ownership to people with flawed credit. Since statutory law requires that their loan program be matched with a down payment of at least three percent, sellers who were anxious to help interested buyers qualify would offer to provide the down payment. In most instances, that down payment grant was built into the housing cost elsewhere.

A government study of these types of loans concluded that because the no down payment plan inflated the home cost these loans were more susceptible to default. The FHA’s response to that was that their clientele was an inherently high risk market, and that they were better off with an FHA backed loan of this type than they would be with a high interest subprime loan provided by a commercial lender.

For the last couple of years, Congress has been exploring ways to make the FHA and the VA more responsive to the changes in the housing market. One of the methods they have been examining is this end-around approach to a down payment grant. The Mortgage Bankers Association has testified repeatedly before Congress in support of legislation that streamlines the FHA financing process.

Testimony has revealed that in 1990, 28% of all new home purchases (which align closely with first time home purchases) were FHA or VA financed. In 2004, that figure had fallen to less than 12%. In 1990, 13% of all loan originations were through the FHA or VA; by 2004 that number had dropped to 3.5%. One of the reasons for this dropoff is that realtors have been reluctant to deal with FHA backed buyers because of the slow pace of completing an FHA loan agreement. One of those time consuming steps has been the no down payment strategy involving third party non-profits.

More importantly, Congress is being urged to develop a no down payment strategy that does not put the buyer in jeopardy of defaulting on the loan because of the round-about down payment grant scheme being employed. The FHA argues, with some merit, that their role is to serve the marginal home buyer, and that their clientele is always going to be at increased risk compared to the home-buying public at large.

One of the suggestions put forth by FHA staff and supporting testimony from the Mortgage Bankers Association Chairman is that the FHA develop a counseling program for no down payment buyers with FHA insured loans, just as HUD insists on counseling for buyers of reverse mortgages prior to signing on the bottom line.

Source: Staff Writer