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How No-Money Down Programs Hurt the FHA

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  • Corey Curwick | | 28 Nov 2012, 07:48 PM Agree 0
    I think there should always be a down payment requirement. I find it shocking, what you said regarding:

    "No-money down programs that enable sellers to provide down-payment assistance to otherwise unqualified buyers. The funds for these programs came from non-profit organizations that in many cases collected money on behalf of builders that was ultimately gifted to low-income home buyers."

    I did not know this was going on. Frankly, it's sad. Thanks for this post.
  • Cory | | 29 Nov 2012, 04:10 PM Agree 0
    I'm not quite seeing the correlation here.

    You say "No-money down programs that enable sellers to provide down-payment assistance to otherwise unqualified buyers."

    I assume you are referring to private programs such as Nehemiah, because HUD points specifically to them.

    Exactly how were they unqualified other than not having down payment money. They obviously qualified debt-to-income wise or they would not have been approved for the mortgage. FHA is after all a full-doc program. So if there was a default the issue more than likely was loss of income, such as having hours dramatically cut-back at work or losing their job altogether during the recession.

    You also state that 13 percent of seriously delinquent FHA mortgages were no down payment mortgages through down payment assistance programs. So 87 percent of seriously delinquent FHA mortgages are from purchasers who had put their own money down. It would seem to me that no-down payment borrowers are not the crux of the problem.

    Lastly, FHA still allows down payment assistance from state, county and city sources. Many of these pay down payment and closing costs. So HUD hasn't eliminated lending when no-down payment is required.

    The logic and reality do not match.
  • DD DaNardo | | 01 Dec 2012, 07:50 AM Agree 0
    Yes, but the mortgage bankers were just doing what Barney the Frank, and Chris Dodd said to do. "Roll the dice, put all the undeserving voters in a house. In other words, "gifts for votes."
  • Jason | | 01 Dec 2012, 07:20 PM Agree 0
    FHA became the lender of choice following the collapse of subprime. Much of the regulatory scrutiny and industry QC measures that exist today were not fully implemented during this time (late 2007 into 2009). As a result FHA marketshare skyrocketed at a time when the housing market was in freefall and many of these mortgages (while full doc) were underwritten by companies lacking controls and made to borrowers with little skin in the game. These deals are going bad at a high rate.

    In 2010 and 2011 the underwriting standards improved industrywide and FHA started to cater to a higher quality borrower (although still with minimal down payments). My fear is that as they increase MIP premiums, they become less attractive to the kind of borrowers needed to bolster their portfolio. Although they will get back to more typical marketshare, they will do so at a time when the market is starting to recover and when they could benefit from handling more of the better credit quality mortgages originated in an improving value landscape.

    Although unpopular I would think FHA, the industry, and ultimately the tax payer would actually benefit from allowing FHA to bail themselves out now with funds from Treasury. This lifeline would allow them to remain relevant during a time when they can pick up high quality marketshare and improve their balance sheet long term. Instead, the private PMI companies are going to benefit while FHA slowly dies and simply prolongs the time before HUD requests the bailout that they will need anyway to make good on all of the bad paper on their books.
  • Rodney | | 02 Dec 2012, 12:37 AM Agree 0
    Really! These buyers lost their homes because they ha no down payment, maybe it was because they lost a job or mayne two in the household. I have been a mortgage banker for over 24 years and see the ups and downs in this business. These poeple lost their homes because of the massive unemployment rate, not because they did not put any money down!!
  • Jason | | 02 Dec 2012, 12:58 PM Agree 0
    Rodney...you are right in large degree. But if they had more equity in the property they could have sold instead of losing the home to foreclosure. I don't believe one can honestly argue that zero downpayment mortgages are not inherently higher risk. The losses are further exacerbated when home values decline. I am an originator myself and I think 55% back end ratio deals with nothing down are crazy. As you know FHA did a ton of these in the old Ameridream/Nehemiah days. My argument is that continually raising annual MIP premiums to cover for these 2007 to 2009 losses makes no sense.
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