With all the talk coming from politicians about how they plan to use the FHA to save the housing market and the economy, it may be a shocker to know that the FHA is struggling mightily right now. The FHA had to withdraw $4.6 billion from its $21 billion capital reserve fund in May to cover losses, according to the New York Times.
“Let me repeat: F.H.A. is solvent,” FHA commissioner Brian Montgomery said Monday in a speech at the National Press Club, according to the New York Times. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”
Something has to change or else the FHA will soon be under water. This is a bit scary to think about because right now, FHA loans make up a good portion of the mortgage market, and an even larger portion in many low income areas. If the FHA were shut down, the real estate market would be in for a huge blow. In reality, though, it is unlikely the FHA will actually shut down even if they become insolvent. Instead, the government would float them the money they needed to continue operations until such a time as they could stand on their own two feet again. As you probably guessed that means taxpayers would ultimately be subsidizing the FHA.
There is one glaring reason why the FHA is struggling right now, according to Montgomery. He blames the seller financed down payment program, otherwise known as down payment assistance. In this program the seller donates the required down payment (typically 3 percent) to a non-profit corporation which then gives the money (minus a fee, of course) to the buyer, who uses it as the necessary down payment. Sound a little sketchy to you? I can assure you I feel the exact same way. Nonetheless, this program has been around for years--and it has been a problem for years as well. 60 percent of the FHA losses can be directly attributed to this program, according to the New York Times, even though these loans only make up around 35 percent of the FHA’s portfolio.
The FHA has been trying to get rid of this program for years, but has met strong resistance and been unsuccessful. Backers of the program say it provides much-needed assistance to low income and minority families who would otherwise be unable to buy homes, according to the New York Times. Naturally, the FHA is continuing its fight against the program, but based on their past experience, it doesn’t appear they are likely to be successful.
“If there’s any justice in this country, they will fail yet again,” Scott Syphax, president of Nehemiah Corporation of America, which provides such loans, said in the New York Times. Wow, you’ve got to love that mentality--if there is any justice in America, we should continue putting people in houses they can’t afford and potentially break the FHA, which would cost taxpayers billions upon billions of dollars. Is it just me or is this guy’s idea of “justice” a little skewed?
Ultimately, whether the down payment assistance programs stay or go, the housing market will likely suffer. If they stay, the FHA will probably need taxpayer support; if they go, then we are losing 35 percent of the FHA loans out there which means we would have even fewer people buying homes. In my mind, though, the right way to go is to ban these programs. The statistics show beyond a doubt that these loans result in an extremely high default rate (about 3 times the FHA norm) and it is not fair to pass this burden on to taxpayers.
The author leaves out a hugely important fact about downpayment assistance providers. First, ninety-six percent of those who use downpayment gifts are paying their mortgages without undue difficulty three years after getting it. Second, even with downpayment assistance still around, the FHA loan fund will have three times the statutorily required money by 2014, demonstrating that they will remain solvent. If Congress gets rid of downpayment assistance, they're going to worsen the housing market and the economy.
Bottom line is if you need downpayment assistance you should not be buying a house! These programs encourage buying unaffordable houses for people who are not even ready to buy.
I think the best fix for the current mess is to stop artificially propping up house prices and let them fall back down to about where they were in the year 2000.
I live in the Seattle area, make $100K/yr. and I can barely afford to buy a shack. I have to wonder how waving the downpayment on a house is going to help out my neighbor who is making the average wage of $15/hr, when the median home price here is about $400K? The best help for him would be to stop artificially propping up house prices and let the price drop back down to where they were a few years ago--about $200K!
I recently had a ex-client come to me wanting to use a Nehemiah Grant. From my perspective the lender was increasing the client's loan by $11,000 and pocketing the grant of $11,000. What good would that have done the client?
I sent the client to a traditional direct lender and he could have gotten the client in the home for a lower monthly payment without the grant except for the fact the client's credit is not so good (bankruptcy and continued late payments after the bankruptcy).
The lender pushing the Nehemiah Grant program is adamant they will get her the loan. The traditional lender says the client is a 50/50 shot at best. Obviously, the Nehemiah Grant lender is making a killing on this deal and is getting someone into a house at an inflated cost.
I agree with one of the anonymous comments! In 2005 my father brought a home that was way over priced and ended up loosing his home. Without the help of any down payment assistance.
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