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Slade Smith's Blog

Bipartisan effort in Congress underway to restore "Down Payment Assistance" scam
by Slade Smith | 2008/10/07 |

Leave it to the geniuses in Congress-- they already want to undo the smartest move they've made all year.

As part of The Housing and Economic Recovery Act of 2008, signed into law by President Bush in June, Congress correctly banned all forms of seller-financed down payment assistance for FHA-insured mortgages:

    (A) IN GENERAL- A mortgage insured under this section shall be executed by a mortgagor who shall have paid, in cash or its equivalent, on account of the property an amount equal to not less than 3.5 percent of the appraised value of the property or such larger amount as the Secretary may determine.
    (C) PROHIBITED SOURCES- In no case shall the funds required by subparagraph (A) consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:
      (i) The seller or any other person or entity that financially benefits from the transaction.
      (ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).

This part of the law went into effect October 1st, discontinuing the use of these sham down payments that have already cost taxpayers $4.6 billion in unexpected losses due to excess defaults on FHA-insured mortgages this year alone, according to HUD Secretary Brian Montgomery.

But to the surprise of approximately nobody, there is already a movement underway in Congress to abolish this common-sense return to a true 3% down payment requirement for FHA-insured loans.  Representative Al Green (not the R&B singer, but the Democrat from Texas whose largest campaign donor is the National Association of Realtors) has introduced a bill that would once again make seller-financed down payment assistance legal for FHA loans.  In a legislative environment where Democrats and Republicans can't agree on the color of the sky, no less than 26 sponsors from both sides of the aisle are eager for the taxpayers to once again back mortgages with fake down payments.

Slade Smith's Blog ::

It's not like these folks don't have some suspicions about how down payment assistance works.  Consider this exchange in a House Financial Services Committee hearing in 2005 between Congressman Pat Tiberi (R-OH) and Robert Newman, CEO of AmeriDream, a major down payment assistance provider:

Mr. TIBERI. ....My neighbor last year sold their house for $168,000 or $169,000. Their house was listed in the low-$160s. They ended up selling to a first-time homebuyer who participated ... in a program similar to AmeriDream... The seller... ended up gifting to the program and in exchange for that gifting, they raised the price of their home to around $168,000, which was then financed by the buyer through this gift program. Is that how it is normally done?

Mr. NEWMAN. That is not something that we condone at all. We do not advocate that. We depend tremendously on two people in the transaction, really three. It is the lender to qualify the buyer and the terms. The lender is also going to get the appropriate appraisal for the property. After all of that is done, then they reach out to us for the gift amount. We are not involved in the qualification of the buyer nor are we involved in the listing or the appraisal of the property. We do not condone, and we do not advertise and we do not do any outreach on the product to suggest to individuals to increase the price of the home.

Notice the sleight of hand in the answer by the AmeriDream executive.  Congressman Tiberi's question was not whether AmeriDream "condoned", "advertised", "did outreach on", "suggested", or "advertised" the practice of sellers raising the selling price of their home in exchange for contributions to down payment assistance "charities".  The Congressman asked whether the practice was "normal".  Newman knows darn well that this is how it is normally done, and being under oath, he never denies it. 

Unfortunately, Tiberi never followed up on his promising line of questioning.  It appears that he just didn't think it was that important an issue that FHA was insuring loans to borrowers with no equity and no skin in the game.  Here's what he says later in a conversation with Janis Bowdler, Housing Policy Analyst for La Raza:

Ms. BOWDLER. I just wanted to take an opportunity to stick up for the counseling process just a little bit.

Mr. TIBERI. You do not have to with me. It is in the bill, required in the bill. [Laughter.]  That is why I argue that this program is actually going to be stronger than the 3 percent down program.

It takes a very special kind of optimism to believe that an hour or two of mortgage counseling is "stronger" than a real 3% down payment paid for by the buyer out of their own savings.  But this is the dreamworld in which Congressman Tiberi still resides, as evidenced by his appearance as a cosponsor on the latest bill to once again legalize Enron-style down payments. 




1179 words | 2753 views | 3 comments | log in or register to post a comment

Excellent blogging, Slade!

Thank you for taking the time to research this issue.  You are dead on in your analysis.  These programs are a joke - we all know that there is no gift here.  Sellers do not "give" anything to the program and the program is making a gift of anything.  Money is shifted from the seller to the program, to the home buyer.  But where did that money come from?  Ultimately, the home buyer through a higher sales price.  Even if the sales price was not increased to make this possible(though it usually is), it certainly was not negotiated down as it could have been without the sham gift.

Why would this be an issue right now?  Because the real estate market is soft and the National Association of Realtors wants to see more business for the Realtors.  The NAR doesn't care one iota about the home buyer or the lender.  They just want to create more commissions for Realtors - that is their job.

Unfortunately, the NAR is extremely powerful.  It is without a doubt that they have a hand in influencing any real estate related bill that goes through Congress.  They have a lot of members and a ton of money to get what they want - and it usually works.

by Robert Franco | 2008/10/07 | log in or register to post a reply

What He Said...

Seems to me that these guys are advocating doing more of what caused the problem in the first place.  I'm no financial wizard, but I am a thinker and I can see that this is nothing but another "shell game" to try to curry favor with voters.  Am I correct in my suspicion that Messrs. Tiberi and Green are both up for re-election?

by Scott Perry | 2008/10/07 | log in or register to post a reply

Yep they are up for re-election

Of course, with 2 year terms, are Congressmen ever NOT up for reelection?

by Slade Smith | 2008/10/08 | log in or register to post a reply
Slade Smith's Blog

I'm the web developer for Source of Title.  Due to this role, I have become an interested observer of the title insurance industry and the broader issues arising out of real estate and finance.   I have also blogged extensively about politics under the pseudonym "skymutt" at the partisan Democratic blog Daily Kos and the non-partisan community Swords Crossed






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