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Actually, the true market value is the net cost of the home to the buyer (assuming no coercion, threats of force, fraud, etc). An appraisal is just one person's estimate of what a similar house would sell for in theory, while the net sales price is what it actually did sell for in reality.
That's my biggest problem with the DPA - if the house would have sold without the seller kicking in extra cash to the buyer the seller would have taken than option instead. But since they are forced to use DPA to get the house to sell, the market value is obviously less than the gross sales price (since the seller tried and couldn't sell it for that price to begin with).
I am building a home right now. I signed a contract back in January and have been pre-approved and everything for an FHA loan. We close in October and part of our financing was a down payment of 3% given to us by the builder through a DPA program. What will happen to those in a similar situation like mine? Will I now have to come up with the 3% on my own? I am still 2 months away so I can do that......however, since the builder pays the DPA program the 3% I would expect them to now take 3% off the price of my home. Any thoughts on the above?
I am building a home right now. I signed a contract back in January and have been pre-approved and everything for an FHA loan. We close in October and part of our financing was a down payment of 3% given to us by the builder through a DPA program. What will happen to those in a similar situation like mine? Will I now have to come up with the 3% on my own? I am still 2 months away so I can do that......however, since the builder pays the DPA program the 3% I would expect them to now take 3% off the price of my home. Any thoughts on the above?
This legislation likely won't apply to "in progress" use of DPA.
I really wish people would stop clouding the real issue. DPA did not cause the meltdown; Low or no downpayment did not cause the meltdown. Bank corruption, buyer ignorance (partially due to the bank's poor procedures) and investor greed caused the meltdown.
"Stated income" loans = automatic red flag. Show me proof that you make $100,000, I will verify that proof and document what you've proven. If you don't have the income and your DTI is screwed, you don't get the loan. Simple as all that.
Overriding system controls that flagged potentially troublesome loans at underwriting - Countrywide was cited for this.
Ignoring egregiously low credit scores - Put it this way. If they can't get a car financed, they shouldn't get a home financed.
Pitching short term ARM loans disregarding the obvious fallout. In my opinion this is Numero Uno as to why we're in this situation now, with stated income being Numero Dos.
"No doc underwriting" - if you ask me, regardless of credit, this should be abolished. It's just asking for trouble. There should always be a human element to the equation.
Artificially inflated home prices - partially caused by the rampant home builders, who were only responding to the above issues that got people into homes they couldn't possibly afford and drove up demand. Also, San Diego had a rash of condo conversions that limited people's rental options. Land is at a premium and has been for a while, causing severe overpricing.
80/20 mortgages to get around FHA limits for borrowers who couldn't afford the home - This was a recipe for disaster. Some could handle it, but a lot more could not. This isn't too bad for a low amount loan, but when you start talking about $400+ grand, it's asking for trouble.
The "Equity ATM" effect" - Numerous marketing ads that pitched home equity as the Holy Grail. It was never intended to be used as a money pot.
Peer Influence - You see your buddy/co-worker driving that flashy new Cadillac Escalade on 24's. He/She tells you they just bought a home and did a cash out refi and "paid cash" out the door. Thinking it's all clean and you can handle it, you do it too.
Industry impacts - Finance was taking a hit long before the bubble burst. It was further exacerbated with the meltdown and continues to be. Without Finance, there is little-to-no backing for every other industry. Money drives the country.
DPA was a small piece of the equation and I daresay not the true culprit of the meltdown. I wholeheartedly acknowledge that there were people who should not have gotten homes that used DPA to get them - but they were already victims of one or more of the above symptoms. DPA in of itself is not the evil the government would have people believe. Many people, including myself, are saying the same thing: This meltdown is creating many, many foreclosures that, with DPA gone, will NOT be filled. That in turn will harm surrounding land values and encourage crime in certain areas.
Don't ban DPA. Just make it harder to be eligible for and enforce earnest money deposit adherence (1%). Also, eliminate sellers from the process - there should be no need to "credit" anything. Require the buyer, buyer's agent or buyer's lender to apply for, and be approved for, the funding and then issue a check to the seller's bank directly via escrow. Set maximum DPA limits if you have to - if 5% is required, set the cap at 4% DPA, 1% earnest money, and enforce it.
Last edited by revelated; 07-25-2008 at 04:21 PM..
I did find the following information on the bill.....
On pages 479 – 481 of the bill, the elimination of down payment assistance is cited (SEC. 2113) with an end date of October 1, 2008. The specific language states that the law “shall apply only to mortgages for which the mortgagee has issued credit approval for the borrower on or after October 1, 2008.â€
So I am assuming that my mortgage would not be included in the new legislation.
I did find the following information on the bill.....
On pages 479 – 481 of the bill, the elimination of down payment assistance is cited (SEC. 2113) with an end date of October 1, 2008. The specific language states that the law “shall apply only to mortgages for which the mortgagee has issued credit approval for the borrower on or after October 1, 2008.â€
So I am assuming that my mortgage would not be included in the new legislation.
Standard language; yes, you should be fine, as should I.
Before you quote all the reasons DPA is not the problem for the increase in FHA foreclosures (which all the HUD studies have shown does increase the risk of foreclosure) you need to realize that ALMOST NONE of the items you pointed out as the cause of these foreclosures apply to FHA loans.
FHA did not allow stated income or no doc loans. FHA takes income, credit and assets into consideration. FHA is almost always 15 or 30 year fixed, they have an ARM program but it is a minor component and the borrowers are not qualified at the initial low rate. FHA stuck by reasonable guidelines and did not loosen restrictions during the housing boom.... which is why so many people turned to the "sub-prime" 100% low document I/O adjustable rate loans.
The seller funded DPA program that was banned was a loophole that began to be exploited in 2004-2006 to get more people into FHA. HUD stats show that in 2000, ~3% of FHA borrowers used seller funded DPA. By 2008, that number went to 40% of their loans. Those loans with DPA, regardless of credit, income, assets or other factors are MUCH more likely to end in foreclosure.
In fact, when HUD does the analysis it shows that credit is one of the worst indicators to predict foreclosure. Debt-to-income, employment history and liquid assets were far better predictors. It doesn't matter much if someone has an 800 score if they use that ATM mentality or liberal approach to debt you mentioned.... sooner or later the bills are due and they can not pay them. However someone with a 600 score but that has built up some reserves and has a low DTI is better able to pay their home.
So yes, that list of factors had a huge impact in the problems we now face... far greater than DPA programs. The problem is not the DPA program itself, its what it shows. The buyer has $0 money saved up for a home and wants the lender to give him and the government to insure 100% of the homes price. Is it good policy to lend money to someone that has proven they can not save? All the good intentions in the world are not going to change their lack of money.
Yes, over the long term home ownership builds wealth. But if after 6-12 months you have to perform a home repair, have a medical emergency, need to fix your car or have another problem... the lack of any reserves and a tight DTI (if DTI was low, then why isn't the person saving money?) is going to cause a problem.
Seller funded DPA means 100% DPA. Its not a non-profit or family member giving a borrower 3-5% and taking on the risk of losing that money.... its the lender and the FHA taking on that risk for the buyer. The FHA and IRS have been trying to close this loophole for years. I have used the program before and it has a place, unfortunately the way it is used 95% of the time it is detrimental to the owner and the FHA as studies have proven.
Before you quote all the reasons DPA is not the problem for the increase in FHA foreclosures (which all the HUD studies have shown does increase the risk of foreclosure) you need to realize that ALMOST NONE of the items you pointed out as the cause of these foreclosures apply to FHA loans.
FHA did not allow stated income or no doc loans. FHA takes income, credit and assets into consideration. FHA is almost always 15 or 30 year fixed, they have an ARM program but it is a minor component and the borrowers are not qualified at the initial low rate. FHA stuck by reasonable guidelines and did not loosen restrictions during the housing boom.... which is why so many people turned to the "sub-prime" 100% low document I/O adjustable rate loans.
The seller funded DPA program that was banned was a loophole that began to be exploited in 2004-2006 to get more people into FHA. HUD stats show that in 2000, ~3% of FHA borrowers used seller funded DPA. By 2008, that number went to 40% of their loans. Those loans with DPA, regardless of credit, income, assets or other factors are MUCH more likely to end in foreclosure.
In fact, when HUD does the analysis it shows that credit is one of the worst indicators to predict foreclosure. Debt-to-income, employment history and liquid assets were far better predictors. It doesn't matter much if someone has an 800 score if they use that ATM mentality or liberal approach to debt you mentioned.... sooner or later the bills are due and they can not pay them. However someone with a 600 score but that has built up some reserves and has a low DTI is better able to pay their home.
So yes, that list of factors had a huge impact in the problems we now face... far greater than DPA programs. The problem is not the DPA program itself, its what it shows. The buyer has $0 money saved up for a home and wants the lender to give him and the government to insure 100% of the homes price. Is it good policy to lend money to someone that has proven they can not save? All the good intentions in the world are not going to change their lack of money.
Yes, over the long term home ownership builds wealth. But if after 6-12 months you have to perform a home repair, have a medical emergency, need to fix your car or have another problem... the lack of any reserves and a tight DTI (if DTI was low, then why isn't the person saving money?) is going to cause a problem.
Seller funded DPA means 100% DPA. Its not a non-profit or family member giving a borrower 3-5% and taking on the risk of losing that money.... its the lender and the FHA taking on that risk for the buyer. The FHA and IRS have been trying to close this loophole for years. I have used the program before and it has a place, unfortunately the way it is used 95% of the time it is detrimental to the owner and the FHA as studies have proven.
Of course HUD is going to issue a study about DPA. And I'm specifically referring to grant programs. HUD doesn't want to have to pay money or reimburse or even subsidize what the grantors are offering. Therefore, they point the finger at a program that, at its core, is not the root of the evil. I even acknowledged that a combination of buyer ignorance, bank corruption and investor greed were the true culprits.
And recall...FHA was not heavily used before, primarily because of two reasons. One, the loan limits were extremely low. Two, the criteria to get the approval was significantly more restrictive than it is now, right down to the inspection results. SO what'd the government do? Lighten said criteria, increase the loan limits, and advertise FHA as the "American Dream", as evident by the regulation that shares that name. Now they're backtracking as a knee-jerk reaction due to what I believe is an unrelated symptom of what I mentioned above.
DPA isn't the problem because FHA was not heavily used. Corruption in the industry and faulty conventional loans were the cause. IF there was only 400 million dollars in FHA loans funded vs. billions of dollars in conventional loans, 40% of 10 billion dollars is a lot more money lost than 40% of 400 million dollars. That's all I'm saying. Based on that, there's no way DPA can be the root cause; it's just a casualty. And the industry is going to suffer from that decision.
No one's claiming that eliminating DPA is going to save every foreclosure from happening. But it is a program that objective studies show is strongly correlated with a significantly higher level of default, so eliminating it is one more step towards helping stabilizing the housing market.
If the program isn't being used that much, why is anyone worried about it going away? It'll get rid of some loans that would have otherwise gone bad on the government's tab and save all taxpayers some money.
I saw they passed this bill this morning.....however, I could not find any details about the banning of DPA's......anyone read or hear anything on it?
Nevermind: I found the info I was looking for******edit******
Don't leave us hanging. Did they or didn't they ban DPA's?
PS Excellent discussion between rcarrillo and revelated. Thank you.
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