by Bill McBride on 6/23/2008 09:30:00 PM
Monday, June 23, 2008
When I first heard of Down-payment Assistance Programs (DAPs), I knew we would see higher default rates on FHA loans. Heck, the IRS has called DAPs a "scam". The FHA has vowed to eliminate DAPs ... and yet, amazingly, the percent of FHA loans using DAPs is still increasing.
DAPs simply will not die.
To understand DAPs in nerdy detail, see Tanta's DAP for UberNerds.
From the WSJ: Government Mortgage Program Fuels Risks
The offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment.These are not real down-payments from disinterested third parties. These programs are designed to have the seller (including home builders) funnel money to the buyer through a "nonprofit" to get around the FHA down-payment requirements. The buyer still has no skin in the game.
The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit.Here are some previous posts by Tanta and I about DAPs:
D.R. Horton Inc., the nation's largest home builder by volume, is touting "100% financing" for its two- and three-bedroom condominiums near the beach in Maui, Hawaii, which start at $498,000. In the Seattle area, local builder Quadrant Corp. is advertising townhouses that can be purchased with as little as $500 down. "Use your coffee budget to move into a new home," says an online promotion.
FHA Going After DAP Again? Tanta, June 10, 2008
DAP for UberNerds, Tanta, Oct 19, 2007 **** READ this one for nerdy details! ****
FHA to Ban DAPs, CR, Sept 29, 2007
Housing: IRS Raps DAPs, June 2, 2006
More on Housing, CR, Feb 24, 2005