Wednesday, July 30, 2008

Ding-Dong! The DAP Is Dead

by Bill McBride on 7/30/2008 11:27:00 AM

*** The post title is from Tanta.

President Bush signed the housing bill this morning. One of the provisions is for the elimination of Down-payment Assistance Programs (DAPs) for FHA loans.

The WSJ has some stats on how widespread DAPs had become: Builders Feel Pinch of Key Omission From the Housing Bill

[F]or the builders, the bill's elimination of seller-funded down-payment assistance on mortgages backed by the Federal Housing Administration is a big loss -- one that could eliminate as many as one in 10 home buyers from the market ... Starting in October, buyers using FHA loans can no longer accept down-payment "gifts" that are ultimately funded by the home seller, often a builder.
...
Miami-based Lennar Corp. used down-payment assistance on 33% of the mortgages it originated in the second quarter, while Ryland Group Inc. said 18% to 20% of its buyers used down-payment assistance during the first half of the year.
...
"There will undoubtedly be some impact, but we believe the buyers will adjust and the market will adjust," says Tim Eller, the chief executive of Centex Corp, which said that 25% of its sales in its fiscal year ended March 31 involved down-payment assistance.
Eliminating DAPs is a positive for the economy and housing. FHA loans using DAPs had significantly higher default rates than when the buyers actually made a down-payment.

"One in 10 home buyers". Wow. Not all of these buyers will disappear. Some buyers had the ability to make a down-payment, but used a DAP instead simply because they were available. Other buyers will borrow from parents and friends or will wait until they save the 3.5% down-payment.

The good news is default rates should decline on FHA loans.

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