In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Tuesday, June 10, 2008

FHA Going After DAP Again?

by Tanta on 6/10/2008 11:28:00 AM

Well Glory Be. FHA Commissioner Brian Montgomery, that well-known Ownership Society Koolaid drinker, went before the National Press Club yesterday and made noises to the effect that FHA will resurrect its efforts to rid the world of the DAP scourge:

The Federal Housing Administration expects to lose $4.6 billion because of unexpectedly high default rates on home loans, officials said Monday.

Brian D. Montgomery, the F.H.A. commissioner, attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years. . . .

But Mr. Montgomery warned that the F.H.A. would have to renew its efforts to end the seller-financed down payment program, which accounted for 35 percent of its loans in 2007.

He said the mortgages had foreclosure rates three times those of traditional loans and would push the F.H.A. to the brink of insolvency.

“Let me repeat: F.H.A. is solvent,” Mr. Montgomery said on Monday in a speech at the National Press Club. “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.”
The Times writer notes that FHA has tried for years on end to get rid of this practice without success. However, the explanation of what these programs really do isn't very helpful. I call them "DAP" (Downpayment Assistance Program) because that's the term HUD uses, and the term you will find in the HUD-sponsored research on the performance of these loans. The term "seller financed" isn't exactly helpful; if we are to use our own term for these deals, I'd suggest "seller money laundered" instead.

I have written about DAP loans and the effort to get rid of them before. Here's an UberNerdly post explaining how the loans work. Here's a post from a year ago summarizing the long tedious and ultimately unsuccessful efforts of the HUD Inspector General to get rid of the program. Let us all devoutly hope that it will work this time.