Monday, November 26, 2012

Timiraos: "The FHA’s Biggest Loser"

by Calculated Risk on 11/26/2012 12:58:00 PM

A frequent topic on this blog back in 2005, 2006, 2007 and even in 2008 were FHA loans and DAPs (seller financed Down-payment Assistance Programs). With DAPs, the seller "donated" the down payment to a non-profit (for a fee of course), and the non-profit gave the down payment to the buyer.  This allowed people to get around the FHA's down payment requirement, and to buy for no money down. For nerdy details, see Tanta's DAP for UberNerds

DAPs were finally banned in 2008 after wrecking havoc on the FHA's finances.

From Nick Timiraos at the WSJ: FHA’s Biggest Loser: No-Money-Down Mortgages

One of the biggest reasons the Federal Housing Administration is facing severe financial woes is a problem agency officials identified and sought to correct years ago.
A big chunk of the losses leading to a $16.3 billion shortfall have come from programs that allowed home sellers to fund down payments via nonprofit groups that provided them to buyers as a “gift.” After trying for years, the FHA finally prevailed on Congress to shut down the programs in late 2008, but not before the agency backed billions in risky no-money-down loans as home prices were dropping fast.
Seller-funded down-payment assistance loans accounted for just 4% of outstanding loans at the end of September, but they represented 13% of all seriously delinquent mortgages, according to a recently released audit.

The audit said that had the FHA not allowed the programs to go forward, then the mortgage program’s $13.5 billion net worth deficit would have turned to a positive $1.77 billion.
The FHA made many bad loans in fiscal years 2008 and 2009 (from October 2007 through October 2009) when private capital left the mortgage market, and the FHA saw a huge surge in market share. With falling house prices, and low down payment loans, many of these borrowers defaulted.

However DAPs also played a significant role in negatively impacting the FHA - and that was obvious in early 2005!