Is the FHA Effectively Condoning Mortgage Fraud?

The Wall Street Journal “U.S.-Backed Mortgage Program Fuels Risks” reports that the FHA is allowing new home builders to use “nonprofits” to circumvent down payment requirements. To a lesser extent, existing home sellers are following the trend. FHA requires a 3% down payment, which cannot be provided by the seller. To get around this, D.R. Horton (DHI) is using Nehemiah Corp. as the conduit.

The percentage of FHA mortgages with down payments from the nonprofits has been increasing steadily: 2% in 2000, 18% in 2003, and 34% this year. The FHA and Congress have been sending conflicting messages. FHA regulations prevent direct cash gifts from sellers to buyers. The concern is that the value of such gifts will inflate the selling prices. However; the FHA says that without down payment assistance, buyers will turn to riskier subprime mortgages. FHA mortgages are fixed rate, while most subprime mortgages have been adjustable rate.

The Senate version of the FHA modernization bill would eliminate down payment assistance programs, while the House bill would keep the status quo. The Senate is focusing on buyers needing to have some skin in the game to reduce the FHA’s risk. The House sees forcing down payments as an impediment in the FHA’s role in promoting home ownership, especially for minorities.

The process that the FHA is turning a blind eye to involves builders or existing home sellers making voluntary (non-tax deductable) contributions to a nonprofit and the nonprofit making a corresponding grant to the home buyers. The Journal does not go into any overhead charged by the nonprofits. The scary part is that the “contribution” can be targeted to benefit specific buyers. It’s not like D.R. Horton is contributing so disadvantaged families can buy any home.

The audacity of this arrangement is that builders are heavily advertising no money down financing. If a buyer cannot come up with a 3% down payment, they are in no position to handle a sudden rise in taxes or insurance, or any type of emergency repair. These arrangements are setting both home buyers and the FHA up for disaster.

No disclosures.

Comments

[fbrothers]

The home builders are desperate. Unfortunately our government does not enforce laws or protect the taxpayers.

[monday1929]

Desperate times call for....... work-arounds.
America may be within weeks of having to face a bleak reality.

[statePoet1775]

"Unfortunately our government does not enforce laws or protect the taxpayers. " fbrothers

I guess the biggest crook would find it hypocritical to punish the smaller ones.

[Malkiel]

"If a buyer cannot come up with a 3% down payment, they are in no position to handle a sudden rise in taxes or insurance, or any type of emergency repair."

But of course, if the 3% down payment is all of their saved cash, then making the down payment doesn't put them in any better a position to deal with those things. Perhaps the real issue for these low-end buyers is finding a way to get them started with proper cash flow--like making the loan 0% down and then putting 3% in escrow for the first 3 years. Talking about people who can come up with down payments as having magic powers to hold their finances together when others can't is like our mythical belief that throwing people in jail for long periods of time reduces crime. If you're truly interested in solving a problem you have to get serious about how the mechanics of it work...

[MuddlingInvestor]

"I see disaster! I see lawyers" (Cassandra in Woody Allen's "Mighty Aphrodite").

FHA will be OK. One way or another. Maybe we, taxpayers, will have to bail it out. Maybe not. Ugly times, ugly solutions. Better than none at all. To all people talking about moral hazard: all that matters in economy is efficiency. Everything else doesn't matter. Economic agents (i.e. people) have short memory, just look at repeating of 1970s oil panic now. Any moral hazard issues which will play ten years from now don't matter either.

[Joe MacKay]

The charge from Congress for HUD and FHA is to increase home ownership in the USA. HUD and FHA are not and should not be profit making entities. For that portion of the population with earning power to accumulate significant reserves, this type of incentive is un-necessary as their needs are adequately served by the conforming market. Persons on the edge of that portion of our society are best served by a program like FHA which deals with several barriers to home ownership. Two income families are often two income families out of necessity. Often those two incomes can adequately provide for a family's needs, but allow little to no room for the ability to accumulate reserves (money in savings). Or families that have some crisis that is not of their making may fall behind and it is incredibly difficult to crawl back on top to accumulate such reserves. Perhaps it was a child's or other family illness or injury that was not adequately served by insurance if they had insurance. If the credit profile of such a borrower supports that they have regard for their obligations enough to justify the making a a loan, how are we served by eliminating their reserves and thus their ability to survive any financial crisis? The amount of monthly payment increase using a program like Nehemiah, in today's market, is $31.50 per month on a $150,000 home that would otherwise, under FHA, require a $4,500 down payment. Are we better served with that borrower exhausting their savings and being prey to any of the host of crisis that happen in everyday life or having the keep the funds in savings and make a payment that is $31.50 per month more that they would have otherwise?

FHA's charge is to help Americans by opening the gates to home ownership and to help those on the margin join the mainstream. That will not always be a seamless path. Some will fail. That is why FHA has instituted higher mortgage insurance for those most likely to fail effective July 14th of this year.

The other falacy is that appraisals are accurate. They are not. They are opinions. Appraisers at best can get close to the real value of a property, but none are so good as to be able to establish absolute value. So, it would not be uncommon for multiple appraisers to arrive at values for a property that could vary by 5% or more. If we are concerned that programs like the Nehemiah program increase home cost, I would make the case that they instead support home values by increasing the number of citizens who can purchase a home and thus help retard home price decreases.

FHA works.

[vboring]

it means that the buyers should be able to afford their loans. it also means that they have no skin in the game. so if the bet goes the wrong way, it is easy for them to ditch the property and let the FHA eat the losses.

FHA does do real underwriting, right?

[Jane]

HUD (FHA) did try to shut down some of these down payment programs but they were defeated: Mar. 2008, Sacramento Bee: sacbee.com/103/story/7... ("Sacramento-base... Nehemiah Corp. of America won a key federal court ruling Monday that again blocked plans by the U.S. Department of Housing and Urban Development to ban its controversial down payment assistance program. The housing agency announced in September it would ban the program within months, arguing that it triggered foreclosures and unfairly raised the price of housing for those who could least afford it. Monday's U.S. District Court ruling followed its earlier temporary ruling that HUD had failed to supply a reasoned analysis for its decision and didn't consider reasonable alternatives.")

The IRS has called some of these programs a scam because they don't operate as non profits under IRS rules. irs.gov/newsroom/artic...

Other sources over the past few years said down payment assistance programs are a way for sellers/builders to launder money. This is the only way they can make sales, and yesterday a builder was quoted in news about this saying exactly that; that it's the only way they can sell.

I'm not a fan of HUD. IMO they sat by and watched builders build shoddy new houses and breach the warranty and so long as HUD didn't eat too much of the cost the agency didn't seem to care much. They didn't seem to care if 3rd party home warranty co's were more a marketing tool than actual protection for home buyers either. But when they (HUD/FHA) started having to absorb the PREDICTABLE losses as a result of mortgage fraud, they suddenly started caring about WHY these things were happening. HUD isn't going to ride to any consumers' rescue, but they may be trying to ride to their own. If there's something good that comes out of that for consumers, it's incidental, but I'll take it.

[CLH]

FHA should be shut down. Who says everyone should buy a house esp. when real estate is going down. Most people should rent and we dont need the gov. for that.

[HARM]

<i>"The charge from Congress for HUD and FHA is to increase home ownership in the USA."</i>

Yes, and that very same "charge" was the whole purpose of founding the GSEs back in the 60s as well. And how well has this worked out for the American taxpayer?

Well, "homeownership&qu... (or more accurately, LOANownership) recently hit an all-time high of 69% of U.S. HHs. Unfortunately, homeowner *equity* also hit an all-time LOW, despite the huge bubble-related gains: calculatedrisk.blogspo...

Then we have that whole "affordability&qu... thingie. In my state (CA), the median house price-to-HH income ratio recently hit nearly 11:1, is still hovering around 10:1: calculatedrisk.blogspo...

And what was it before all these wonderful government affordability-promotin... behemoths were around, underwriting bankster risk, and touting their new "innovative" financial products (neg-ams, Option-ARMS, NINJAs)?: closer to 3:1. In line with the historical ratio recommended by fiscally conservative economists and your grandparents' local S&L.

God Bless the gub'mint and it's myriad of bureaucracies designed to "help" us.

[Matt S.]

First of all, why highlight D.R Horton? The down payment assistance you are talking about can be, and is, used by everybody in the business, private sellers included! The FHA is not allowing sellers to "circumvent" the down payment requirement-they are merely allowing gift funds (with no repayment requirement) to be used for the DP. This allows parents, for example, to assist in their childrens home purchase by "gifting" funds". It also allows other parties to contribute to the DP, provided the no repayment requirement is met. And who says that all these buyers can't come up with a down payment? Quite a few have money in the bank, giving them an extra cushion instead of draining the account for a down payment. Why wouldn't you take advantage of a seller paid down payment if you could, especially at todays low rates. Wouldn't you rather pay a tax deductible $30-35 extra a month to keep your $6000-7000 nest egg in the bank in these uncertain economic times?

[rm]

[If a buyer cannot come up with a 3% down payment, they are in no position to handle a sudden rise in taxes or insurance, or any type of emergency repair. ]

Actually, you've got two factors there:

1- They're not saving ANY money. If you rent an apartment for $800/month, and you want to buy a $100k home, first and last month's rent gets you more than halfway home.

2- If they have the down payment and that's all they have, and then they use it for a down payment, they're back to square one, as most average Americans have no savings.

There are other issues that are contributing to and exacerbating the problem.

Their lack of a down payment demonstrates their inability to save...

[Jane]

Matt, the "gift" from a DPA isn't necessarily something they don't have to pay back. Sometimes it's rolled into the price. I don't think anyone's targeting DR Horton but other articles on this have said builders are the largest users of DPA's. The fact sellers use them too doesn't really matter. What matters is that these purchases are far more likely to go into foreclosure. Bannning DPAs will not ban true gifts from one's family members.

FHA can't handle the loss and it may fall on tax payers. Getting buyers into homes with toxic financing isn't charitable, it's irresponsible. IMO we're pushed way too aggressively to become homeowners in this country. Renting isn't evil, and sometimes it's a better option. I have been both a renter and an owner. It's astounding how renters are vilified no matter how responsible they may be, no matter how senseless or unaffordable buying may be for them. But we treat them as if they're deadbeats for not owning, then expect them to become shining examples of financial responsibility when they buy a house they can't afford with a loan that's a ticking time bomb.

[Matt S.]

Jane, I agree wholeheartedly with your comments about renting being a viable option instead of buying, and the effects of bad loans, however, Michael led off his article with a statement that makes it seem like D.R.Horton is the only one "getting around the system" (his words, and not exactly neutral) And yes, if you're making a point about who uses the DP assistance program, it's does matter that you disclose all the participants, like private sellers, and builders, and even public agencies. Highlighing one company out of the dozens, maybe hundreds of entities using DP assistance is not exactly fair. If builders are the largest users of this program, why not say that? Also, a gift DP is always a gift, and never has to be paid back, even if it is rolled into the price-no getting around that. Banning DP assistance would mean the family "gift" rules go out too, because that "no-repay gift" rule is exactly what allows family members, friends, and yes, 3rd party DP assistance providers to provide that gift. Does anyone remember what the original purpose of Nehemiah ( one of the original down payment assistance providers) was-or what it means? Perhaps the rule needs to be amended to eliminate 3rd party gifts? Or, to be on point about using money efficiently, how about bringing back 4-5 month reserves, if you use DP assistance?

[T.Paine]

"Also, a gift DP is always a gift, and never has to be paid back, even if it is rolled into the price-no getting around that. "

Wow! Are you a Realtor? Loan agent maybe?

Let's be clear, if the gift is rolled into the price there is no gift. The loan balance is 97% of the purchase price; if the purchase price is raised to offset the cost of the gift program then the loan amount is also being raised a commensurate amount.

The gift is not a gift, it is a loan, paid back through an inflated mortgage balance. The gift is being repaid. This is fraud against FHA and the homebuyer.


"A long habit of not thinking a thing wrong gives it a superficial appearance of being right. " - Thomas Paine

[Matt S.]

No, I am neither. And the price can always be negotiated-that is, down OR up. And it is a gift, according to FHA definitions, regardless of how it got there. They don't differentiate between a higher sales price, or a negotiated sales price and the source of the gift. Their definitions, not mine. And if they allow these loans with full knowledge of gifted funds and an appraisal to match (and how many inflated appraisals are getting by these days?) -who are you to say it's fraud-a congressman?

Seek first to understand, then be understood: Stephen Covey

[yanni raz]

Today's Most Popular Fha Loans

What is fha loans with bad credit ?

Fha loans are the most popular consumer mortgage loans you can possibly have today.
Also fha bad credit loans are done by the government, basically the government have created these loans years ago and it was actually very popular.
Fha bad credit loans also called fha hud loans have their fha guidelines and fha requirement.
So for you to get a consumer mortgage and an fha approval you need to know the guidelines.

1.Fha fees- fha fees are not so much different than any other conventional mortgage loans you had in the past.
The problem is that some of us that apply to have a consumer mortgage are being charged high points in conventional mortgage loans.
If you will read the fha guidelines you will understand that with fha lending it's a much safer way to go because there are some restriction with the fha fees.
2.Fha appraisal- fha appraisal is also not so different from a normal appraisal you will have to get done in a conventional mortgage.
But here the appraiser that will appraise your home will have to be fha approved to get you an fha appraisal done.
3.Fha conventional- fha conventional is not a normal term but some people are using this term for some reason.
Fha conventional is not related to one another, fha is fha and conventional is conventional.
4.Fha lenders- there are not a lot of fha lenders and fha brokers.
A lot of people think that every mortgage broker can help them with their fha Home mortgage, no.
Only a few Mortgage brokers out there are really fha approved, so before you make a decision about the next mortgage broker you will use make sure they're approved.
5.Fha loan limits- the fha loan limits have changed recently. Until march of 2008 the fha limits were up to $417,000, because of states like California, New york and Florida the fha loan limits have changed to $729,000.
The new loan limits will help many homeowners to refinance their homes and avoid foreclosure.
6.Fha pmi- fha pmi is the mortgage insurance you required to pay.
Please read the fha requirements, in conventional loans you will pay pmi only if your loan is more than 80% ltv.
Since fha programs don't offer a second loan on your mortgage they will make you pay pmi instead, which is good because paying pmi is much better then a second loan.
7.Fha rates- fha rates are much better then conventional interest rates.
Conventional banks have a higher interest rates because they charge to the index of your loan a margin. Fha interest rates have no margin since the fha program is done by the government.
Fha rates are lower then conventional rate loans.

So again learn the fha guidelines and the fha requirements.
now you will know the fha loan limits.
1. you will probably have to pay fha pmi.
3. The fha rates shouldn't be higher then conventional rate loans.
Now go find fha lenders or an fha broker, get your refinance or mortgage done and save your home.