More on DPA’s
by Tom on July 31, 2008
in Market Musings
I just got this letter e-mailed to me this afternoon (a few more comments after the letter)
Dear Valued Clients,
Well I hate to say it but we are in for another crazy couple of months. I am sorry that it has taken me awhile to put together an update, but until yesterday we didn’t know a lot of concrete information. Now we have a little more info to share with everyone. This email is lengthy, but hopefully will help.
As you may know the president passed the bank bailout bill yesterday morning. The provision in this bill regarding DPA stipulates that the buyer must have “credit approval” before Oct 1 to qualify for DPA programs. After October 1, DPA will no longer be allowed. This means two things:
First we are not dead yet and we don’t plan on rolling over. The house of representatives continues to indicate that they will take up a renewed effort in the next few months to put together a bill that will re-instate DPA and a form of risk based pricing that will lower the overall risk to the Mortgage Insurance fund. Every indication says that this new DPA bill will come before October 1.
Here are quotes from my two new favorite members of congress, Maxine Waters and Barney Franks…
“We did not get the Seller Funded DPA program but my Subcommittee on Housing will start immediately to work on this legislation that we can come back in a few months with a stand alone piece of legislation to do what needs to be done. This is an important Program. This program has helped over 730,000 homeowners between 2000-2007. It is extremely important to helping those who can afford to pay the mortgage every month that cannot afford the down payment to get into the home. It works! it works well and it needs to be understood. We need to put in the Law and do it correctly!
Barney Franks Committee Chairman (who issued the compromise to get downpayment assistance removed from HR 3221): Immediately followed Maxine and said, “We were able to postpone the deadline for DPA until Oct. 1, there was also an issue on Risk Based Pricing. I believe we will have both of those resolved in a more flexible way before Oct. 1st so that Seller Financing and risk based pricing appropriately done will not go out of existence”.
Second, everyone needs to know that we will continue to fund transactions as long as underwriting departments will accept them, even if it is in to next year. You will begin getting letters from lenders saying that they will not accept DPA after October 1, but remember we have fought these battles before and won!
On a more exciting note, we want to officially welcome xxxxx to our team. Many of you know he worked for Ameridream for quite some time and as our biggest competitor. In recent months he has seen some business decisions by Ameridream that he feels create a serious conflict of interest with the lenders he has worked with for so long. Because of this he decided to come on board with us and xxxxxx. He has been one of the best DPA reps in the country, (definitely kept us working and on our toes) and so we feel VERY lucky to have him. If any of you were sharing deals between us as reps we are asking you now to send all of your business to xxxxxxx. The Preferred Program will continue to fight to keep DPA alive and will never make any business decisions that would jeopardize our relationships with such great customers.
I can’t say enough how much your support and continued business has meant to us over the last 7 years. I hope we can continue to offer our product to you and your homebuyers for years to come. Please email or call me with any questions. Tiffany is also there to help. We will update you as soon as we get more info.
Thanks,
Okay, Tom here again with a couple of thoughts:
1. Seller funded downpayments have shown to be significantly riskier loans than those wher the buyer put some of their own money down on the house.
2. They talk about “risk based pricing” for the DPA loans. I believe that if someone were to accurately account for the additional losses in these loans and then assess the appropriate risk based pricing adjustments to them (meaning higher rates), the rates would be so much higher that they wouldn’t even be feasible.
But I think the main “issue” that I have with these is that by calling them grants from an organization when in reality it’s the seller’s money is that it’s not right. If you read Paul Jackson’s article about mortgage servicers not being social insitutions, this fits right into that if you ask me.
I’ve never down a DPA loan and I have no intention of doing so. These are, if you ask me, substantially different than loans where the buyer is getting a grant from a neighborhood association. That money doesn’t come from the seller.
As Jeff Brown says, “Do the Right Thing No Matter What.“ I don’t believe that these are the right thing and I believe that the way this letter is written shows that.
What do you think?
Tom Vanderwell
Tom,
I believe that a DPA program has its place. Though it should not be used for everyone, it is important to remember each loan product, even ARM’s, Neg Am etc has its place, just people tend to abuse them.
I’ve heard it called “FHA money laundering” before. In a way that’s true. The buyer is paying for it in the price of the home, either way. Then the funds just get passed through an entity that charges a fee. If that’s ok to do, why not allow the seller to pay for the dp directly and save the fee? Or allow 100% ltv? Same difference. Just a thought.
I think that we can do a lot of “discussing” about different “options” but the reality of things is pretty much like this:
Loans with seller paid downpayments default at a significantly higher rate than those with “skin” in the game.
Calling it a “grant” when it is really a contribution from the seller is a scam.
Tom
Hunter,
I think we’ll have to agree to disagree on that one. To me, saying that every loan program has it’s place is ignoring the fraudulent nature of the DPA’s where you are saying that they are getting a gift from an organization but it just so happens that the seller is making the same size gift to the organization. That’s essentially fraud in my book.
I’m all for the organizations that truly give grants to encourage home ownership. One of my client’s kids got a $5000 grant from the city because they were buying an owner occupied duplex in a certain area. That’s a great way to encourage people to buy homes in certain areas. There’s a difference between that and what the dpa’s are doing.
Sorry this took so long to get on here – I have no idea why, but my spam filter didn’t like you.
Tom