"You've Caught the NET!"

FHA Loans! 

Their proponents say their the answer to many prospective buyers with low down payment and blemished credit.  Until last year, many would have opted for higher-risk, high-leverage sub-prime loans, complete with potentially-dangerous rate resists, high interest rates, and low potential for building equity.

FHA loans are fixed, at competitive interest rates.  Closing costs can be covered by the seller if the buyer in low on funds, and the Mortgage Insurance Premium can be added to and financed with the loan. 

Others are concerned that the FHA requirements, meant to help insure the loan will not default, will keep away some potential buyers, and scare of potential sellers wary of subsequent FHA repair mandates.

Within the past year, FHA loan applications for new homes have doubled.  FHA also guarantees loans for sub-prime re-finance loans, and provides rescue for those with old adjustable-rate loans now resetting to higher rates, and the resulting higher monthly payments.

One facet of FHA loans, however, is a loophole which currently allows down payment contributions by the SELLER, on behalf of the prospective buyer, through a third-party "charitable" intermediary.  As a practical matter, sellers would make a "contribution" to the third-party company, in the name of the buyer.  The intermediary would then disperse these funds, less a "transaction fee" of roughly $400-$600, to the buyer at closing for their down payment.

Today, the two most well known Buyer's Intermediaries for FHA Loans are Nehemiah Corporation of America, and AmeriDream, Inc.    Using either company, buyers can purchase a new home with virtually no payment out-of-pocket.

There is a problem here, however!

The U.S. Department of Housing and Urban Development (HUD) contends buyers using these intermediary-held funds are showing foreclosure rates two or three times higher than those where buyers or their families came up with the required 3% down. 

A 2005 survey by the Government Accountability Office indicated that including a down payment credit from the seller may actually INCREASE the home sales price.  Sellers want to be reimbursed for the money they provided, and they raised their contract price by an amount equal to their contribution to Nehemian or AmeriDream.

Homes selling for over their true market value contribute to larger FHA losses when buyers default or slow pay their mortgage.

Down payment credits from the seller are usually prohibited in conventional loans, but they have become typical for those backed by FHA.   Over the last few years, the government agency estimates that as many as one-third of FHA loans have involved a seller down payment contribution.

Now, the FHA wants to end seller contributions to buyer's down payments.  They cite excessive loan default ratios, high numbers of foreclosures, and severe losses that threaten their solvency.  Within the past year, the IRS has cracked down supposed "charitable" organizations funneling seller down payment contributions, including AmeriDream and Nehemiah, revoking their status as not-for-profit entities.

FHA Commissioner Brian Montgomery announced earlier this month plans to prohibit seller down payment contributions by the end of the 2008.  Under his proposals, gifts by bona-fide local government agencies, charities, employers, and relatives would still be permitted.  But those by "charitable intermediaries" would be prohibited. 

Of course, the FHA proposals are bringing considerable resistance from those companies offering seller-provided down payment assistance to buyers.  Scott Syphax, President and CEO of Nehemiah, challenged the department's foreclosure and loss statistics, saying HUD's database is "corrupt." HUD declined comment on Syphax's charge.

To date, attempts to block down payment assistance companies have failed.  Last October, Federal Courts blocked implementation of rules to block down payment assistance companies, mainly for procedural and technical reasons.

If the FHA prevails, and the prohibition against down payment assistance companies becomes reality, this will impact low-income, low-down-payment purchasers' ability to buy their new home.  From the point of view of the FHA, however, the possible reduction on loan default and new foreclosure proceedings would outweigh this negative.

Read our post today @ BlogChicagoHomes.com for more information.  We've also provided a link to Kenneth R. Harney's article in today's Chicago Tribune.

DEAN & DEAN'S TEAM CHICAGO