June 15, 2008

FHA Looks to Ban Seller-Assisted Payments

The Federal Housing Administration has reopened a public-comment period on seller assisted gifts to be used for down payments, which the agency says leads to higher-than-normal foreclosure rates.

How it Works: A third party,typically a charity, provides the down payment for the buyer and is then reimbursed by the home seller, ( read home builder). This helps home sellers close deals with buyers who can't come up with down payments on their own. They get to sell property that might otherwise just sit there and they contend that in these times of tighter credit, they are helping the lower income buyer with less borrowing ability, to buy into a home.

The government-backed loans made to borrowers who receive down-payment assistance go into foreclosure at three times the rate of loans in which borrowers pay for their own down payment. Loans with seller-assisted down payments make up about 35% of the FHA's loan portfolio.

There is a large business tied to helping families into homes by providing seller assisted "gifts" to families that need help with a down payment to qualify. Although the FHA would like to limit these work arounds, they have lost this fight before. After all, gifts from family members are allowed when Federally backed loans are involved. HUD contends that these seller assisted gifts (a third party makes the gift to the buyer) are not true gifts because the seller (builder) is reimbursing the giftor for the "gift".

The FHA has a right to make good economic decisions to protect its asset base. Certainly isolating areas to mitigate loss is just good business. The problem is that its become crucial for home builders to off load inventory during this home crises. Lennar, a major national home builder has gone from $45 per share in 2007 to $15 today. Its also earned a BBB rating and this will only make it harder for the national home builders to weather this storm. Some things have no good answers, but the FHA is asking people to weigh in on whether they should limit or eliminate seller assisted down payments.

The Federal Housing Administration has reopened a public-comment period before it tries again to limit or eliminate these loans that are now almost 30% of the entire loan portfolio of the FHA.

Thanks for Reading

Howard Bell
A web site of over 450 articles related to real estate focused primarily on property management.

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