Bush proposes to help stabilize housing marketMortgagePress.comBush administration, FHA, housing market,
The Bush Administration has renewed its efforts to address risky
government-backed seller-funded downpayment assistance loans that
are significantly more likely to lead to foreclosure. HUD's Federal
Housing Administration (FHA) will reopen the public comment period
on a proposed rule that would ban seller-funded downpayment
assistance on mortgage transactions insured by the FHA. The
proposed rule will be re-published in the Federal Register and
comments will be accepted for 60 days following publication. The
rule can also be viewed on FHA's Web site.
In a speech to the National Press Club, HUD's Assistant
Secretary for Housing-Federal Housing Commissioner Brian D.
Montgomery warned FHA must take action because these loans, which
now make up one third of FHA's portfolio, are causing substantial
losses. This year, as a result of its annual re-estimate, FHA had
to book an additional of $4.6 billion in unanticipated long-term
losses, mostly due to the increased number of certain types of
seller-funded loans in the FHA portfolio.
"Given these concerns, we cannot just stand by. No private
mortgage insurance companies back these types of loans. We are
concerned about this business because the substantial losses affect
FHA's bottom line and FHA's ability to serve American citizens who
need access to prime-rate home loans," Montgomery stressed.
Stressing that FHA is still solvent with reserves of about $21
billion, Montgomery also noted: "However, no insurance company can
sustain that amount of additional costs year after year and still
survive. Unless we take action to mitigate these losses, FHA will
soon either have to shut down or rely on appropriations to operate.
That, I think, would have a far-reaching impact on the economy: it
would severely reduce the number of new homeowners each year; and
it would also sharply reduce the need for the services required to
build and maintain homes. In other words, the negative impact goes
far beyond the individuals who would not be able to purchase homes,
and would likely be felt across the entire economy."
The primary focus of HUD's rule is to establish appropriate
standards for downpayment assistance that is categorized as a gift.
Specifically, it would prohibit downpayment assistance provided
before, during, or after closing of the sale by the seller, any
other person or entity that financially benefits from the
transaction, or any third party or entity that is reimbursed
directly or indirectly by any of the parties benefiting from the
sale.
The rule would clarify that downpayment funds for FHA-insured
mortgages cannot be derived from sellers - directly or indirectly -
or any other party that stands to benefit from the transaction
financially. "The IRS, GAO and our own Inspector General have
previously expressed concerns with these circular financing
schemes. Data clearly demonstrates that FHA loans made to borrowers
relying on seller-funded downpayment assistance go to foreclosure
at three times the rate of loans made to borrowers who make their
own downpayments," noted Montgomery.
"In its entire 74-year history, FHA has been self-sustaining.
That means that our income has exceeded our costs and we have not
needed an appropriation of taxpayer dollars to cover FHA's
operations. That's pretty unique for a federal program," Montgomery
said.
Permissible sources of gifts as a source of the homebuyer's
investment include a family member, a governmental or public
agency, the borrower's employer or labor union, and a charitable
organization that qualifies as a tax-exempt charitable or
educational organization.
In these cases, there is a clear quid pro quo between the
homebuyer's purchase of the property and the seller's
"contribution" or payment to the charitable organization. Often,
these contributions function as an inducement to purchase the home.
One of FHA's primary concerns with these transactions is that the
sales price may be increased to ensure that the seller's net
proceeds are not diminished, and such increase in sales price is
often to the detriment of the borrower and FHA.
Discussing the Bush administration's effort to help families
stay in their homes, Montgomery also called on Congress to pass
legislation that modernizes FHA, which includes addressing the
risks associated with seller-funded downpayment assistance.
"Frankly, we need reasonable solutions to the housing crisis. And I
think there is considerable common ground on confronting it. There
is surely a consensus on a number of actions. But some in Congress
are advancing legislation that, while well intentioned, could be
problematic for the economy and the country. Some of the proposed
Congressional actions could actually weaken FHA and endanger the
housing market by turning FHA into a less stable, less solvent,
more bureaucratic entity," stressed Montgomery.
For more information, visit www.hud.gov.
