At the start of the whole "mortgage meltdown", Congress and the government reacted with all the deft of a bull in a china shop by eliminating programs like FHA Seller-Financed Down payment Assistance. Prior to 2008, FHA borrowers could ask the seller to pay 3% towards closing costs and an additional 3% towards the buyer's down payment, resulting in the borrower coming to closing with very little out of pocket. The money would be legally funneled through a non-profit like Nehemiah back to the borrower at closing.
The problem with these programs is that they were used to put less than qualified borrowers in homes they could not afford and were cited as a means for potential default. Today, more people are losing their homes because of job loss, strategic defaults, or other hardships aside from having received down payment assistance.
In 2009, H.R.600 was introduced by Congressman Al Green (D-TX) (not the Al Green the soul singer) and it reformed the FHA down payment assistance guidelines, which would make the program designed more for borrowers with a 680 credit score. Unfortunately, this bill is absolutely dormant in the house but I think it should be revived.
Think about this: the First Time Home Buyer Tax Credit cost tax payers $19 billion and created a mini-bubble in the real estate market that burst right before summer. Seller funded down payment assistance programs cost tax payers ZERO or $19 billion less. I know most sellers in today's market would gladly fund the buyer's down payment and closing costs if it resulted in selling their home.
With no skin in the game, wouldn't people just walk away? That seems to have been the thought among many who were against the DPA's in the first place. Consider that if you are lending money to a borrower with less than perfect credit, you will result in higher defaults since the borrower has already proven they default in credit.
Finally, both HUD and the VA have no down payment programs on their properties. If they were genuinely concerned about defaults, they wouldn't offer this program to borrowers purchasing their home with their financing. The thing is that they aren't.
The down payment assistance programs that are available today are run by government agencies (the NCHFA, USDA Rural Dev, and HouseCharlotte) and have income restrictions on much you can make to receive the assistance. Also the borrower must attend a HUD approved counseling class to see how broke they actually are. Why not then get the government out of it and give the money to the borrowers who can qualify DIRECTLY?
NAR and the Mortgage Bankers Association must support H.R.600 as it is private stimulus that will help absorb the inventory on the market and stabilize home prices. Do your part today and call your member of Congress (probably now on recess…gotta be nice) and tell them to jump on board as well.