Tuesday, August 26, 2008

Down With Downpayment Assistance

Down With Downpayment Assistance
The stupid crap just never goes away, does it?

Again we're going to be fighting over down payment shenanigans in Washington, it seems. One of the few bright spots — maybe the only bright spot — of last month's housing bill (H.R. 3221) was the fact that it did away with down-payment assistance programs (often called DPAs or DAPs) indirectly funded by the seller of the home.

To my mind, DAPs are flat-out nasty. They're just a shiny way to launder money. What they produce, in effect, are sellers bumping up their sales prices to cover (1) their own "down-payment gift" to the buyer, and (2) the fees paid to the nonprofit charity (ahem) who funnels this money from seller to buyer.

In these cases, since the buyer comes to the table with zero funds of his own, the mortgaging bank is effectively loaning one hundred percent of the sales price. The buyer has no "skin in the game," as it were. So when times get hard for Mr. Homebuyer and the mortgage payment starts to seem a little too burdensome ... well, you know where it goes from here. You've watched the news.

So seller-funded DAPs got the legislative axe last month, as mentioned above. Within moments, it seems, a few Congressfolk got together and popped the cork on H.R. 6694. Which, as you might guess, seeks to reinstate DAPs. And now we get this website:


Cute, ain't it? Oh, they're all about home ownership, they are. They suggest that you and I — all of us who value the Dream of American Homeownership — contact our Senators to let them know we want them to support H.R. 6694. Here's a grand snippet from their "Why?" page:

DPA Program Is Specifically Designed to Meet FHA Borrower Needs - Charitable DPAs programs aid borrowers who have sufficient credit to qualify for government-backed loans but have insufficient capital to meet the three percent downpayment requirement for an FHA loan. Charitable DPAs bridge the gap by providing this downpayment as a gift to the buyer, helping those who otherwise could not become homebuyers. The DPA program was developed and designed to work with FHA’s specific mortgage requirements to expand homeownership opportunities and serve the population of homebuyers that it is FHA’s mission to serve - minority, low-income, and working families with limited access to capital.

Why, indeed. Look — I don't care if a borrower's FICO is 849 and his wallet's crammed full of Amex Black cards. If he can't scrounge up three percent of a home's sales price FROM HIS OWN SAVINGS to put toward the purchase of said home, then he shouldn't be buying that home. And the bank has no business lending him the money to do it — especially when Joe Taxpayer seems to be the patsy at the other, far end of the "Who gets to eat this?" deal. Am I so completely off-base with this?

Some people are simply not ready to be homeowners.

Since the website above doesn't clearly make its ownership known, a few kind souls at Ticker Forum got involved in a discussion and went digging a bit. Turns out ownership belongs to the Genesis Foundation of Valparaiso, Indiana ...

... who just happens to pop in this Fort Worth Weekly article (hat tip Etz3l):

But what is making Dauphinot maddest is the increased use of “down payment assistance” programs that give mostly first-time buyers a “charitable” gift of the down payment money needed to close the loan under Federal Housing Administration loan rules.

Here is how it worked on a recent loan deal, coincidentally, just down the street from Felipe Garcia’s house in Edgecliff Village. According to documents sent to the buyer and obtained by the Weekly, the asking price on the home was $85,000. But the proposed buyer had bad credit, and the lender wanted a hefty down payment. So the Genesis Foundation, based in Indiana, was brought in to “give” the buyer the $7,200 down payment in return for a $595 fee that was rolled into the loan. In return, the company selling the house gave Genesis a tax-deductible “gift” of equal value and paid Genesis a $750 transaction fee.

It’s illegal for a home seller to give down payment money to a buyer, under federal lending rules. But in this case, the down payment technically came from a charity. In reality, it was just a way to move the money from one pocket to another. The new purchase price for the house was $93,000. So, in the end, the FHA (which requires at least a 3 percent down payment) was backing a higher loan with no real down payment. And instead of an $85,000 loan, the buyer now had a $93,000 loan.

“When these loans don’t get paid, the taxpayers are going to have to cover them,” said Dauphinot, who has been in the business for 30 years. “Everyone likes to portray these foundations as groups that are helping out the poor and getting them into home ownership. But it is all about getting around laws and inflating prices in the market. That house went from $85,000 to $93,000. The borrower now has a bigger loan to cover. That’s not helping the poor.”

Sums it up ever so nicely, doesn't it?

I'd be pumping H.R. 6694 if I were them, too.

But I'm not. I'm just a guy who somehow managed, with his wife, to piece together a three percent down payment on our first home way back when we were earning in the low- to mid-$20k range per year.

And a guy who knows dumbassery when he sees it.

So I believe I'll be better served if I simply write to my Congressfolk and indicate my complete and utter disdain for DAPs and, in particular, H.R. 6694.

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— Posted by Michael @ 8:25 AM


Michael: Thanks for calling this to our attention. I'm with you 100%. Just more vultures trying to make money by facilitating transactions that should never happen.


Down payment assistance programs have represented a significant proportion of all FHA loans during the past few years. According to HUD, “virtually all down payment gifts prior to FY 2000 were funded by the borrower’s relatives. You can get still more information about home buyers which I browsed on internet can fetch you help.

Anonymous Anonymous
, at 2:57 PM, August 26, 2008  

Gift - From Wikipedia.com
A gift or present is the transfer of something, without the need for compensation that is involved in trade. A gift is a voluntary act which does not require anything in return... a gift is meant to be free.

[Congress and the real estate industry need to pull out their dictionaries. Requiring a borrower to repay by bumping up the price of the mortgage is not a "gift" ... it's a lie.]

Anonymous ExcelGeek
, at 6:58 AM, August 28, 2008  

What if someone has a very low income and lives frugally, and can't come up with a three percent down payment?

What if theyir income is $15K and they have $1,000? How much "skin in the game" would be enough for you?

Anonymous chronically poor
, at 11:43 AM, September 02, 2008  

How much "skin in the game" would be enough for you?

Three percent, bare minimum, regardless of credit rating or income. And downpayment funds must be shown to come from the buyer; i.e., no funny business.



This article makes it out to be a black and white situation, which it is not. Like most things in life, having an option is better than not having an option at all, and those who argue for a balck and white solution are not only blind, but are of a kind of a nazi as well.

Everything has a purpose and utility when used properly. DPAs can be great for some one good with finances, knowing the consequences, and have better use for the money rather putting a down payment. Just to say something is 100% right or wrong is just plain stupid.



Well, if I'm "kind of a nazi" then you're "kind of a real-estate agent who's talking his book."

If, as you write, someone is good with finances, knows the consequences, and has "better use for the money rather putting a down payment" then surely that someone would understand just why it is that DPAs (like so many other "innovative" financial products) work okay when asset prices are rising ... and are a kiss of death when they're not.

But if you're a lender who's silly enough to let a buyer/seller combo utilize a DPA for a home purchase, then don't come crying to the already-tapped-out U.S. taxpayer when your balance sheet starts cratering.



You said it yourself... Your article looks at only one side of the equation, i.e. the down side of the market today. Would you have written the same article 5 or 10 years ago when it was an up market? I don't think so. So as you see, your article is relevant for a given situation at a specific time, but it is written as an absolute, which is totally wrong!

Secondly, you are ignoring the population of the people who can afford the down payment, but have chosen not to put a down payment. It was their choice for whatever reason, just as much as the new Tax Credit is not really a tax credit at all, but would be good for those who want an interest free loan. For those people that know how to manage their finance, this is one more option, rather than having to put all your cash down. That down payment money could have been better used for emergencies, rather than having to put all your money down, and not having anything for a rainy day or for an emergency. All you have shown in this article is just a one sided argument.


That down payment money could have been better used for emergencies, rather than having to put all your money down, and not having anything for a rainy day or for an emergency.

Oy. You really don't get it, do you?

Stop with the dreck about "better use for the money than as a down payment." I understand all that; it's why I don't pay extra toward my 2.75% (after tax credits) 15-year FRM each month.

DPAs are simply a way to get around the law — a law that, I like to believe, once was meant to maybe protect the taxpayer who'd eventually have to cough up for FHA-backed loans gone bad. DPAs are money-laundering schemes, but with a cleaner facade — nothing more, nor less.

My sincere hope is that they go away, permanently. I'd like to believe that the era of mortgage lending we're entering here will make that outcome inevitable.

But I see an economy around me that depends so much on full-bore debt at every turn that in the end, I have little hope of this happening. Somebody will come up with a better mousetrap.

And it'll go for a few years before it blows up, too.

Sometimes I think that what this country needs now, more than anything, is a Greater Depression. Might knock some sense into us, but good.



From your article and the emotions you have written your article and the comments you have exchanged with me, what I can gather from it is that you want to pin the whole housing mess to this DPA or at least you think its the major cause of it.

I don't disagree with you about DPA being legal money laundering. That was my first thought too, when I learned about 100% financing. However, that is a choice that is available for some one to use it if needed. Its not forced down some ones throat, and taking a choice away is something that I am always against. Besides, there are many other legal forms of money laundering schemes available in the tax code, too, isn't it? So why is this so unique?

I also agree with you about not bailing out financial institutions at the expense of the tax payer. However, I have to strongly disagree about your opinion about the DPA. It is not the catch all cause of the housing problem.

Lets take 2 families, both making the same amount, similar expense patters, and both frugally having saved 4K towards putting for a down payment for a 100K home. If one decided to put 3K towards a down payment with 1K left as savings and the other to go with 100% financing and keep that 4K as savings. The difference in payment would come to less than $50 a month. After they buy the home and the warranty runs out, AC goes out, the heater fails, a car breaks down, etc that causes unexpected expenses. Who is better prepared for the unexpected expenses? Who is the family that has to file for foreclosure if one looses a job on top of this? One with the money can hang in for a few months while looking for new job, while the other one runs out of funds fast. It is this choice that I say is important, and you say shouldn't be. Now if we take these two families and plug in more or less capable families to the same situation, things can be different, but the choices they make should be suited for their needs.

If you are looking for other articles to pin the blame on, pick ARMs, Reverse Mortgages, or Interest Only Mortgages... there are too many to pick pick from. However, what you will find is that some of these would have been good for some people at some time. Even the interest only mortgages can be a good option for some one with a high income and wanting the tax benefit to lower the income, even though they can pay off the loan if needed. I am sure you use knives to cut meat and vegetables, but some people use the knives to cause harm to others as well. So should we ban knives as well since it can cause damage? There are no catch all silver bullets for the problems in life, but you have judged every ones situation based on your openion of how things should be.

Also, I have to say that these problems are well known problems with capitalism. When the times are good, everyone runs towards the latest, greatest party, and when things go bad, every one runs away from it to the next one, abandoning everything. Haven't you seen this with the .com bust, telecom bust, biotech bust, and now the real estate and financial bust? This is just another phase in the cycle, except we are running out of steam (or is it oil) and grinding to halt.

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