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Are we throwing out a program that works, the FHA Down Payment Assistance Program, in this case the baby, while trying to fix the sub prime mess, the bathwater? I guess it all boils down to how valuable home ownership is and how well it helps drive a healthy economy.
A lot of realtors, including myself, have used an FHA non profit down payment assistance program (NDPA) with borrowers that want to own a home but can’t save a down payment fast enough to keep up with rising home prices. FHA programs, like Nehemiah or AmeriDream, allow more options for buyers, including the gifted down payment portion, and now that zero down payments are hard to find, this program is needed even more.
The non profit down payment assistance programs are going to be stopped in February unless Congress votes to extend the program. In the HUD Appropriations bill, congressional members are being influenced by a study done by HUD that shows that the default rate from the non profit down payment programs is 1% higher than other down payment assisted loan programs.
However, there is a further study by George Mason University that contradicts the HUD study and calls into question the validity of that statistics. For instance, the HUD sampling was limited to four US cities that had a higher than normal use of the programs and decreasing home values. Because of this study, the bill extending the programs may not pass.
The George Mason University study as well as the HUD bill is available by emailing me. It is long and takes time to get through, but here are the key findings, extremely edited!
1. 627,000 NDPA loans in 5 years.
2. National economic benefits as a result of these loans in the same time period is 4 times the estimated costs.
3. Those using this program had total wealth growth of 9.6 billion of this period.
4. NDPA homeowners contributed 228 million in property taxes in that time period.
5. NDPA homeowners generated 7293 jobs just in using more utilities due to their home ownership
6. Spending on household items created 60794 jobs, 1.8 billion in personal income, and 5.8 billion in total economic output.
Senator Patty Murray has voted against this bill possibly because of the influence of the HUD study. I hope she changes her mind. Since over 95% of all homebuyers using this program have not defaulted, we would be punishing those hopeful buyers and throwing out a wonderful and productive program.
Sounds like the study was dominated by its time period – the last five years has been a pretty frothy real estate bubble, and of course any scheme that involved getting people into the bubble paid off. Of course, it also means that people who stayed in the market are probably going to be hurt. Run the study again in another five years and see what comes out.
Now that we’re on the downside of the bubble, it’s irresponsible to back a scheme to get people into houses when they can’t even afford a 10% down payment. Sen. Murray is doing the right thing here, both for taxpayers and homebuyers.
That the market is abandoning zero-down-payment loans should send a message loud and clear: they’re a bad idea. Especially now that home prices are dropping, anyone who can’t put together a strong down payment has no business buying a house.
The market has abandoned zero-down-payment loans? That’s news to me. I believe there are still 100% Freddie or Fannie products out there.
But in any case, I always have wondered how much of a favor you’re doing people who won’t otherwise qualify. In this regard I’m thinking mainly of the Washington HFC programs for first time buyers, where it’s not only 100%, but some is deferred. That’s really betting on appreciation.
I could never wrap my arms around the DPAs. I know they helped a lot of people buy homes…but what seemed to happen more often than not was that the sales price would be bumped up to cover the sellers participation in the DPA and their contribution. Yes…I know the home would have to appraise to justify the increased sales price over the list price…it just seemed screwy to me.
I’m all for FHA loans and Kary is correct. You can still do 100% Fannie/Freddie mortgages (for now).
James,
In a market where the average home is 450,000 and increasing at least 6-8% annually, how many young people can save 45-50000 for a down payment? So does that mean, only high income young people that can put away that much will be able to buy? sure it does. Given that over 95% make their payments, how do you justify not wanting people that want houses and will pay for them.to have them
Kary, if they can make the payments, let them decide whether to do it or not.
Rhonda:
Re: the Freddie and Fannie product. FHA standards make it easier for the lower income. What are the fico scores for the Freddie and Fannie products, and what’s the LTV? Doesn’t FHA go up to 50% LTV?
With the numbers at 627,000 who have taken advantage of the program, that must be 627,000 for whom the Freddie and Fannie products did not work.
Eileen –
“So does that mean, only high income young people that can put away that much will be able to buy? sure it does”
Yes, I agree, but I don’t see that as a problem here. You need to have a fair amount of disposable income to purchase a half a million dollar house. If you can’t put together $40k but you still think you can afford a $450k house, you’ve got a problem with overconsumption. You’re definitely a bad bet for a big loan in a declining market.
This is pretty basic stuff – your down payment is a commitment to staying in the house through a downturn. If you have no skin in the game, the bank (and in some cases the taxpayers) are on the hook for it. Put down 10%, and you’ll still be able to sell your house if you loose your job. You may loose money, but it’s less likely that anyone else is going to get hurt. Put down 0%, and the pain is easily transferred to other people. Thankfully the other people (aka the world’s credit markets) are rapidly coming to their senses.
“Given that over 95% make their payments, how do you justify not wanting people that want houses and will pay for them.to have them”
It’s not whether or not they can make the payments right now. It’s how much risk there is around them not being able/willing to make the payments in the future. Add to that the risk around the decline of housing prices, and it’s likely that you’ve got to have a crazy-high tolerance for risk to be making 100% loans backed by real estate these days.
“if they can make the payments, let them decide whether to do it or not.”
That, in a nutshell, is the credit crunch. The lender should look at their income and their down payment, and then decide if that’s a sensible risk for a bank to take. Their own opinion of how much they can give up to make a housing payment is entirely irrelevant. Come up with enough of a down payment to cover the lenders risk and then you can make any decision you want about whether or not the monthly is right for you.
Eileen, the Fannie/Freddie 100% LTV products (I used Fannie Mae Flex the most) has a higher loan limit of $417,000 over FHA.
It is credit score sensitive, however (until very recently) allows credit scores based on an AUS accept. Some lenders are now requiring credit score minimums for FHA. (I’m not sure where you’re getting the 50% LTV figure from).
When I have compared a 100% Fannie Flex to an FHA program, more often than not, the Flex was better for the borrower. The DTI on the Flex programs were the same if not better than FHA and you could opt for LPMI instead of monthly MI…FHA also packs upfront MI on top of their (low) montly MI.
And again, we are FHA direct lenders…I love FHA loans…I never had the hots for DPAs.
Eileen wrote: In a market where the average home is 450,000 and increasing at least 6-8% annually, how many young people can save 45-50000 for a down payment? ”
This assumes a starter home is an average home. That’s rather unusual.
What you need to compare is the price of starter homes to income, etc.
Eileen wrote: “Kary, if they can make the payments, let them decide whether to do it or not.”
To some extent I agree with that. The problem is they’re using taxpayer dollars to fund these programs. Also, while they do require a class be taken to qualify, I’m sure some don’t fully understand what they are getting themselves into.
These programs “help” no-one except for the home builders and real-estate agents (and the people who operate the so-called charities). The down payment is simply rolled into the price of the house, meaning the buyer is paying it back with interest, and is paying the fee the “charity” took, and is paying extra commission to the REA (and a bit to the title agent and anyone else whose fees depend on the sale price). All buyers who’ve been hooked into these schemes would have been better off just getting the money as a discount off the sales price. The FHA (and the IRS, which really killed these scams but exposing the bogusness of their “for profit” charities) are correct in rejecting these, and instead focusing on real 0-down programs that don’t inflate sales prices, don’t increase the risk to the financial system, don’t line the pockets of the real-estate industry, and don’t take advantage of some of our most vulnerable consumers. I say good riddance, and any of you who’ve directed your clients into these programs should feel a significant measure of shame for participating in these shenanigans.
Kary reminds me of a point I forgot to make w/comment 8: locally the Fannie Flex and Freddie 100% programs have a higher loan limit than FHA will allow. We’re talking $417,000 vs. $362,790 (before the upfront MI of 1.5% is factored in). Plus, with the Fannie Flex 100, buyer can buy a home with just a $500 contribution instead of FHA’s 3% investment requirement (unless you do the DPA and pump up the sales price).
Ken, I think you’re talking about a different type program than what I was. I was talking about something run by the State of Washington, not some charity. And no one is cracking down on them.
What I don’t understand is this statement: ” All buyers who’ve been hooked into these schemes would have been better off just getting the money as a discount off the sales price.” Wouldn’t the seller object? Most of the money goes to them. That’s why I call these “first time home buyer” programs second time home buyer programs. The people moving up are really the ones that benefit because the additional demand created by the programs increases prices.
James Moore wrote: “This is pretty basic stuff – your down payment is a commitment to staying in the house through a downturn. If you have no skin in the game, the bank (and in some cases the taxpayers) are on the hook for it. Put down 10%, and you’ll still be able to sell your house if you loose your job. You may loose money, but it’s less likely that anyone else is going to get hurt. ”
I’d agree that putting more money down makes it more likely you can sell (without going out of pocket or doing a short sale). But I’d disagree that having nothing down means the person is more likely to walk. Someone named Shane made a similar comment in another thread.
Foreclosures and deeds in lieu have serious implications for people. But beyond that, people generally think they own the house regardless of their equity, and they want to keep it. Home ownership was a goal–one they don’t easily give up on.
“I could never wrap my arms around the DPAs. I know they helped a lot of people buy homes…but what seemed to happen more often than not was that the sales price would be bumped up to cover the sellers participation in the DPA and their contribution. Yes…I know the home would have to appraise to justify the increased sales price over the list price…it just seemed screwy to me.”
Well, when I bought my house it magically appraised for the sale amount, so I’m not sure that a slightly inflated appraisal was really anything too rare in the past few years.
The DPA assistance programs are just a way to finance the down payment in order to show that you have a down payment, when in fact you don’t. The problem is that the provider of the down payment has a financial interest in providing it to you, and then just increases the sales price to cover it. You, the buyer, happily take the increase in sales price because they’re giving you the down payment you need, and you get to finance the down payment over 30 years.
Getting a down payment for your sister, dead grandmother, rich uncle, generous friend, is an entirely different matter. The sales price is not affected and there is actually a little bit of equity in the house providing the cushion to the lender that a down payment is *supposed* to provide.
“A lot of realtors, including myself, have used an FHA non profit down payment assistance program (NDPA) with borrowers that want to own a home but can’t save a down payment fast enough to keep up with rising home prices.”
Luckily, prices are leveling off or coming down (depending on area) and so I guess this means that the programs are no longer needed, according to your argument I quoted above. Right?
Kary, crazy as it sounds, the reality is that foreclosures as of recently (last couple years or so) have had marginal impact on the ability for someone to buy. Perhaps today’s credit environment will eliminate that pool of potential buyers, but lenders are going to have to create revenue somehow and there will be new programs invented in the near future. We’ve closed transactions where the borrower is just out of a recent BK or 12 mos. out of foreclosure. Crazy, isn’t it?
In my view there has been no greater impact on a market and that of mortgage brokers than that created by the 100% nothing down programs offered by various lenders.
“lenders are going to have to create revenue somehow and there will be new programs invented in the near future.”
You’re leaving out a huge piece, though – lenders aren’t the ones providing the cash. The whole system for securitizing the loans that the lenders create has been altered drastically since this summer. I’m sure you’re right that a company like WaMu or Countrywide would be happy to create yet another generation of screwy loan products – but who’s crazy enough to buy them from the lenders?
Tim wrote: “Kary, crazy as it sounds, the reality is that foreclosures as of recently (last couple years or so) have had marginal impact on the ability for someone to buy. Perhaps today’s credit environment will eliminate that pool of potential buyers, but lenders are going to have to create revenue somehow and there will be new programs invented in the near future. We’ve closed transactions where the borrower is just out of a recent BK or 12 mos. out of foreclosure. Crazy, isn’t it?”
I knew about the former (I used to practice bankrutpcy law). The loans there generally required that they have made their payments for 12 months without issue. I’ve not heard about the foreclosure packages, but we did have a client who bought after being foreclosed–I didn’t follow the financing on that one however.
I suspect the latter has probably dried up, but not the former. The rates, however, even before the “mortgage crisis” were relatively much higher than in the past.
SPB, the appraiser knows that the sales price is, so if it comes in exactly at the price it means they probably thought it was a bit lower, but close enough not to make an issue of it. Remember, appraisals are only accurate probably +-5% or so, so if they’re
I don’t know what happened to the rest of my post above, but it said:
“within 1% or so they’ll likely adjust it up.” Then I said the 5% and 1% figures were pulled from the air to make the point, not to say those were actually the numbers.
I am confused as to how the nonprofit organizations that provide down payment assistance are taking criticism for what is obviously a flaw in the appraisal process. If the problem is that appraisers must appease lenders and home sellers, something is wrong with the appraisal system – not gift down payments. And the problem isn’t isolated to loans using gift down payments either, as appraisal inflation has been a problem since I started as a mortgage broker.
After an independent appraisal, a homeowner reimbursing a nonprofit organization will not inflate home prices as is mistakenly argued above. And, just like a gift down payment from Grandpa or Uncle Joe, it will give the home buyer instant equity in the house. While I appreciate the idea of protecting my tax dollars, the whole idea behind the FHA is to expand homeownership to those families not otherwise able to achieve it. Why would we limit the use of the FHA to those buyers with rich relatives? Here is a private sector program that stepped up to fill a void because Congress took to long to modernize the FHA. The program has worked so well the Federal government modeled the American Dream Down Payment Initiative after it.
If it is ok for the government to gift down payments, it should be allowable for the private sector to do so as well.
I’ve always thought appraisal inflation was mainly an issue with refinancing. We’d not had any issues with appraisals, but I think that’s mainly because there’s only been two transactions in the past year I was at all worried about. The first was because the prior comparables in the complex were sold low (with offers within a week), because other agents didn’t realize there’s been a re-siding project on the complex (my list price was 10% above the recent sales and since then sales have gone up another 10%). The other was due to the lack of recent comparables in the same complex.
With a resale you have a buyer exerting some downward pressure. With a refinance you might not have that at all.
BTW, back when I was practicing bankruptcy law if a client came in with an appraisal, I’d always ask the purpose of the appraisal. If it was a refinance appraisal I’d assume it was high, and I never got into trouble making that assumption. That goes back years, probably more than 10, so it’s not a recent phenomenon.
Mike, how many times have you found a seller in recent history that is willing to contribute towards the buyers closing costs AND do a DPA without the price being bumped up to compensate the seller?
As a LO, I would much rather see family members helping out towards a gift than the seller using a DPA to pass money through in order to be able to go beyond what a seller is allowed to contribute on an FHA transaction. At least when it’s family chipping in, you know the borrower (who’s all ready doing min. down) has help to fall back on if they’re “iffy”. With a DPA, you have more often than not, bumped the sales price and have no true equity in the property.
The borrower is also most likely better off doing a Fannie Flex vs FHA with a $500 min investment so the home does not need a bump up in pricing.
With homes no longer appreciating at the rates they have been in our area, DPAs would not be able to function as well as they did before anyhow. Yes, you’ll have more motivated sellers…however why not just price the house right from the start and/or offer closing costs.
“As a LO, I would much rather see family members helping out towards a gift than the seller using a DPA to pass money through in order to be able to go beyond what a seller is allowed to contribute on an FHA transaction. At least when it’s family chipping in, you know the borrower (who’s all ready doing min. down) has help to fall back on if they’re “iffy
“Simply put, if you’re not able to save a few hundred bucks a month NOW, while you’re renting, then I simply cannot believe you’ll be able to afford a bump in expenditures when you get into a mortgage!!!! Where is that extra cash going to come from?”
a few hundreds bucks a month isn’t going to save to 40,000 anytime soon.
Regarding whether or not the NDPA buyers are over buying, again, I point out that they’re not defaulting any more than any other program.
Regarding the issue of overstated appraisals, I have found that I can’t do anything more than the closing costs on condos, so I could never use the NDPA program there since they didn’t appraise. It only worked with houses.
I’ve only done 2 of these programs. However, when they were needed, they were really appreciated;
James:
“It’s not whether or not they can make the payments right now. It’s how much risk there is around them not being able/willing to make the payments in the future. Add to that the risk around the decline of housing prices, and it’s likely that you’ve got to have a crazy-high tolerance for risk to be making 100% loans backed by real estate these days”
Just look at the statistics. These programs don’t default any more than others, so your argument doesn’t matter.
As to the argument that these programs are subsidized, please reread my original post.
Rhonda,
Do you do all the first time home buyer loans? Any buyer campaigns? First time home buyer webinars, etc?
I don’t do “all” the first time buyer loans, Eileen. That would be impossible. My mortgage practice was built working with first time home buyers. Doing a lot of FHA and VA loans in South King County. When I was a title rep many moons ago, my Realtor relationships were from south west King County and many followed me when I “retired” and became a Mortgage Professional. I’m not totally sure if being a newer LO back then caused me to have more FTHBs or if it was being located in where homes are more affordable.
I still work with many FTHBs and really enjoy it. It’s exciting to help someone buy a home.
Yes, I’ve done seminars for first time home buyers. I have yet to do a webinar…I want to. In fact, I recently finished a presentation for agents on FHA loans. Maybe I can run it by you and get your feedback? 🙂
Prospective Home Buyer, I often recommend first time home buyers to “practice” making their proposed mortgage payment, paying their savings the difference between rent and the proposed PITI. This helps build their savings and hopefully allows them to get comfortable with the new payment.
Eileen, on the DPAs you’ve done:
1) was the sales price increased to compensate the seller?
2) how much did the seller contribute to the closing costs and to the DPA?
Rhonda and Prospective Seattle Buyer-
With respect to gifts from family members:
Correct me if I am wrong, but the purpose of the FHA is to expand housing opportunities for ALL Americans, not only those with rich relatives. Also, the data does not support your hunch that someone securing a loan using a gift from a relative “has help to fall back on.” The data that Eileen posted addresses that issue, and shows that there is no statistical difference in default between those using a gift from a seller-assisted nonprofit, or from a relative. While your experiences are surely helpful, I think that decisions should be based on data and not hunches.
It makes no difference whether the seller pays closing costs or contributes to the down payment. One idea might be to cap the total of contributions at a percentage of the sale price. There is no reason why this aggregate should not include a down payment.
Eileen said:
“a few hundreds bucks a month isn’t going to save to 40,000 anytime soon.”
Well, assuming this is 10% of a $400,000 house, I’m not sure you’re using the right set of numbers. AFAIK, down payment assistance is for much less than that – 5%? And your house price is too near the median to be useful. I thought DPA was for starter homes?
I would suggest a more meaningful example of the numbers would be 5% on a $300K property. That works out to be $15K. A brief search online indicates that there is a lot of inventory (SFH) out there in, say, Renton for $250-350K.
If you got a loan for 300K, with 15K down then you’re looking at approximately $2000 a month (7% loan, which is pretty high) which I estimate includes insurance, taxes, and deduction advantage (beyond standard) for a middle income buyer. I’ll add a couple of hundred bucks a month for upkeep of the house over time. So we’re looking at about $2200 a month for this house.
Renting a similar property in Renton seems to cost about $1400 a month. So we’re looking at an $800 difference a month that this family needs to be able to save or they won’t be able to afford the house. After two years of saving at this rate, they’ll have about $19,000! Enough for the 5% down payment and moving costs, and they can sleep at night knowing that their budget and expenses are in alignment.
If, during those two years, they realize they can’t save this much money, either because income and expenses or because it reduces their lifestyle to a point they are not willing to accept, then they’ll be able to make a decision to *not* buy that house.
Is saving a down payment for just TWO years such a terrible thing? I saved for two years when I bought my first place. What’s the big deal? And, like I said above, if prices are at best leveling off, then this is still a much more prudent approach. Who knows, maybe you’ll get that house for $250K in a couple of years?
Mike said: “The data that Eileen posted addresses that issue, and shows that there is no statistical difference in default between those using a gift from a seller-assisted nonprofit, or from a relative.”
The data seems to only relate to the last five years (please correct me if I’m wrong). This is a time in which property prices have risen to such a degree that anyone getting in trouble financially could easily sell, refinance, and get out. The problem with extrapolating short-term data like this is that it only deals with the times that were experienced over the life of the study.
Back in 2005, the newspapers (and realtors) in San Diego were raving about how the incredibly low foreclosure rate was going to protect them from price declines. Well, it turns out that foreclosures are really a lagging indicator and that the whole market there was built on a house of cards/leverage. I’m not in any way saying that Seattle is San Diego. My example just serves to illustrate that extrapolation using data from the past five years (the biggest housing boom in decades) probably isn’t a great predictor of future performance.
What is prices level off? No automatic equity cushion after 6 months of owning, unlike the past five years. Please note that I’m *not* saying these loans *are* higher risk, but I am saying that you cannot conclusively state that they are *not* given the data presented.
Mike, my experience has been that whenever someone was going to use DPA, the sales price was pushed much higher in cover the Sellers participation with the DPA and the closing costs. This is why I’m asking what Eileen’s experiences are with DPA in comment 30.
If the buyer does not have “rich relatives” (it does not take a rich relative btw…but we all have families that cannot or will not contribute for what ever reasons), there’s always Fannie Flex 100.
I did promise ARDELL a post on Fannie Flex compared to FHA. Eileen…your post is a great segway. 🙂
“there’s always Fannie Flex 100”
If I didn’t know a little bit about the mortgage business, I’d probably assume “Fannie Flex 100” was a new butt crunch product on QVC.
That is funny, SeattleProspectiveBuyer. They can also do the Flex97, too! 😉
Rhonda, I have to admit I’ve never heard of the Fannie Flex. It has been awhile since I’ve done any DPAP. I guess when the market rose so much.
Regarding the amount of the price increase. It would go up by the down payment plus the closing costs. I could get away with closing costs on condos, but not both. That was the problem with these programs, because ofter the FTHB could only afford a condo, yet they couldn’t use the program on them.
Seattle Prospective
The period of time doesn’t really matter. It’s just the $ or defaults compared to normal that matters. It should stay the same.
I’m listing a condo in downtown next week. it’s all of 462 sq ft and I will list it at 269,950 and it’s only a studio. Seriously, our first time homes are in the 400,00’s in some of the areas I work, like, Bellevue, Redmond, Issaquah, and Seattle. Renton is a great area for value. Just so HARD to get the buyer’s there. Burien is a great place for value, too. Des Moines and Federal Way beat them all. Not much increase in values, though.
here’s another statistic. I sold a townhouse in Sammamish for 445,000. First time buyer inventory.
“Seattle Prospective
The period of time doesn’t really matter. It’s just the $ or defaults compared to normal that matters. It should stay the same.”
Eileen, that is absolutely not true – the samples used when creating statistics is the most important part. Your referenced study is over the past 5 years which, again, was one of the biggest housing booms in the country and WA. You’d have to be a complete fool to foreclose in the past few years. Wait for 6 months and your house is worth 5% more than you owe (even if 100% LTV). Foreclosures are a lagging indicator, not a predictor.
San Diego had the lowest foreclosure rate it had seen in decades back in 2005. Back in 2005 in San Diego, and using that year (and previous few years) as a sample, they gave anyone a loan for any house. After all, the 2005 numbers show that pretty much nobody will default (note limited sample, and unwise extrapolation into the future). Prices will go up forever anyway, so there is no risk… Sigh.
Seattle is not San Diego. I’m just trying to show how a sample of data over a short time period, especially one that everyone agrees was historically abnormal, is not a way to make sound predictions of the future.
Dear Seattle:
What I’m saying is that the two things that they were testing, i.e., did the DPA have a higher rate of default than the non DPA doesn’t depend on the time frame and shouldn’t depend on the market area, (The FHA study picked an area in which DPA’s are heavier, which erroneously scewed the study.)
These must be constants to get true results. It’s the ratio, under any market conditions, DPA/Non DPA.
In other words, do the DPA give up their homes easier than those withouot DPA and according to the George Mason University Study, they don’t.
“What I’m saying is that the two things that they were testing, i.e., did the DPA have a higher rate of default than the non DPA doesn’t depend on the time frame and shouldn’t depend on the market area, (The FHA study picked an area in which DPA’s are heavier, which erroneously scewed the study.)”
Eileen. I’m sorry, but you’re not getting my point. The time-frame *does* matter and I’ve illustrated why it matters in my posts. You are not illustrating why it does not matter, and instead are simply stating “it doesn’t matter”. In response, I’d like to ask WHY the time-frame of a study such as this does not matter?
Imagine different time-frames in Seattle:
-3 year study, with a 2 year deep recession in the middle
-20 year study with 2 recessions, and 3 booms
-50 year study from 1958 until now
-1 year study in where the housing appreciation rate was 15% for that particular year
Are saying that DPA vs non-DPA defaults (the ratio) for *all* these different time frames will be identical? Are you saying that the time period and events during that time period are irrelevant? Surely you can’t believe that?
“In other words, do the DPA give up their homes easier than those withouot DPA and according to the George Mason University Study, they don’t.”
This is not correct. It is more correct to say “Did the DPA give up their homes easier than those without DPA during 2001 to 2006, and according to the GMUS, they didn’t”. “Didn’t” and not “don’t”. The study was not predictive, it was simply stating what had occurred, in the past.
You cannot make predictions about the future using a study from the past unless you can reasonably predict that future conditions will remain the same as those experienced during the study.
Do you therefore expect that housing prices will double every 5 years, like they did in the 5 years during the study? If so, then you can use the study to reasonably predict the future because the conditions of the future will be the same. If conditions are likely to change (which they already are) then the study of the past doesn’t mean anything about the future.
If I had used a study of wheat prices over the last ten years I could say “wheat prices will not increase more than 2% in a given year”. However, due to changing conditions in the world (conditions not present during the study) wheat prices are now up 50% this year alone. That’s another example of why a study from a particular time frame did not reflect the future and actual events that occurred.
Of all of your examples, none are ratios. I guess we’ll have to agree to disagree. I agree that if you study different time frames, one time frame will give you different results than another if you’re only testing for one thing, like wheat prices. However, if there is a ratio of sales between wheat prices and rice prices that is pretty constant as the GMUS study suggests, then in different market conditions, if wheat goes up, and the ratio of wheat to rice is constant, then rice will also go up too. The real question is is the ratio consistent and the GMUS study seemed to suggest.
So, I’m not debating that under different time periods,t he number of delinquencies will change. I’m simply saying they won’t change any more than other no down loan programs will change. Unless the variables aren’t held constant, such as the HUD study.
The FHA bill that passed the Senate this week did contain language that would stop the NPDA programs, so they may be gone anyway.
Looking at the responses to this post, it looks like most are against those programs anyway.
Just to clarify, there are two different types of downpayment assistance programs and they are very different animals. I think some of the posters have been mixing the two types:
1.) The non-profit downpayment programs (NDPAs) are used by sellers as a way to funnel $ through a ‘donation’ to a non-profit organization that is turned around and ‘granted’ to potential homebuyers. As several posters have noted, this is a thinly veiled seller contribution, with the non-profit organization getting a little taste at each transaction. The IRS has pulled the 501c3 status for some of these ‘charities’ because they are not really fulfilling any reasonable charitable purpose.
2.) Downpayment assistance programs funded by governments through silent or soft second loans. These loans are generally set at below market rates and subsidized by local taxpayers. They typically are limited to low or moderate-income buyers, and many have mechanisms to recapture equity through shared appreciation at sale or refi. You can argue about whether or not governments should be subsidizing private property purchases, but they are not fundamentally different from any other type of second loan (except for the subsidized rates and fees). You can even make the argument that it’s cheaper to drop $5-10k in interest subsidies for a low-income family to buy a property rather than providing a Section 8 subsidy of $500 per month ad infinitum.
Good distinction.
I assumed that this post is about DPA #1 in comment 43.
DPA #2 is a whole different animal. Because of the recapture feature with those programs, our company steers clear of those programs (in #2).
“So, I’m not debating that under different time periods, the number of delinquencies will change. I’m simply saying they won’t change any more than other no down loan programs will change.”
That’s a fair assumption to make, although the immediate nature of the negative equity (assuming seller increases price to cover DPA) is a little different to normal 100% LTV.
I suppose my big point in all this is not that these DPA programs WILL default more than non DPA 100% programs. It’s simply that the data of the study is for a period in time that was historically very different in the housing market. Studies like this don’t tell you the future, they just tell you what happened in the past and using a housing boom time period as the period of time for a study just seems to be very short-sighted on the part of those that did the study.
Like you say, it seems that we won’t have these programs any more soon anyway, so it’s probably a moot point.