Members of Congress are making a last-ditch effort to head off an Oct. 1 ban on the use of seller-assisted down payments on federally insured mortgages with a compromise measure designed to win over skeptical federal housing officials.
The proposed bill would resurrect the programs, which Congress, with the backing of the Department of Housing and Urban Development, axed earlier this year. The compromise measure would limit their use to borrowers with higher credit scores. In exchange, HUD would be able to institute risk-based pricing for federally insured mortgages, allowing the agency to charge higher premiums for less-creditworthy borrowers.
Supporters of the measure face an uphill battle, with just weeks before the Oct. 1 deadline and with Congress focused on other matters in the weeks before an election recess. Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee, said that HUD has appeared receptive to the proposal, but a HUD spokesman said the agency had "deep reservations about the legislation in its current form."
Under the programs, a third party, usually a nonprofit, provides a down payment to the buyer and is reimbursed by the seller, often a home builder. That allows buyers to qualify for a mortgage backed by the Federal Housing Administration, which requires a down payment of at least 3% -- which will increase to 3.5% on Oct. 1.
The programs had largely filled the void left by the subprime-mortgage market that all but vanished in 2007. Federal officials renewed an effort to end seller-funded assistance earlier this year, arguing that borrowers were two to three times as likely to default on their loans if they received their down payment from a nonprofit. Other critics say that builders simply increase the price of a new home by the price of the down payment.
Builders said the program made homeownership possible for low-income buyers who didn't have money for a down payment. The assistance providers had mounted a lobbying campaign over the years to protect the programs from federal officials who tried to end the practice. The program also had strong support from low-income-housing groups.
"Our view was that, yes, there were abuses, but you ought to be able to curtail those, put in some safeguards and not wipe out the whole thing," said Rep. Frank.
The compromise is designed to ease concerns that the programs' above-average default rates were causing the FHA to lose money. Borrowers with credit scores above 680 would be able to use the programs, and those with scores between 620 and 680 might face higher insurance premiums. Borrowers with credit scores lower than 620 wouldn't be able to use the programs until mid-2009, when the HUD secretary would have the discretion to extend the program to less-creditworthy borrowers.
Home builders have aggressively marketed the assistance programs -- used by nearly 20% of first-time buyers -- urging them to buy a new home before the Oct. 1 ban takes effect. Realtors and builders have said that pulling the plug on the programs would further crimp sales at a time when the housing market has struggled to find a bottom.
"If one of the few financing mechanisms that allows for an accelerated sales rate for builders is taken off the table, it has some impact," said Howard Glaser, a mortgage-industry consultant and former HUD official. "On the other hand, you don't want to create more problems with a loan product that's doomed to fail, and that's also been the case."
Supporters of the program pointed to a new study by Alex Brill, a fellow at the American Enterprise Institute, challenging HUD's claim that buyers who got seller-funded down-payment assistance were two to three times as likely to default.
"Are our people going to...perform as well as someone who's wealthy enough to bring 20% down payment to the table?" said Scott Syphax, president and chief executive of Nehemiah Corp. of America, one of the nation's largest private down-payment-assistance providers. "Our people are going to be more fragile."
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