The housing bill approved by the House, which dropped its support of seller-funded down payment assistance (DPA) programs, made its way to the Senate July 24. As of press time, President Bush had removed his veto threat, and it was likely that the bill would be passed into legislation, taking effect as early as Oct. 1.
As access to mortgage money has tightened in the wake of the subprime mortgage crisis, many public and private builders adopted FHA-insured mortgages and turned to DPA programs, going through third-party nonprofit organizations to make seller-funded down payment gifts to buyers. Without the programs, home builders lose access to critical segments of the first-time and first-time move-up buyer market that otherwise would fail to qualify for conventional mortgage financing.
Home builders such as D.R. Horton have seen their FHA-insured business soar from 14 percent in 1Q2007 to 50 percent in the same period this year. KB Home and Lennar Corp.'s FHA exposures are 67 percent and 60 percent, respectively.
"A likely curtailment by Congress poses a material risk to the industry and, hence, all builders, irrespective of individual exposure," says Michael Rehaut, vice president and senior analyst for home building at JP Morgan Securities.
Concrete data regarding the impact eliminating DPA programs would have on the new-home market is sketchy. However, Rehaut expects the public builders in his coverage universe will increase their reliance on FHA financing from 32 percent of all loans originated through in-house mortgage subsidiaries in 1Q2008 to between 40 percent and 50 percent of originations in 2Q2008. Placing that projection in context with data from the U.S. Department of Housing and Urban Development that DPA programs likely will provide down payments for 37 percent of FHA loans this year, Rehaut estimates that public builders are relying on these programs for approximately 17 percent of their loan originations. He says this data likely is a good proxy for the whole of the first-time and first-time move-up market.
Without access to down payment money funneled to buyers from the builder through the largest private down payment assistance provider–Nehemiah Corp. of America–it could take home builder C.P. Morgan even longer than the year it currently takes to get some buyers credit-worthy enough to get into a home. The company writes as much as two out of five deliveries using DPA.
The President, HUD, and the Internal Revenue Service, among others, are pushing to eliminate such seller-assisted DPA programs. They say that the loans have a higher rate of default from borrowers more likely to bolt when times get hard because they have no personal equity in the home. That is of special concern now that FHA is taking on more risk in the mortgage markets. FHA leaders argue that the loans artificially inflate home prices because, in some cases, the selling price is raised to account for the seller's contribution, essentially making the mortgage 100-percent-financed at best and upside-down in a falling market.
They suggest that companies such as Nehemiah and AmeriDream–another large nonprofit that funnels funds from seller to borrower for a fee–are likely to push through loans for people who can't afford the homes to ensure their own success. The IRS has revoked the charitable status of some providers of seller-assisted down payments.
Nehemiah and AmeriDream counter, saying they have helped millions of Americans into homeownership. They question HUD's foreclosure data and suggest that FHA is trying to get more buyers to use its own, less frequently used DPA program.
While some builders have increased their participation in seller-assisted financing as they've upped their dependence on FHA loans, others have pulled back.
"I can tell you that a few years ago we moved way from DPA, stopped offering it altogether," KB Home CEO Jeffrey Mezger said during the company's second quarter conference call. "There is a lot of pressure as you have seen in the news from Congress to eliminate the program, and we're sensitive to that so we don't want to create a business that relies on something that could possibly go away in the future."
Holiday Builders has decided to steer away from the practice, opting rather to buy down mortgage interest rates for its customers, says CEO Kim Shelpman. "The Nehemiahs of the world make it possible for buyers to put no skin in the game," Shelpman says. And with home prices still unstable, Shelpman says, "It's not 100 percent [financing], it's actually over 100 percent. ... Are you putting people in a position where they have negative equity from day one? ... How tied are they to making that mortgage payment if something happens? It's very easy to take the keys, put them in an envelope, and send them in."
–Teresa Burney and Sarah Yaussi
Learn more about markets featured in this article: Los Angeles, CA.