As expected, a housing bill the Senate passed late Friday would eliminate the hotly contested seller-funded down-payment assistance programs that have served as a deal-clincher for almost one in five home buyers in today's reeling new-home market.
A version of a housing bill that will wend its way through debate toward a likely vote in the House later this week keeps seller-funded programs in place--and preserves many home builders' hopes for a continuation of down-payment assistance in some form--with pockets of hefty support from U.S. Representatives and a strong lobby in favor.
At stake is builders' access to a segment of the first-time and first-time move-up home market of buyers that would otherwise not qualify for conventional mortgage financing. Under the current regulations, home sellers are allowed to make a gift of down payments and/or closing costs to buyers through payments made to third-party nonprofit organizations.
Public and private home builders whose product offerings focus on entry-level buyers quickly adopted FHA-insured mortgages and turned emphatically to the down-payment assistance programs for many of those who'd earlier taken subprime and Alt-A loans to buy homes. According to data from the U.S. Department of Housing and Urban Development, FHA-insured loans as a percentage of all loans are about 40 percent for new-home purchases; the FHA estimate for down payments provided by non-profit groups is 34 percent of 200,000 loans it has insured this year.
Home builders such as D.R. Horton have seen their FHA-insured business soar from 14 percent in the first quarter of 2007 to 50 percent in the same period this year. Indianapolis-based private home builder C.P. Morgan writes as much as two out of five deliveries with down-payment assistance loans.
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 C.P. Morgan even longer than the year it now takes to get them credit-worthy enough to get into a home.
The company hand-holds its buyers through the process of correcting credit and bolstering their bank accounts through planned savings. Without the down payment contributions, the builder will probably have to expand the "buy and save" timeframe for buyers to include saving up the down payment as well as fattening their bank accounts, C.P. Morgan CEO Tom Eggleston said.
"That is one of the remedial steps, but it would not be ideal," Eggleston said. Another option might be to take more advantage of FHA's down-payment assistance program. "That is a hope and a stop gap," he said.
Many in Congress, the Bush administration, and government agencies are pushing towards eliminating seller-assisted down payment programs.
The President, the Department of Housing and Urban Development, and the IRS have been down on an FHA rule that allows buyers to get their 3 percent down payment from charitable organizations that serve as pass-throughs for sellers to pay buyers' down payments.
They say that the loans have a higher rate of default from borrowers more likely to bolt when times get hard and their houses lose value 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 inflate home prices because, in some cases, the selling price is raised to account for the seller's contribution to the down payment, 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 that argument, saying they have successfully helped millions of Americans into home ownership. They question HUD's data on foreclosures and suggest that FHA is trying to get more buyers to use its own, less frequently used down-payment assistance program.
At C.P. Morgan, FHA-insured loans have grown from about 7 percent of the financing a year-and-a-half ago to more than 80 percent, Eggleston said. A good share of that includes the seller-assisted down payment programs--40 percent in Indiana, and about 25 percent in its Charlotte, N.C., market.
Data regarding how much impact eliminating the bill would have on the sales of home builders is sketchy, just as data on the investor-buyer segment of the market is unsatisfactory. Although individual home builders may be ambiguous about their current exposure to the down-payment assistance debate, clearly the new-home building sector would lose another catalyst in its battle with a year-long supply of standing new-home inventory if these borderline buyers have no recourse.
"A likely curtailment by Congress poses a material risk to the industry and, hence, all builders, irrespective of individual exposure," said Michael Rehaut, vice president and senior analyst for home building at J.P. Morgan Securities.
While some builders like C.P. Morgan have increased their participation in seller-assisted financing as they've upped their dependence on FHA loans, others have pulled back from the program as it has become clear that the opposition is endangering its chances of survival.
"I can tell you that a few years ago we moved way from [down-payment assistance], 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."
Florida-based Holiday Builders also has decided to steer away from the practice, opting to buy down mortgage interest rates for its customers instead, said CEO Kim Shelpman.
"Builders give money to them as a seller subsidy, and then these organizations 'gift' it to the buyers; the Nehemiahs of the world make it possible for buyers to put no skin in the game," Shelpman said. "And with home prices still unstable--and falling in a lot of areas--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?... Are you setting them up for failure [with this program]? 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."