Wednesday, November 30, 2005

'Seller-Funded' Downpayments Lead To Defaults

National Mortgage News has a report on 'seller-funded nonprofits' and the risk they add to a loan. "Down payment assistance provided by a seller-funded nonprofit can alter the structure of the purchase transaction in important ways. First, when a homebuyer receives assistance from a seller-funded nonprofit, many nonprofits require the property sellers to make a payment to the nonprofit that equals the amount of assistance the homebuyer receives plus a service fee, after the closing. This requirement creates an indirect funding stream from property sellers to homebuyers that does not exist in other transactions."

"Mortgage industry participants reported, and a HUD contractor study found, that property sellers who provided down payment assistance through nonprofits often raised the sales price of the homes involved in order to recover the required payments that went to the organizations. Our AVM analyses found that homes bought with seller-funded nonprofit assistance appraised at and sold for higher prices than comparable homes bought without assistance, resulting in larger loans for the same collateral and higher effective loan-to-value (LTV) ratios."

"Specifically, we found that homes with seller-funded down payment assistance were appraised and sold for about 2 to 3 percent more than comparable homes without such assistance. That is, homebuyers would have less equity in the transaction than would otherwise be the case."

"Loans with down payment assistance do not perform as well as loans without down payment assistance; this may be explained, in part, by the homebuyer having less equity in the transaction."

"With regard to down payment assistance providers that receive funding from property sellers, we recommend that FHA take additional steps to mitigate the risk associated with these loans. These controls include treating such assistance as a seller contribution and, therefore, subject to existing limits on seller contributions."

"Because gifts of down payment assistance from seller-funded nonprofits are ultimately funded by the sellers, they are like gifts of down payment assistance made directly by sellers. We, therefore, continue to believe that assistance from a seller-funded entity should be treated as a seller inducement to purchase."


At 11:20 AM, Blogger Ben Jones said...

Readers may remember a post done on this scam regarding Dominion Homes in Ohio. The incredible default rates prove these 'non-profits' are putting people into homes they can't afford, just to move houses for the homebuilder. Should be many foreclosures until someone cleans up this mess. Kudo's to NMN for running the story.

At 6:38 PM, Blogger el scooter de heffe said...

SFDP's are just a bad idea. There's a reason most loan underwriting involves checking down payment fundage for "seasoning". And it ain't beacuse they're Emeril and like a little Ms. Dash on their asparagus.

At 6:48 PM, Blogger Chip said...

I oppose even the do-gooder local government programs that provide the down payment. If the prospects did not save up a down payment, they have no business buying. Period.


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