by Calculated Risk on 9/10/2008 09:39:00 AM

Downpayment Assistance Programs (DAPs) are a symbol of the excesses and lack of oversight during the housing bubble. Basically DAPs allow the seller to provide the buyer with the 3% downpayment as a "gift". The FHA has been trying to eliminate these programs for several years - the IRS has called them a "scam" - and one of the provisions in the recent housing bill was to eliminate DAPs for FHA loans.

Some in Congress will not give up. Inman News reports: Congress weighs reprieve for seller-funded gifts (hat tip Jim Klinge)

A last-ditch effort to head off an Oct. 1 ban on the use of seller-funded down-payment assistance with FHA-backed loans is picking up steam as a compromise bill, that would mend rather than end the practice, gains momentum.

HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, is certain to pass the House of Representatives and has the blessing of the Department of Housing and Urban Development, Rep. Barney Frank, D-Mass., said at a hearing on foreclosures this weekend.

DAPs encourage appraisal fraud, and lead to higher default rates for FHA loans.

HUD has sought to end the use of seller-funded down-payment assistance with FHA loans outright, claiming the practice artificially inflates home prices and that borrowers who relied on the gifts are more likely to default.

Although FHA loan guarantee programs have always been self-sustaining -- they are funded by premiums paid by borrowers, and not taxpayers -- HUD said the enormous growth in the use of seller-funded gifts and the poor performance of the loans threatens to put the insurance fund in the red.
...
At Saturday's hearing, Merced Mayor Ellie Wooten [a local Realtor] said the down-payment assistance program offered by Nehemiah Corp. of America was "heavily used" in Merced County.

"We are an agricultural community, and (farmworkers) are solid people, but many people don't have bank accounts with the 20 percent down payment," Wooten said. The minimum down payment for FHA guaranteed loans is now 3 percent, and is being raised to 3.5 percent on Oct. 1.

Perhaps this is part of the reason the foreclosure rate is so high in Merced. And what is this comment about a 20% downpayment? The FHA only requires 3.5% as of Oct 1st, and any potential home buyer that can't save (or borrow from friends and family) a small downpayment probably isn't ready to be a homeowner.