Down-Payment Spigot to Shut Off
Saturday, September 27, 2008
In the past two months, most of the people who bought condominiums at the Stratford Club in Leesburg used no-money-down mortgages insured by the federal government, through a program that will be dismantled on Oct. 1.
The builders are concerned about what's going to happen now. "This is another obstacle to overcome," said Larry Breneman, senior project manager at the new community.
The federal government eliminated this popular financing arrangement in a broader housing package enacted this summer. Lawmakers and regulators said that this type of lending, called a seller-funded down payment, contributed to the foreclosures that crippled the housing market and damaged the economy at large.
But the nation's largest builders say thousands of first-time home buyers, minorities and single parents will be shut out of the housing market without this financing tool. They're stunned by the government's decision to wipe out a program that has generated 15 to 30 percent of their sales -- especially now, when the building industry is struggling to stay afloat.
"Today is not the time to cut off the blood supply to the patient that's on the operating table," Stuart Miller, chief executive of Lennar, told analysts this week.
Under this arrangement, the Federal Housing Administration allows charities to provide down-payment money to buyers. The sellers then reimburse the charities and pay an administrative fee for the service. About 79,000 people bought homes this way last year, most from builders.
Seller-funded down payments allow builders to sell to cash-strapped customers without lowering prices and depressing values in the subdivisions they're constructing.
"Some builders have used this program for so long that it's part of their everyday business, and they don't know the effect it's going to have once it's removed," said Ken Wenhold, a regional director at real estate advisory firm MetroStudy.
Michael Rehaut, an analyst at J.P. Morgan, predicts that one in every 10 potential new-home buyers will be forced out of the market once the program vanishes.
That helps explain why some builders' mortgage representatives are "just freaking out," as Kelvin Clarke of Countrywide Home Loans in Gaithersburg put it.
"There is a lot of panic," said Clarke, who works closely with builders. "They're definitely worried that it's going to hurt sales. A lot of them were rushing to get contracts done well before deadline."
For years, the FHA has tried to get rid of seller-assisted down payments, calling them the single biggest challenge to its solvency. The agency says borrowers who receive them go into foreclosure at nearly three times the rate of those who do not.