The FHA No Down Loan

In January I wrote a post about down payment assistance plans and called them the bad idea that won’t die. It looks like I was right. Now the government agency that fought tooth and nail to get rid of them is all set to introduce their own version.

I thought I heard something about this move this morning but hoped I was wrong. HousingWire, however, has a post up confirming that we missed Dracula’s heart when we thought the stake had been pounded home.

Home buyers qualifying for Federal Housing Administration-insured mortgages may soon use the new first-time home buyer $8,000 tax credit as a down payment, US Department of Housing and Urban Development secretary Shaun Donovan said today.

The process of applying the tax credit toward down payment, called ‘monetization’ in the industry, allows for FHA-qualified borrowers to use the tax credit to obtain a government-insured mortgage.

Donovan’s announcement came at a National Association of Realtors legislative summit this morning, although HUD’s details on the initiative aren’t scheduled for official release until next week. The initiative will allow FHA-approved lenders to monetize the tax credit through short-term bridge loans, letting borrowers access the funds at the closing table.

“We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment,” Donovan said, according to NAR.

Just to refresh your memory, DAP’s were a thorn in the side of FHA, primarily because the loss rate on these loans averaged about three times the loss rate on loans in which the borrowers made the requisite down payment. The scam that FHA finally convinced a reluctant Congress (Barney Frank) to get rid of involved home builders “donating” the downpayment on a new home to a “non-profit” organization which for a fee channelled the money back to the closing table as a “charitable contribution” that was used to cover the downpayment and sometimes closing costs.

FHA fought court battles to get the practice outlawed and labeled the transactions as nothing short of money laundering. The loss rates validated the fact that they were overly risky loans with an unacceptable default rate. So now they want to introduce their own version? Well why not. After all what could possibly go wrong.

If you want a new housing boom you’re going to get it. If we have learned anything it’s that people will buy houses in droves when they’re free. At least we learned one lesson from the bubble.

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