DAP: The Bad Idea That Won't Die

Down payment assistance plans (DAP) are proving to be harder to kill than Dracula.

I think it was only last summer or early fall when FHA finally prevailed and Congress, after a lot of kicking and screaming, outlawed the product. No sooner was it buried than the home builders and real estate industry were trying to exhume the corpse. They tried the frontal assault and their enablers were sympathetic but politically it wasn’t worth the risk. Well, never say die. They’re back with a stealth version.

This time they want a piece of the fiscal stimulus bill to include a tax credit of from $10,000 to $20,000 for home buyers. But their proposal comes with a twist. They want buyers to be able to “monetize” the credit. Translation, you get it upfront to use for your downpayment. Basically, the taxpayers fork over the money upfront so others can buy a house with no money down. But they don’t stop there. They would also like the government to pay for an interest rate buydown.

From HousingWire, here is what the NAHB had to say about this.

The housing stimulus NAHB is advocating involves a temporary program that would be effective for any home — new, existing, or foreclosure-sale — purchased in 2009 as a primary residence. The buyer would not be required to repay the credit, which would range from $10,000 to $22,000 depending on the local mortgage limits regulated by Fannie Mae and Freddie Mac . The credit could be “monetized,” or moved up from the buyer’s tax return to the date of closing, to be used as the down payment for the home. It would act in concert with a federal mortgage rate buy-down, which would vary depending on which part of 2009 the buyer closed the purchase in.

Now, if you remember DAP, there were two things about it that were highly objectionable. One, it was basically a sleazy money-laundering operation that involved the seller donating money to a “nonprofit entity” that in turn made the downpayment for a buyer. It was a detour around the law. Bad enough, but the big problem was that it cost the government a lot of money. If I remember correctly (never mind, here is the previous post on DAP) the default rate for FHA loans utilizing DAP for downpayments is three times the rate for normal FHA downpayment loans.

This new initiative is truly just a DAP in sheep's clothes. The industry is hooked on credit and for that matter, easy credit.

Isn’t that what got us to this point in the first place?

Comments

[Jane]

Thank you so much for this article! I have grown so tired of, and disgusted by, the housing industry's incessent lobbying for things that are very bad for the economy, very deceptive to home buyers, and a total sham. This whole bailout and all the ridiculous toxic lending practices make me want to hurl. This industry got us into this mess and it's appalling that Congress is so in bed with them that they risk bankrupting the country and destroying millions of families to support wealthy crooks at the heads of homebuilding and lending firms. Our govt is headed toward third world style corruption.

2009 Jan 29 04:56 PM

[John Preston]

There is not one shred of evidence that the DAP is a prime culprit in the current housing/mortgage mess.

To say that DAP/NO DOWN PAYNENT structured mortgage financing leads to default is like saying that since many

In the future, near or not, there will be a true public study...some genius of an economist or other academic...will do a post-mortum, if you will... on the many mortgage files that went bad...

The resulting facts will show that over-leveraging on household income (high debt to income ratios) , together with job instability and eroding household income (high debt ratios getting higher due to declining income) were the prime factor.

When income goes declines or goes away....down payment or no down payment.......delinque... and default occur...

This whole financial mess ....mortgages/housing.... about over valuing income, and the resulting asset valuation problems!

2009 Jan 30 08:08 AM

[John Preston]

sorry...forgot to finsh this sentence:

To say that DAP/NO DOWN PAYNENT structured mortgage financing leads to default is like saying that since many bank robbers drink coffee, coffee causes people to rob banks......

2009 Jan 30 08:13 AM

[Lfish]

For John,

Do you actually think it was a coinsidence that FHA pulled risked based MIP rates at the same time congress ended DAP. I think that maybe, just maybe your anology is generally correct but specifically it is dead wrong.

2009 Jan 30 09:31 AM

[nobull]

John,
DAP is a 2-headed monster. One, it enables people to get into homes beyond their means. Two, more dangerous, it gives them every incentive to walk out when prices drop, because they have nothing at stake.

2009 Jan 30 09:41 AM

[Gremalin]

You can argue all you want about what got us to where we are today. Most likely the post mortem will reveal an astounding confluence of events (including: monetary policy, fiscal policy, deregulation, greed by industries and individual home purchasers and global influences previously not experienced) that triggerred this recession.

Bottom line though, is that you need to fix residential real estate and housing first or we'll be in this a lot longer than we all want. Once housing prices stabilize, the stock market will rebound, home equity will begin to increase as the market picks up, consumer confidence will rebound, people will start spending again, jobs will be created and we will all be back in business!!! Pick your poison, but it starts with residentail real estate and housing and recession history has proven this time and time again.

2009 Jan 30 12:34 PM

[Kunst]

Actually, at this point it all starts with jobs. With half the population out of work or afraid they soon will be, even people who can afford to buy aren't going to do so.

2009 Jan 31 08:31 PM