Spreading the Word About the Campaign to Stop 'FHA Subprime'

The folks over at the Implode-O-Meter have launched a campaign to try to stop HR Bill 600 which seeks to reinstate "seller funded downpayment assistance", otherwise known as "FHA subprime", and I'm doing my part to help spread the word.

Despite those who desperately want the housing market mess to quickly heal itself so the rest of the economy can begin to climb out of the gigantic hole that it is now in, bypassing downpayments for home purchases really shouldn't be a part of it.

Looking back, of all the things that contributed to the housing bubble and bust, getting around the "skin in the game" requirement for borrowers through a variety of nefarious loan program ranks near the top of the list.

For all the easy money that washed over the world a few years ago, there was never a housing bubble in Germany. Why? In part, at least, because the buyer always had to come up with a sizable downpayment.

There's no reason to allow anyone to be able to buy a house anywhere without coming up with some of their own money. That's a character-building part of one's life that everyone should have to go through - saving for your downpayment.

While we are in desperate need of an end to the housing crisis in the U.S., we're in even more desperate need of character-building.

Here's the write up from Implode-Explode Heavy Industries (love that name!)

The contentious practice is called "seller-funded downpayment assistance" (SFDPA). It is used to allow home buyers getting Federally-backed mortgages to bypass the need for a downpayment, supposedly for charitable reasons.

On the surface, it sounds benign, but it is actually fraud and money laundering inflicted on the Federal Housing Administration (that is, taxpayers), the housing market in general, and in a sense, even the buyers!

One of these companies, Global Direct Sales (which runs the "Grant America Program") has sued us in an attempt to stop us from revealing the existence of SFDPA and discussing it frankly. SO FAR A FEDERAL JUDGE HAS BLOCKED THEIR ATTEMPTS TO SILENCE US. (Read More about our battle here. Help us to fight this NUISANCE lawsuit which is a blatant attack on free speech!)

How SFDPA works:

Someone wants badly to sell a home. FHA has subsidized programs to help home buyers. The "problem" is that even with FHA's programs, a 3.5% down payment is still required (to show commitment on the part of the buyer). Sellers realize if they could cut the downpayment to zero, they can make home buyers out of virtually anyone, and hence unload homes easier. Intermediaries like Realtors, as well as home builders, realize this would have the potential to increase their sales and transactions. Even some in Congress are in on the scheme, as they can appear to provide constituents with "free homes". After all, home ownership is a right, isn't it??

Enter SFDPA.

Third party, private companies have established programs that allow sellers to cover the downpayment FOR the borrowers, by promising to repay the money after the sale. While initially the downpayment is covered by the SFDPA company, the seller's money is then channeled through one or more entities which have a nonprofit or otherwise "exempt" status (like an Indian tribe) to repay them. The buyer has already presented the LENT money to the FHA as if it were their own, covering the required downpayment. Effectively, the seller has paid the buyer's downpayment, with the FHA being none the wiser.

The FHA has no reliable way of knowing which loans were made this way.

The GAO has found that transactions using SFDPA usually have been marked up by about 3%... in other words, USUALLY THE SFDPA DOWNPAYMENT MONEY COMES FROM SIMPLY MARKING UP THE HOME VALUE!!!

Why is this bad? Well,

• it distorts home prices, and creates an incentive to keep exaggerating prices upwards endlessly
• it means ALL the money for the purchase actually comes from the FHA (taxpayers), as it is rolled into the loan principle (in other words, the FHA nets NOTHING of real value)
• since the markup in value is not "real", it means the buyer immediately has a zero or negative equity position, relative to true market prices

This is bad all around -- for everyone, that is, except the seller and the intermediaries INCLUDING THE SFDPA COMPANIES, WHO MAKE HUNDREDS OF DOLLARS IN "FEES" OFF EACH TRANSACTION. These companies have netted millions off of SFDPA, given the popularity of the programs with builders and Realtors (in other words, those who want to see homes sell, no matter what).

So why in the world is there a bill to get this practice started again? PERHAPS BECAUSE ITS CONGRESSIONAL SPONSORS LIKE THE DONATIONS THE SFDPA COMPANIES, REALTORS, AND BUILDERS KEEP SENDING IN, to help insure this particular loophole is kept open, and other "housing-friendly" giveaway legislation is put forth. The main sponsors are:

• Al Green (D-TX)
• Maxine Waters (D-CA)
• Gary Miller (R-CA)

Does SFDPA Help Homebuyers?

Some argue that SFDPA should be allowed because it helps people get into homes. But this makes no sense:

If no-money-down loans were a good idea, why wouldn't the FHA just provide 100% financing itself, and cut out the middle-men? [In fact, the FHA has tried and been blocked in the past... by the SFDPA companies!]

If the loans were actually charitable, wouldn't the money come from charities, instead of the home sellers? [The IRS agrees. Sellers contractually COMMIT to "donate" the money to cover the buyers' downpayment]

Think about what is going to happen to these loans in a market of falling prices, with greater job loss, forcing more people to sell & move [All of the performance statistics for these loans, as disturbing as they were, were from good times!]

Haven't we learned as a society that loans with "no skin in the game" are inherently unsound and a bad idea, as they simply lead to foreclosures? [Some people apparently havent -- or they don't care!]

Why Did The Bill Number Change?

Since the 110th Session of Congress ended with H.R. 6694 still pending, it had to be re-introduced for the 111th. It received the number H.R. 600. However, there is some "apparent" difference. H.R. 6694 specifically instituted fees to attempt to cover the risk of SFDPA lending. However:

• The fees were essentially subprime "risk premiums," increasing as FICO scores went down. But these practices have already been reviled as "subprime" and discredited by the failure of FICO scores to provide for true risk mitigation.

• Proponents argued that the FHA would "make money" on the program because of the risk premiums, but neglected to point out that the fees would be simply refunded after a history of on-time payments.

• If the loans went into default, the FHA would likely lose money. Since home values start off inflated, it is unlikely the "risk premiums" would cover losses (and FHA is already operating at a loss for the first time in its 7-decade history).

The end result: SFDPA borrowers would be treated just like subprime borrowers, and the FHA (taxpayers) would still likely lose lots of money overall.

HR 600 does omit the section of HR 6694 that set up the premium structure. However, it still requires the FHA to set up a premium structure for borrowers with a FICO score under 620 and authorizes the FHA authorizes FHA to charge up to 3% upfront and 1.25% for annual premiums up to a fico of 679. So in other words, more of the details have been moved from the legislation itself to future FHA rules. We believe this is simply a tactic to deflect criticism -- especially of the use of FICO scores as risk-control criteria -- not to actually change the nature of the SFDPA legislation.

The law is substantially the same -- the renewed SFDPA would provide no-money-down, subprime-like loans at great peril to the FHA and taxpayer. It would continue to inflate home values, and likely lead a great many home buyers into foreclosure.

IT MUST BE STOPPED.

How you can help:

• Write to and call the bill sponsors expressing your opinion, and to your congressmen to get them to apply pressure to stop the bill.

• Donate to us in our legal fight to keep our free speech on this subject, and defend the pocketbooks of all taxpayers.

• Spread the word -- put STOP "FHA SUBPRIME" buttons on your web page, and link to this page.

Comments

[Dave Shafer]

Thank you, this is absolutely correct. Imagine trying to convince any rational person that having to come up with 3.5% as a downpayment is onerous and restricts home ownership unfairly. Also look at the history of this program, which caused all sorts of losses for FHA!

2009 Feb 27 08:43 AM

[PatriotJim]

Just a quick question... if SFDPA is equal to subprime lending, then when did we bail out Ginnie Mae? I know we bailed out Freddie and Fannie, but not ONE DIME went to help Ginnie Mae. ALL SFDPA programs were used on FHA loans and those loans were sold to Ginnie. Get your facts straight. Speaking of Facts, the CBO (congressional budget office) put out a report late last year that allowing SFDPA (per HR 6694) would pose no risk to the FHA insurance fund and would generate $18Million in tax revenue. Get your facts straight. SFDPA isn't fraud and it isn't money laundering. It was a completely legal practice that the Government was well aware of and chose to do away with. The merits of that decision are up for debate, but get your facts straight about what's fraud and what isn't. Opinions are a dime a dozen and if you're correct about your opinion, you don't need to back it up with false claims.

So I ask you again, if SFDPA was so bad, where's the bailout of FHA and Ginnie Mae in all this mess? There isn't one. Facts are facts and they should speak louder than every Joe Lender's opinions (trying to get media attenton). Unfortunately they don't always. You may get your wish to keep people out of homes who could otherwise pay their monthly payment, buy goods at Lowes, and generally contribute to the health of the economy like many recipients of SFPDA are doing today. But hey, you've got your home and that's not your problem is it?

Not a single dime of bailout money in this mess has gone towards helping Ginnie Mae or FHA stay solvent. That was where SFDPA was used. Facts are a nasty thing.

2009 Feb 27 11:55 AM

[Socialism cannot compete!]

Have we learned NOTHING from this debacle?? Get the bloody government OUT of housing!!! Entirely!!! Everything they touch turns to DUNG.

2009 Feb 27 12:10 PM

[Fabien Hug]

Well done Mr. Iacono. I truly hope you keep the flame alive. These behind the line market distortions are scandalous.

2009 Feb 27 12:22 PM

[StevePinATL]

Unlike Fannie & Freddie which were bailed out in lump sums, Ginnie Mae has in fact been bailed out on a loan by loan basis where as funds from the FHA MIP premium trust fund has been drained almost dry making up losses on defaulted SFDPA loans. Now that these SFDPA loans have bled the MIP trust fund dry, FHA will now need to borrow from the general fund (i.e. the tax payers) in order to make lenders whole on future FHA defaults which are inevitiable (in light of rising unemployment rates).


On Feb 27 11:55 AM PatriotJim wrote:

> Just a quick question... if SFDPA is equal to subprime lending, then
> when did we bail out Ginnie Mae? I know we bailed out Freddie and
> Fannie, but not ONE DIME went to help Ginnie Mae. ALL SFDPA programs
> were used on FHA loans and those loans were sold to Ginnie. Get your
> facts straight. Speaking of Facts, the CBO (congressional budget
> office) put out a report late last year that allowing SFDPA (per
> HR 6694) would pose no risk to the FHA insurance fund and would generate
> $18Million in tax revenue. Get your facts straight. SFDPA isn't fraud
> and it isn't money laundering. It was a completely legal practice
> that the Government was well aware of and chose to do away with.
> The merits of that decision are up for debate, but get your facts
> straight about what's fraud and what isn't. Opinions are a dime a
> dozen and if you're correct about your opinion, you don't need to
> back it up with false claims.
>
> So I ask you again, if SFDPA was so bad, where's the bailout of FHA
> and Ginnie Mae in all this mess? There isn't one. Facts are facts
> and they should speak louder than every Joe Lender's opinions (trying
> to get media attenton). Unfortunately they don't always. You may
> get your wish to keep people out of homes who could otherwise pay
> their monthly payment, buy goods at Lowes, and generally contribute
> to the health of the economy like many recipients of SFPDA are doing
> today. But hey, you've got your home and that's not your problem
> is it?
>
> Not a single dime of bailout money in this mess has gone towards
> helping Ginnie Mae or FHA stay solvent. That was where SFDPA was
> used. Facts are a nasty thing.

2009 Feb 27 02:12 PM

[OldLimey]

Governments both in the US and the UK are desperately trying to restore the status quo ante. What they will in fact do with measures such as this is either prolong the downturn, or provide sufficient 'adrenalin' to make it look as though the patient is recovering before another, bigger crash ensues. I'm guessing that we'll be looking at a 'W'.

Sorry I don't have a congressman to abuse; at least your guys pretend to listen even if they then carry on doing what Goldman Sachs tells them to do, but over here politicians don't even go through the motions of listening. (For anybody interested, there is a constitutional reason for the fact that none of our elected 'representatives' even raise a pretence of paying attention to their constituents: in the UK, it's Parliament that is sovereign rather than the people. Hence reference to the system as an 'elected dictatorship'.)

2009 Feb 27 02:20 PM

[Harry Tuttle]

You are working against the home-builders lobby.

Good luck with that!

2009 Feb 27 02:23 PM

[JAYBOB]

I agree with the article. Except Fha New all about thses DAP programs and that they were not truley Non-Profitt companies giving the 3% we had to show them the approval letters from the DAP companies and they had to see they were approved for it. The Problem is that these companies had deep pockets and took care of whomever they needed to. Those loans have performed less than those whom actually had there own money. But I say that if FHA knew about it and allowed it then they need to eat it. The Fha problem is that they were getting killed by conforming loans being so easy to do they loosened up there standards or I should say changed themto get more people into homes. Because they wanted to make money as well. But it has all backfired. I Pray for our Nation.

2009 Feb 27 03:24 PM

[Hmm?!]

I apologize to the people who have already seen this but......

I will keep reposting it, until everybody knows it. These two statements say it all, if you can do simple math (from Mortgage Liquidity Du Jour by Credit Suisse, March 2007)

"low/no documentation loans increased from just 18% of purchase originations in 2001 to 49% in 2006"

"sampling 100 stated income loans found that 60% of borrowers had "exaggerated" their income by MORE than 50%"

That means 30% of ALL mortgages in 2006, the buyer only had 66% of the income they claimed. Some of the other mortgages were also likely bad from minute one. If the buyer lied by 49% or 30% on their application?

Congress voted against oversight of Fannie and Freddie in 2003 and presto we have horrendous debt. What did it cost the no money down crowd? What will it cost the honest in America?

2009 Feb 28 12:55 AM

[rm]

Agreed.

My recollection is that the Nehemiah and Ameridream programs preceded the zero-down, 100% and 80/20 programs on the conventional side of the fence.

In addition, for safety's sake, I would suggest having verified, seasoned reserves IN ADDITION TO the down payment.

It's one thing to pony up to obtain the property; it's quite another to ride out the bumps in the road when economic "issues" arise.

2009 Mar 01 11:31 AM

[Jim Bunning]

they weren't sold to ginnie mae, ginnie mae securitizes loans that are insured by FHA. ginnie mae doesn't assume credit risk when it securitizes FHA & VA loans. The credit risk remains with the FHA.


On Feb 27 11:55 AM PatriotJim wrote:

> Just a quick question... if SFDPA is equal to subprime lending, then
> when did we bail out Ginnie Mae? I know we bailed out Freddie and
> Fannie, but not ONE DIME went to help Ginnie Mae. ALL SFDPA programs
> were used on FHA loans and those loans were sold to Ginnie. Get your
> facts straight. Speaking of Facts, the CBO (congressional budget
> office) put out a report late last year that allowing SFDPA (per
> HR 6694) would pose no risk to the FHA insurance fund and would generate
> $18Million in tax revenue. Get your facts straight. SFDPA isn't fraud
> and it isn't money laundering. It was a completely legal practice
> that the Government was well aware of and chose to do away with.
> The merits of that decision are up for debate, but get your facts
> straight about what's fraud and what isn't. Opinions are a dime a
> dozen and if you're correct about your opinion, you don't need to
> back it up with false claims.
>
> So I ask you again, if SFDPA was so bad, where's the bailout of FHA
> and Ginnie Mae in all this mess? There isn't one. Facts are facts
> and they should speak louder than every Joe Lender's opinions (trying
> to get media attenton). Unfortunately they don't always. You may
> get your wish to keep people out of homes who could otherwise pay
> their monthly payment, buy goods at Lowes, and generally contribute
> to the health of the economy like many recipients of SFPDA are doing
> today. But hey, you've got your home and that's not your problem
> is it?
>
> Not a single dime of bailout money in this mess has gone towards
> helping Ginnie Mae or FHA stay solvent. That was where SFDPA was
> used. Facts are a nasty thing.

2009 Mar 01 04:34 PM

[Jim Bunning]

GNMA doesn't hold credit risk. that is, while GNMA issues securities on FHA and VA loans, those loans are insured by the FHA and therefore the FHA retains the credit risk. Duh.


On Feb 27 11:55 AM PatriotJim wrote:

> Just a quick question... if SFDPA is equal to subprime lending, then
> when did we bail out Ginnie Mae? I know we bailed out Freddie and
> Fannie, but not ONE DIME went to help Ginnie Mae. ALL SFDPA programs
> were used on FHA loans and those loans were sold to Ginnie. Get your
> facts straight. Speaking of Facts, the CBO (congressional budget
> office) put out a report late last year that allowing SFDPA (per
> HR 6694) would pose no risk to the FHA insurance fund and would generate
> $18Million in tax revenue. Get your facts straight. SFDPA isn't fraud
> and it isn't money laundering. It was a completely legal practice
> that the Government was well aware of and chose to do away with.
> The merits of that decision are up for debate, but get your facts
> straight about what's fraud and what isn't. Opinions are a dime a
> dozen and if you're correct about your opinion, you don't need to
> back it up with false claims.
>
> So I ask you again, if SFDPA was so bad, where's the bailout of FHA
> and Ginnie Mae in all this mess? There isn't one. Facts are facts
> and they should speak louder than every Joe Lender's opinions (trying
> to get media attenton). Unfortunately they don't always. You may
> get your wish to keep people out of homes who could otherwise pay
> their monthly payment, buy goods at Lowes, and generally contribute
> to the health of the economy like many recipients of SFPDA are doing
> today. But hey, you've got your home and that's not your problem
> is it?
>
> Not a single dime of bailout money in this mess has gone towards
> helping Ginnie Mae or FHA stay solvent. That was where SFDPA was
> used. Facts are a nasty thing.

2009 Mar 01 04:38 PM