Background on the President's Homeownership Agenda

Buying a home is the biggest single investment most people will make in their lives. Homeownership is a cornerstone of America's healthy, vibrant communities, and benefits individual families by helping them build stability and long term financial security. But sadly, homeownership is out of reach for many Americans -- especially for minority families. For millions of these families, homeownership is a distant, unreachable dream.

President Bush has a comprehensive agenda to help increase the number of minority homeowners by at least 5.5 million before the end of the decade.

While the overall homeownership rate has reached an all time high of nearly 68 percent, the statistics show a clear and persistent homeownership gap:

• Despite increases in minority homeownership during the decade of the 1990s, large persistent gaps between non-Hispanic whites and minorities remain and have narrowed only slightly;

   

• According to HUD, in 1994 the minority homeownership rate was 26.8 percent below the rate for white households;

   

• The African-American homeownership rate was 27.5 percentage points below the white rate, and the Hispanic rate was 28.8 percentage points below the white rate;

   

• The second quarter Census data for 2002 shows that non-Hispanic whites have a 74.3% homeownership rate, while African-Americans have a 48% rate and Hispanics a 47.6% rate; and

   

• Asian-Americans and other races have a 53.7% homeownership rate.

A new report from the Department of Housing and Urban Development (HUD) -- which analyzed the most recent homeownership data from the U.S. Census Bureau -- highlights the many barriers that prevent minority families from owning their own home. The barriers include:

• A lack of inventory of affordable single-family housing available for sale in many areas where a majority of residents are minority families;

   

• A need for down payment assistance, which affects minority families to a greater extent than non-Hispanic whites because they have less accumulated wealth that can be used to help children with down payments;

   

• A lack of access to affordable mortgage credit;

   

• A lack of understanding of the homebuying process;

   

• Weak credit histories, often arising from a poor understanding of financial matters and where financial counseling is required;

   

• A lack of information about available homeownership programs in the community; and

   

• Language difficulties or cultural differences.

It doesn't have to be this way. The President's agenda will help tear down the barriers to homeownership that stand in the way of our nation's African-American, Hispanic and other minority families by:

The President also believes that government alone can't close America's homeownership gap. It is critical that our government challenge the private sector to take concrete steps to tear down the barriers to homeownership that face minority families. The President is issuing "America's Homeownership Challenge" to the real estate and mortgage finance industries to join in his effort to increase the number of minority homeowners by 5.5 million families by the end of the decade. Many organizations have already responded to the President's challenge by committing to:

Down Payment Assistance - Grant That Is Never Repaid By The Homebuyer!

There are national charities dedicated to assisting homebuyers with their down payment and closing costs.

Buyers can receive a free gift under these programs. Gift amounts vary with each program but are generally available in amounts of 3% with some programs, all the way up to $22,500 with others. They are mostly only accepted when using an FHA loan. The biggest advantage is that the Buyers never have to repay these gifts.

These gifts or grants are the easiest to qualify for, however qualification guidelines do vary with each program. Each program requires that buyers must qualify for any eligible loan program (mainly FHA) and that the seller agree to work with the charitable organization in the form of a matching gift plus a service fee after the closing. That is why we strongly recommend that you and your realtor work with the charitable organization or one of our Down Payment Assistance Counselors to assist you in putting together the contract offer.

Other types of DPA programs are in the form of government subsidized grants. They will tend to have stricter qualifying requirements such as, requiring that the buyer complete a Home Ownership Counseling Course or provide 1% of their own funds into the transaction. In addition some programs have income/asset restrictions, are only eligible in targeted zip codes, and the most common is what is called the "forgivable loan". It will require the home buyer live in the home for a specific time period before the loan is forgiven. Time periods range from 5 - 15 years. If the home buyer moves with the time frame, the loan must be paid back. Some programs will pro-rate the amount to be paid back based on the length of time the home buyer lived in the home. The biggest disadvantage is some programs will also charge a much higher interest rate on the forgivable loan. We do not recommend these programs that require 15 years of residency or charge higher interest rates. Please be sure to ask for all of the details from these programs before you apply.

These programs generally participate with conforming loan products. Most of these programs do not underwrite the loan or add any cost in the form of points, fees, etc., they simply provide the gift for the down payment and/or closing costs.

These down payment assistance programs can be used for Single Family (1-4 unit) homes, Manufactured/Modular Homes, Condominiums, Townhouses, Existing or New Construction, Rehab and Non-Conforming.

EXCLUSIVE: HUD Admits Non-Seller Funded Downpayment Assistance Loans Risky Too 5/11/2006 9:00:00 PM By HoustonRealNews Market Analyst   irsdownpaymentassistance.pdf To view the following document, you will need Adobe Acrobat. Click on the image to download the latest version of Abobe Acrobat. Click Here to view Click here to download Bizarrely, the crux of the debate on whether downpayment assistance, when seller-funded, ought to be considered "charitable" or not, has hinged on the fact that these loans go into default more so than typical loans. Yesterday, the Department of Housing and Urban Development (HUD) admitted that downpayment assistance, whether charitable or not, results in higher foreclosures. If Houston real estate investors and builders had been thinking that their "charity" was hurting homeowners, only as much as anyone's charity would hurt the homeowner. Ad: ACTION Mortgage: Now Specializing in FHA loans for First-Time HomeBuyers. We Hired a NASA Rocket Scientist to Do Your "Hard to Do Loans." And You Will Pay Less. Call Marcy 713-723-7800. The admission has been well-known among industry insiders for some time, although it has not been mentioned in the press even once since Thursday's IRS ruling banning seller-funded downpayment assistance. BUSINESS AS USUAL ACROSS THE BOARD HoustonRealNews reported earlier that the IRS will take six months examining the "charitable" entities, during which time companies are conducting "business as usual." Charitable entities, lenders, Houston real estate investors and builders are not alone. In fact, HUD-certified housing counselors still promote the downpayment assistance to HUD clients. HUD told HoustonRealNews that they have no new guidelines for counselors yet, nor a timeframe for providing them. HUD has not fought the decision, as we noted in a blog post on Monday. In many respects, the ruling bails HUD out of a mess of its own doing. Just as HUD counselors still promote the downpayment assistance tools to clients, HUD lacked the political will to end downpayment assistance on merit. So, the IRS has taken its regulatory stick to the lending, building and investing industries. It has whacked the hopeful homeowner on the head alongside the professionals. Ad: LISTING AGENTS: We are so sure you can find buyers for your listings without the MLS AND KEEP MORE COMMISSION, we don't use it. Find out How. HUD argued in its two-paragraph Official Comment (below), that seller-funded downpayment assistance (gift funds) "do not perform as well as loans to borrowers with no such assistance." Since the performance is lower, they ought to be priced higher, or disallowed. The IRS is taking care of the latter, and the new HUD proposal for FHA programs we believe will take care of the former, as we forcefully argued in the Monday blog post. The new talk that ANY downpayment assistance increases the costs and risks of loans to the FHA is not a welcome part of the debate. The IRS ruling leaves those gift funds unscathed, although they too lead to higher foreclosure rates. HUD's Official Comment HUD recognizes that loans with downpayment assistance from seller-funded nonprofit gift providers do not perform as well as loans to borrowers with no such assistance. However, the Department is committed to its mission to protect consumers, expand homeownership opportunities, and serve hardworking, creditworthy homebuyers who may be a higher financial risk. Ad: OAK WILLOW BUILDERS: Houston's Quality Affordable Custom Builder - from the low $80's The types of homebuyers who rely on downpayment assistance could be well served by financing through the Federal Housing Administration (FHA). HUD recently proposed legislation that would make FHA financing more available to borrowers who have riskier financial profiles or have little cash for a downpayment. The legislation, introduced in the House of Representatives April 6, would provide safer, more affordable financing options for this type of borrower, as opposed to mortgage products that are risky and more costly.   Non-profits and No Down Payment: A Second Opinion by David Reed Thank goodness for all those government studies. Where would we be without them? I wish that I had buckets of money to go pay people to find stuff out for me. That way I wouldn't have to think so much, I could spend most of my time just hanging out. But I think this time around the government got gypped. The recent ruckus looks at down payment assistance for FHA loans, specifically when the seller provides the down payment assistance in concert with a nonprofit agency. This nonprofit agency exists to facilitate home ownership and to provide a vehicle by which sellers can legally give their buyers down payment funds. Or at least until the IRS said that structure was in essence a sham and they'll be examining such organizations much more closely. Others say that FHA homes with seller-funded down payment assistance "jacks up" the price of the home, robs buyers of any initial home equity, adds another element of risk and such transactions perform more poorly than those without seller-assisted down payment funds. True enough. But I don't see what all the stink is about. I'm not going to debate whether or not a seller can work with a nonprofit and whether that nonprofit is really, truly a nonprofit. Those things are decided by others, not me. FHA loans historically have been more liberal in their underwriting criteria with one of those criteria being the source of funds to close on a deal. A borrower need only have 3 percent of her own funds in a transaction. But FHA takes it one step further than other loan programs by allowing the buyer to get a gift from a family member, a trade union or the borrower's employer, or a government agency specifically designed for such transactions and nonprofits It's this last category that has certain people wagging fingers. That is when the seller is intimately involved. The way some of these transactions are structured is that if a seller is motivated enough to sell his home and someone needs down payment assistance the seller often times increases the price of the home to cover the down payment gift. On a $150,000 home, 3 percent down is $4,500. Instead of selling the house for $150,000 the seller increases the sales price by $4,500 to $154,500, gives $4,500 to the buyer (via the nonprofit) and the seller nets the same either way and the buyers get into a home with no money down. The problem apparently is that the sales price of the home is artificial because the seller increased it by $4,500. I disagree with their conclusion. It's not the source of the down payment gift that's a problem. All things being equal the single, solitary difference between a seller-funded down payment and one from a neutral nonprofit agency is the price of the home is increased 2 to 3 percent. So what? Suddenly the buyers are treading into dangerous territory? I don't think so. Take that $150,000 FHA 30 year loan at 6.50 percent. The payment is $948. Now "jack up" the price by the astronomical 3 percent to $154,500 and the payment zooms to … $976. Big deal. That's twenty-eight bucks. That's a large pizza and two beers, at least where I eat pizza it is. Per month. Only now that pizza and two beers gets the buyer their very own home when they couldn't get one before. At least not if they went to a non-prime lender who would happily charge an even higher rate for a zero down loan. Okay, so the home sold for 2 to 3 percent higher than others. Is that really such a big deal? This happens every day where the buyers want the sellers to help pay for their closing costs and during the negotiations the sales price is adjusted and the seller defrays some of the closing costs. As long as the seller contributions are in line with lending guidelines and the property appraises I see no issue. Will equity appreciation occur more slowly? Of course it will. The buyers didn't put anything down and the home started out 2 to 3 percent higher than the one down the street. But so what? Using this logic, every down payment assistance program should be banned if appreciation and equity position are factors. No, I think if there are performance problems it's not due to the source of the funds, it's due to underwriting guidelines. Instead of banning seller-assisted down payments, why not make the loans harder to qualify for? No down payment? Okay, but we'll ask that your debt ratios be 38 not 41. Sheesh, how easy is that to figure out? What you have here is the government confusing coincidence with causality. Aside from the issue of whether or not certain organizations meet nonprofit status -- and I admit this is an important issue-- blaming poor performance on a seller-assisted transaction because of an increased sales price of 2 to 3 percent is ridiculous. That's what I think.