Why HUD Is Trying To Get Rid Of The Down Payment Assistance Programs?

Much has been made of late on HUD trying to eliminate Down Payment Assistance (DPA) programs such as the popular Ameridream and Nehemiah programs.  HUD actually issued a rule in September banning all down payment assistance from the seller, effectively closing down the traditional DPAs.  Both companies sued and were issued an injunction until the judge can rule on the Ameridream case.

But why is HUD trying to shut these programs down when their name just sounds so good…”down payment assistance”? 

You first have to understand how the DPAs work with FHA financing. 

With FHA, the buyer is required to have 3% into the deal.  When the borrower lacks 3% to put into the deal the obvious answer in the FHA world is to utilize a DPA program.
The DPA would provide the buyer their 3% investment in the form of a gift, from a non-for profit organization.  In return the seller would pay the DPA program the 3% plus a fee. 

So what would the seller do? 

They would either, A) raise the price of the home to cover the DPA costs or B) not lower the price as much as they would have, to cover the DPA.

So in essence, the buyer was obtaining 100%, which is not something FHA wants — or will want (I’ll be discussing possible changes to FHA in a future blog).

In the past, when prices of homes were appreciating rapidly, this would not normally be a problem.  In many cases, by the time the deal actually closed, the 3% had been earned (and then some) and the buyer would have equity built in already.  However, now the market has turned and home prices are now stagnant to declining in most markets across the country. 

In today’s market, if a buyer uses a DPA to get into a home, by the time the home closes now, it may be worth less than what it was when they purchased the home.  If the buyer were to be forced to sell the home, they would not be able to sell it for what they paid for it.  In those cases the buyer/borrower is more likely to just walk away from the home.

This issue with DPAs is not a new one.  It has always been a hot button issue with HUD.  But when the market was good, it was easier to overlook.  Now is the appropriate time to examine what can be done.

With the market changing and FHA financing coming back onto borrowers and lenders radar, changes to the DPAs had to come.  What the ultimate outcome will be is yet to be seen, but it does not look good for Ameridream and Nehemiah.  You may still be able to take advantage of these programs for the next few months, but maybe not much longer.  The elimination of the DPAs is sad, as the program has helped hundreds of thousands of people get into their homes. 

It is also another reason that FHA must change to be more accommodating to those with lesser means.  FHA must modernize, to be able to continue to provide homeowners and lenders the types of financing that is attractive to both.  Look for more information about “FHA Modernization” soon to come.