Down-Payment Spigot to Shut Off

Builders Fret Over Loss of Seller Help

Washington, DC — September 27, 2008
By: By Dina ElBoghdady, The Washington Post

In the past two months, most of the people who bought condominiums at the Stratford Club in Leesburg used no-money-down mortgages insured by the federal government, through a program that will be dismantled on Oct. 1. The builders are concerned about what's going to happen now. "This is another obstacle to overcome," said Larry Breneman, senior project manager at the new community. The federal government eliminated this popular financing arrangement in a broader housing package enacted this summer. Lawmakers and regulators said that this type of lending, called a seller-funded down payment, contributed to the foreclosures that crippled the housing market and damaged the economy at large. But the nation's largest builders say thousands of first-time home buyers, minorities and single parents will be shut out of the housing market without this financing tool. They're stunned by the government's decision to wipe out a program that has generated 15 to 30 percent of their sales -- especially now, when the building industry is struggling to stay afloat. "Today is not the time to cut off the blood supply to the patient that's on the operating table," Stuart Miller, chief executive of Lennar, told analysts this week. Under this arrangement, the Federal Housing Administration allows charities to provide down-payment money to buyers. The sellers then reimburse the charities and pay an administrative fee for the service. About 79,000 people bought homes this way last year, most from builders. Seller-funded down payments allow builders to sell to cash-strapped customers without lowering prices and depressing values in the subdivisions they're constructing. "Some builders have used this program for so long that it's part of their everyday business, and they don't know the effect it's going to have once it's removed," said Ken Wenhold, a regional director at real estate advisory firm MetroStudy. Michael Rehaut, an analyst at J.P. Morgan, predicts that one in every 10 potential new-home buyers will be forced out of the market once the program vanishes. That helps explain why some builders' mortgage representatives are "just freaking out," as Kelvin Clarke of Countrywide Home Loans in Gaithersburg put it. "There is a lot of panic," said Clarke, who works closely with builders. "They're definitely worried that it's going to hurt sales. A lot of them were rushing to get contracts done well before deadline." For years, the FHA has tried to get rid of seller-assisted down payments, calling them the single biggest challenge to its solvency. The agency says borrowers who receive them go into foreclosure at nearly three times the rate of those who do not. FHA officials have never targeted down payments from other sources, such as family, employers or churches. They say those perform well and function as "gifts." The down payments at issue do not fit the "gift" definition, they maintain. Instead, they skirt FHA policies that prohibit a seller from directly financing a down payment. Nationwide, there are at least 100 groups that enable seller assistance. The largest is Nehemiah Corp. of California, which has been lobbying feverishly to resurrect this type of financing. Scott Syphax, the group's chief executive, said the FHA's numbers are skewed. They undercount the number of loans made while properly capturing the number of foreclosures it has had to pay for, thus inflating the percentage of bad loans, Syphax says. The FHA denies that. The National Association of Home Builders was "distraught" about the decision to abolish seller-funded down payments but did not oppose the housing package because other elements of it helped the industry, said Jerry Howard, the group's chief executive. Still, some builders are stunned that Congress would get rid of a program so vital to their sales, especially heading into a time of year when demand for homes tends to be seasonally low. The decision is "absolutely ludicrous" and incompatible with the housing bill's goal to spur sales, said Donald J. Tomnitz, chief executive of builder D.R. Horton. "I'm absolutely shocked by it, and I'm upset by it," Tomnitz said during a recent call with analysts. Just about every large public builder has raised this issue in recent months. Lennar said about a third of the loans it closed in the quarter used seller-funded down payments. Trailing were D.R. Horton at 29 percent, Centex at 25 percent and Meritage Homes at 15 percent. These builders do not contend that they would have lost all those sales without seller funding. But the big unknown is: How many of these buyers could have come up with their own cash if they had to? "We don't know the answer to that until we put it to the test. . . . But it's certainly not 100 percent," Tomnitz said. Randi Grimsley, 27, said she could not possibly have ponied up the cash needed to buy her new townhouse near Chantilly without help. Grimsley and her boyfriend rented for about five years. They started house-hunting only because prices were down and their landlord was about to raise their rent. Their lender suggested that they take out an FHA loan and use a seller-funded program so that the required 3 percent down payment -- about $7,500 in their case -- would not be an issue. Their monthly payment is now about the same as what their rent would have been, and Grimsley said they can definitely afford it. "We just didn't have the cash for the down payment, that's all," she said. "When you rent, it's tough to save up that much money." Supporters of seller-assisted financing say this option meshes with the FHA's mission to serve low- to moderate-income people. While they acknowledge that the system has problems, they say it should be fixed, not nixed. To that end, House lawmakers have offered legislation to restore the program but limit it to borrowers with good credit. This bill is likely to languish. Congress will be in session only one more week before election time. Also, the FHA has said it has "deep reservations" about the measure. "I'm concerned about the building industry and the effect it will have on new-home sales," said Secretary of Housing and Urban Development Steve Preston. "But we have to understand, this program comes at an enormous cost to the taxpayer." Many builders hope that a new $7,500 tax credit for first-time home buyers will boost sales and offset any losses related to the demise of seller funding. But many financial analysts are skeptical that this deferred credit, which must be repaid, will appeal to a large number of buyers. That leaves many builders little choice but to develop other financial incentives for buyers, as Centex said it is trying to do. "Frankly, it's probably a good thing over the long term" that seller assistance is ending, Cathy R. Smith, Centex's chief financial officer, recently told analysts. It "will probably pressure industry sales in the near term, but over time, our buyers and the market will adjust." Other builders are playing up the Oct. 1 deadline. At Stratford Club, the Leesburg community built by Toll Brothers, the sales team launched a marketing blitz to notify renters and past customers of the looming cutoff. "It's created the urgency for people to use it or lose it," said Breneman, the senior project manger. Staff researchers Madonna Lebling and Lucy Shackelford contributed to this report.

# # #

For additional information, please contact Shelley Mitchell, smitchell@nehemiahcorp.org, 916-231-1999.

# # #