By Brian Collins
http://www.nationalmortgagenews.com/lead_story/?story_id=139 It was well known inside HUD that a special program where non-profit housing groups arranged downpayments for low-income homebuyers was bad news for the Federal Housing Administration mortgage insurance fund. Department of Housing and Urban Development officials tried to stop the seller-funded downpayment program (SFDP) several times over the past decade — only to be blocked by the courts or supporters in Congress.
The homebuyer assistance program allowed sellers to fund the downpayment and then turn around and inflate the home price to recoup the expense. The seller also paid a fee to the non-profit for qualifying buyers and arranging the transactions. HUD saw it as a scam, though the downpayment assistance providers denied it.
It was well documented that buyers generally paid too much for the properties and ended up in high loan-to-value loans that were generally three times more likely to default than other FHA single-family loans.
And default they did. The latest FHA actuarial report calculates the damage SFDP inflicted on the FHA Mutual Mortgage Insurance Fund in startling detail. If the government had never endorsed SFDP loans, the economic value of the MMIF would be $13.2 billion as of September 30 — instead of $3.6 billion — a difference of almost $10 billion. In other words, FHA would be in stronger financial shape today.
The government began insuring SFDP loans in 1998. Over the years the program grew steadily, accounting for nearly 20% of coverage from fiscal 2004 through fiscal 2008.
Congress finally banned seller-funded downpayments and FHA stopped insuring the loans on October 1, 2008.
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A piece of government mortgage stupidity from the Clinton administration.