May 28, 2022

FHA Zero Down Payment Financing Returns

Home buyers can once again purchase a home using FHA financing with a zero down payment.

Previous zero down payment FHA loan programs were funded by seller contributions funneled through a nonprofit group which then donated the down payment to the purchaser.  These seller financed down payment programs were terminated in 2008 after the FHA experienced default rates three times higher than when buyers made a cash down payment.

The innovative zero down payment FHA home purchase program was recently introduced by The Lending Company of  Phoenix, Arizona.  In order to meet the FHA required 3.5% down payment the borrower receives a 2.5% gift from a non-profit organization and the remaining 1% can be gifted from a family member. 

The Lending Company notes that the program is not a seller-paid down-payment assistance program.  To further reduce the amount of cash required by the purchaser, the seller is encouraged to provide seller concessions to cover closing costs.  A borrower receiving both gift funds and seller concessions can potentially purchase a home without putting any cash into the transaction.

The Lending Company – The One Percent Down Solution Gift Program is designed to provide eligible homebuyers a gift of up to 2.5% of the sales price to be applied towards the FHA down payment and/or allowable closing costs for the purchase of a home.

Targeted towards quality affordable housing, approved homebuyers can purchase a home for as little as 1% down payment. The program also allows for the remaining 1% down payment to be gifted from any FHA allowable source.

Program Benefits:

  • The program provides up to a 2.5% gift to FHA qualified home buyers (subject to market conditions, greater gift amounts up to 5.5% may be allowed)
  • Seller can and is encouraged to contribute towards the closing costs to further assist the homebuyer
  • Minimum credit score of 620
  • Successful credit restoration allowed

It will be interesting to see how future default rates on this zero down payment program compare to earlier “seller funded” down payment assistance programs (DAP).  The Federal Housing Finance Agency is well aware that zero down payment mortgages default at a much higher rate, as detailed in a 2007 study by the Office of Federal Housing Enterprise Oversight.

This paper extends the analysis of mortgage default to include mortgages that require no down payment from the purchaser. The results indicate that borrowers who provide down payments from their own resources have significantly lower default propensities than do borrowers whose down payments come from relatives, government agencies, or non-profits. Borrowers with down payments from seller-funded non-profits, who make no down payment at all, have the highest default rates.

Source of down payment has not previously been considered in default modeling, but the relationship between default and the source of the borrower’s down payment may be related to trigger events. Borrowers who are capable of increasing their saving, or increasing their labor earnings, in response to unforeseen events may be less susceptible to trigger events. The need to save for a down payment may serve to separate those who can more readily increase saving and earnings from those who find it more difficult.

Loans with involvement from Down payment Assistance Program’s (DAPs), which effectively had no down payment, consistently showed the highest delinquency and claim percentages. Loans with a down payment from a source other than the borrower, such as a relative or government program, had lower claim and delinquency propensities, while loans with down payments from the borrower’s resources consistently showed the lowest rates of claim and delinquency.

This paper examines the case of literally “no money from the buyer” mortgages, and finds delinquencies and claim rates much higher than those for comparable loans with cash from the borrower.

fha-format

In January of this year, a bill was introduced in Congress that would have reinstated seller funded FHA down payments to purchasers through non profit groups.   The bill was never approved but  FHA Commissioner David Stevens stated his opposition, as reported by Bloomberg:

“We’ll always listen to proposals, but Secretary Donovan has been absolutely crystal clear that he’s against the idea, as am I,” said David Stevens, commissioner of the FHA, which is under the purview of Housing and Urban Development Secretary Shaun Donovan.

Stevens said that homeowners are more willing to default if they haven’t put any cash into their purchases.

“If a buyer puts down even a few thousand dollars, it’s a lot of money for them,” he said. “There’s a financial and an emotional commitment to the home that you don’t have otherwise.”

About 13 percent of down-payment-assisted mortgages originated in 2004 have defaulted compared with about 4 percent of other FHA mortgages, according to agency data.

None of the lenders, including San Francisco-based Wells Fargo & Co. and Countrywide Bank, acquired by Bank of America Corp. in Charlotte, North Carolina, incurred any losses, since mortgages they issued were insured by the FHA, the agency said.

Programs that provide down payments to purchasers may help home sales, but past experience suggests higher default rates and increased losses for the FHA.

Borrowers Chose Strategic Default On Reverse Mortgages

When reverse mortgages were last reviewed, it was predicted that many unqualified borrowers would wind up defaulting, despite the fact that a reverse mortgage has no payment due. 

As originally conceived, reverse mortgages were designed to fulfill a legitimate borrowing need.  Reverse mortgages were developed for elderly Americans who had a mortgage free home with substantial equity and wanted to cash out their home equity to supplement their retirement income without having to sell the house or face large mortgage payments.

In theory, the HECM made sense by allowing homeowners to remain in their homes and monetize their equity.  The lifetime HECM payment, along with other retirement income and savings would allow for a more comfortable lifestyle.  The only theoretical loser on the HECM program would be the FHA if property values dropped.

The HECM is available to all those 62 or older who have sufficient equity in their homes.  HECM program lends without regard to credit or income and is strictly  asset based lending.  Do these lending criteria remind anyone of  past  disastrous mortgage programs, such as  sub prime, ALT A or Pay Option ARMs??

A HECM does not require that the homeowner escrow for taxes  or homeowners insurance.  A known risk factor for default is a non escrowed loan.  The homeowner can face foreclosure  for not properly maintaining the property or for non payment of taxes or insurance.

Many homeowners taking out reverse mortgages were taking the maximum loan allowed upfront (instead of taking a monthly draw) and using the proceeds to payoff existing debt.  This choice left the elderly homeowner with little equity and no monthly cash payment to supplement retirement, a recipe for financial disaster.

The reason why borrowers are taking most of their available cash out upfront is because they are using the proceeds to pay off mortgages, consumer debt, medical bills, credit cards, etc.   Borrowers run up large amounts of debt when spending exceeds income, a situation likely to continue  after the borrower taps the last dime of equity from his home.  Since the HECM was the last option available, what happens in a couple of years when the borrower is again overwhelmed by debt?

Based on the credit profile and debt levels incurred prior to his approval of a HECM, what are the odds that the borrower’s finances turn around after his refinance?  My guess is that within a few short years, the borrower is in heavy debt again, unable to pay the property taxes or maintenance on the property and thus facing a potential foreclosure.  Since HUD will not be throwing senior citizens out of their homes, expect a mortgage modification program for reverse mortgages and further losses to the taxpayer on another mortgage program gone bad.

It now appears that, as predicted, many elderly reverse mortgage borrowers cannot afford to pay the property taxes due on their homes or are strategically chosing default since the decline in property values wiped out whatever equity they had left.  The end result is the predicted and ridiculous situation of borrowers defaulting on mortgages that do not have payments. 

This situation was confirmed in an audit report by the Office of the Inspector General.

HUD Was Not Tracking Almost 13,000 Defaulted HECM Loans With Maximum Claim Amounts of Potentially More Than $2.5 Billion

We performed an internal audit of the U. S. Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage (HECM) program because we found that an increasing number of borrowers had not paid taxes or homeowners insurance premiums as required, thus placing the loan in default. Also, we noted that HUD had granted foreclosure deferrals routinely on defaulted loans, but it had no formal procedures.

We found that HUD’s informal foreclosure deferral policy and its reversal had a negative effect on the universe of HECM loans and loan servicers (servicers).  As a result, four servicers contacted were holding almost 13,000 defaulted loans with a maximum claim amount of more than $2.5 billion, and two of the four servicers said they were awaiting HUD guidance on how to handle them. Further, the servicers had paid taxes and insurance premiums totaling more than $35 million for these 12,958 borrowers…

Since unreported defaulted loans were only obtained from 4 of a total of 16 HECM servicers nationwide, more defaulted loans may exist. Further, as HUD could not track these loans, it did not know the potential claim amount. In the event of foreclosure of the 7,673 loans for which HUD was aware and 12,958 loans of which it was not aware, HUD could lose an estimated $1.4 billion upon sale of the properties.

Strategic Defaults – The Difference Between The Rich And “Other People”

Million Dollar Home Owners Falling Off The Cliff

“I think you’ll find the only difference between the rich and other people is that the rich have more money” – Mary Colum

If the difference between the rich and “other people” is money, why are the rich walking away from their mortgages just as fast as anyone else?   This question is examined in a recent New York Times article which cites a serious delinquency rate of 1 in 7 for homeowners with a mortgage over $1 million compared to a delinquency rate of 1 in 12 for smaller mortgages.  The Times’ conclusion is that the biggest defaulters on mortgages are ruthless rich folks with no scruples.

Without citing specific statistical analysis, the Times article seems to draw the conclusion that anyone with a million dollar mortgage would have substantial financial resources that could be tapped to keep the mortgage current.   This may well be the case for some, but drawing from my own experience in the mortgage industry, many homeowners with the million dollar mortgages are financially thin and over leveraged.   For a variety of reasons ranging from ego, poor financial planing or irrational exuberance, many purchasers walk into million dollar homes with empty pockets.

Many of the million dollar homes now in default were purchased when eager buyers believed that home values could only go up and that buying as much home as possible simply meant larger profits down the road.  A ten percent gain on a million dollar home results in a handsome $100,000 gain – ten times the profit from purchasing a $100,000 home.

A few short years ago, at the height of the housing bubble, income was deemed irrelevant when banks granted mortgage approvals.   The proverbial strawberry picker or fast food cashier with average credit could use exotic mortgage programs to buy at any price level chosen, without the bother of a down payment or income verification.    Ever increasing home values then allowed cash extraction from a refinance or second mortgage, once again without the hassles of verifying income.  It should come as no surprise that wannabe millionaires taking the biggest risks now have the highest default rates.

According to the Federal Reserve, “half of the defaults are driven purely by negative equity” when the mortgage debt exceeds 150% of a property’s value.  Since high priced homes have seen large declines in value, it should come as no surprise that many strategic defaults will occur at the high end of the market by homeowners with million dollar mortgages.  The open question is – does having a million dollar mortgage imply a wealthy homeowner?

If a statistical study was done on the net worth of defaulting homeowners who have million dollar mortgages, it would probably reveal that many of these alleged “rich” homeowners have an embarrassingly low or negative net worth.  Consider the findings from one of the most influential studies on the mind set and lifestyles of the wealthy from The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, by Thomas J. Stanley and William D. Danko.

Characteristics of the millionaire next door:

  • Avoids buying status objects or leading a status lifestyle
  • 97% are homeowners with an average home value of $320,000, occupying the same home for over 20 years
  • The average millionaire lives well below his means and spends below his income level

The rich did not get rich by being poor stewards of capital or chasing housing bubbles.  The bulk of those defaulting on million dollar mortgages (strategically or otherwise) are simply poor people, living in big houses they could never afford in the first place.

Living Large

Living Large

Depression In Commercial Real Estate Results In Bargains For Some

Depression Pricing As Empty Hotels Slash Rates

The recent era of easy lending was not confined to residential real estate.  Commercial real estate lending is the next big worry for a banking industry already beset by an avalanche of non performing loans.  The banking industry has $1.8 trillion dollars of commercial real estate loans and many analysts believe that banks have reserved for only a small fraction of current and future losses.  Recent examples of losses on commercial hotel loans  in major travel destinations such as Hawaii and Las Vegas indicate the severity of the problem.

Hawaii Hotel Industry Downturn Worse Than Great Depression

Hawaii Hotels Face Fewer Visitors – For the hotel industry in the continental U.S., this downturn is the worst since the Great Depression. But the Hawaiian resort industry is taking a beating that’s even more severe.

Meanwhile, revenue per available room has fallen nearly 25% in the past two years and now averages $150.75.

Major renovations of existing hotels are common in Hawaii because construction of new resorts has been limited since the 1980s because of steep land prices and local governments’ opposition to expansion. “So the name of the game is to buy, renovate and reposition,” says Joseph Toy, president and CEO of the hotel-consulting company Hospitality Advisors, based in Honolulu. Many of the resorts that changed hands in recent years were built by Japanese owners in the 1980s.

But practitioners of that pricey repositioning strategy now find themselves in a bind due to the recession, the capital crisis and Hawaii’s tourism downturn. “The operating numbers have cratered, the underlying fundamentals aren’t very good, and you have a whole bunch of problem loans,” says David Carey, president and chief executive of Outrigger Enterprises Group, which owns 30 Hawaiian hotels, none in foreclosure.

Las Vegas Hotel Worth 41% Of Construction Cost – Cheaper to Tear Down Than Finish

Doubts Are Cast On Value of Las Vegas’s  Fontainebleau – LAS VEGAS—The Fontainebleau the luxury hotel and casino development at the northern end of the Las Vegas Strip, sits more than half-finished after falling into bankruptcy in June.

But as potential suitors consider rescuing the project, they are facing a grim reality: It may not be worth the money it would cost to complete it. More than $2 billion has already been poured into construction.

“It is going to take $1.2 billion to $2 billion to finish Fontainebleau, and it’s not worth that much,” Penn National Gaming Chief Operating Officer Tim Wilmott said. Penn is currently negotiating to take it over from the project’s creditors.

When the 4,000-room Fontainebleau project was first mapped out four years ago, gambling revenues were soaring and Las Vegas barely had enough hotel rooms to accommodate a flood of visitors.

Now, Las Vegas has a surfeit of luxury rooms. Occupancy rates in August fell to 83% from 94.9% two years earlier, and room rates have fallen sharply.

An outside analysis contracted by some of the Fontainebleau lenders last spring found that Fontainebleau would be worth $1.76 billion if it were completed in May 2010, according to a court filing, far less than its $3 billion total cost.

Depression Pricing For Hotels

Overwhelming supply and weak demand have resulted in hotels slashing room rates to keep the cash flow going.  In many cases, the cost of lodging at major hotels and resorts has dropped as much as 50% from two years ago and vacancy rates still remain high.  For newer resorts that were built during the boom years, the picture is even bleaker, resulting in bargain rates that were previously unimaginable.  On a recent trip to Mexico in September, I had the occasion to visit the newly completed and mostly vacant multi billion dollar resort, La Amada Hotel, Playa Mujeres, Cancun.  The La Amada website describes the property, which opened in May 2009,  as follows:

La Amada Hotel is a 5-star luxury hotel. Here you’ll have a comfortable home base of contemporary luxury. Stylish hotel architecture and decor, generous suites, spotless service, deluxe facilities, and of course, our secluded beachfront setting, all enable you to let your days here happen naturally. Situated just 25 minutes from Cancun International Airport, Playa Mujeres is the newest luxury resort destination in greater Cancun.

This 922-acre (373 hectare) luxury development includes a boutique hotel, upscale residences, a golf, yacht, and beach club, and Cancun’s first marina situated on tranquil Playa Mujeres in the Mexican Caribbean. Envisioned as an exquisitely and carefully developed sustainable community, La Amada is a destination where culture, ecology, history and art are integrated in a stimulating style.

La Amada, located in the Marina section of the Playa Mujeres “master planned’ community, is a 552-unit project of one, two and three bedroom residences, a 110-room five star boutique hotel, and a top of the line spa. In addition, the developers have created a “marina village” with 150,000 square feet of commercial space for restaurants, bars, cafes and shops, creating an ambiance akin to top European resorts such as Puerto Banus and St Tropez. No expense was spared on this spectacular creation; residences can even fly in and land on the properties private helicopter pad.

La Amada is a spectacular luxury resort hotel.  Equally spectacular are the discounts  – luxury suites are being offered at $280 per night, marked down from $700.  Apparently, even at these discounted prices, income stressed consumers are saying no.  During three visits to the property, I saw only one couple on an otherwise deserted beach.  Finished units remain empty with no guests to be seen.   The planned bars, cafes and shops have not opened.   Virtually all of the 176 slips in the Marina remain empty.  La Amada was built during an era of easy money when it was assumed that prosperity, based on eternal asset appreciation, would never end.  There is little doubt that the investors in La Amada have created a truly fabulous resort – far less certain is whether or not they will ever see a return on their investment.

La Amada sign points to empty hotel

La Amada sign points to empty hotel

Deserted La Amada beach

Deserted La Amada beach

Beachfront La Amada

Beachfront La Amada

Empty boat slips at marina

Empty boat slips at marina

La Amada - where are the guests?

La Amada - where are the guests?

Discount prices fail to lure guests

Discount prices fail to lure guests

Can The Unemployed Afford A Mortgage Payment?

Government Determined To Keep Unwilling Homeowners In Homes

The FDIC announced a new initiative to reduce foreclosures on home mortgage loans held by failed banks that were acquired by another institution.   This new FDIC program goes far beyond previous government mortgage assistance programs such as the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP).

Whereas the HARP and HAMP programs require income verification and attempt to lower a monthly mortgage payment to a level that is reasonable in relationship to a homeowner’s income, the new FDIC forbearance plan will attempt to help homeowners who are currently unemployed.

FDIC Encourages Forbearance To Unemployed

As part of its loss-share agreement with acquirers of failed FDIC-insured institutions, the FDIC is encouraging its loss-share partner institutions to consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed. This program will provide additional foreclosure prevention alternatives to these borrowers through forbearance agreements that will give them an opportunity to regain full employment and avoid an unnecessary foreclosure.

“With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures. This is simply good business since foreclosure rarely benefits lenders and would cost the FDIC more money, not less,” said FDIC Chairman Sheila C. Bair. “This is a win-win for the borrower, who can remain in his or her home while looking for a new job, and the acquiring institution, which continues to receive payments on the loan. Ultimately, by reducing losses under our loss-share agreements, this approach helps reduce losses to the FDIC as well.”

The recommendation to loss-share partners applies where unemployment, or underemployment, is the primary cause for default on a home mortgage. In such cases, the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months. The monthly payment during this period should be established based on an affordable payment – given the borrower’s circumstances – and it should allow for reasonable living expenses after payment of mortgage-related expenses.

FDIC Plan Likely To Help Few Homeowners

The objectives of the FDIC’s forbearance plan are well intentioned.  Allowing an out of work homeowner time to find a new job may prevent an unnecessary foreclosure and eliminate the need for a costly foreclosure by the bank.  From a practical standpoint, the FDIC plan may ultimately benefit very few homeowners for the following reasons:

  • The program is only available to those homeowners who have mortgages with failed banks that were acquired by another institution under a loss-share agreement with the FDIC.
  • Under the forbearance agreement, the bank will accept only a portion of the regular mortgage payment.  The FDIC is asking for only a 6 month forbearance.  Given the prospects of a “jobless economic recovery” and the difficulty in finding new employment, the FDIC appears wildly optimistic about a quick change in fortune for an unemployed homeowner.   Banks do not want to foreclose, but very few banks now offer a forbearance plan to the unemployed since they do not expect them to quickly find a new job.
  • The mortgage foreclosure prevention plans currently in effect have had dismal success rates and these programs are limited to candidates who have income.  The HARP program, expected to help millions of homeowners had at the end of July approved only 60,000 refinances.   The government loan modification program (for those not qualified under HARP) has been plagued by very high re default rates ranging from 17% to 45%.
  • The FDIC recommends that the lender establish an “affordable payment” for six months, allowing for reasonable living expenses.  Many homeowners with jobs are struggling to make their mortgage payments.  Many states pay only a fraction of previous earnings in unemployment benefits.   Unless the homeowner has put aside some savings, unemployment compensation will usually cover only basic needs, leaving nothing for a mortgage payment.  It is likely that any payment (other than zero) will be too high for unemployed homeowners.
  • Recent statistics on the “cure rate” for delinquent mortgages show a stunning decline.  The cure rate is the percentage of borrowers who are able to catch up and bring a delinquent mortgage current again.  As of July, the cure rate for prime mortgage loans plummeted to 6.6% from an average of 45% during  2000 to 2006.  Some of the delinquent borrowers had lost their jobs but many were still employed.  This is a sea change in attitudes towards home ownership.   Many of those financially able to catch up apparently saw no benefit in doing so; either the burden of home ownership outweighed the benefits or there was no perceived benefit in continuing to make payments on a home with large negative equity.   Many homeowners may view foreclosure as the best “program” for getting back on their feet since they could potentially enjoy years of “rent free” housing before the bank ultimately forecloses.

Trapped Homeowners Want Out

Heavy Load

Heavy Load

Courtesy: laprogressive

Many Americans are apparently rethinking the “dream” of home ownership and acting accordingly by relieving themselves of the costly burden of mortgage payments, taxes and maintenance on what has become a depreciating asset.

While the government says “yes we can”, impoverished homeowners are saying “no we can’t”.  Perhaps this is why the massive government initiatives to prevent foreclosures are failing.   Trapped homeowners are doing what’s best for them and walking away, while the government vainly attempts to impose home ownership on those who now reject it.