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The story of downpayment assistance programs (DAP)

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Here’s the scheme:

You live in random Midwestern industrial city. The housing market is terrible. Finally, you find someone who wants to buy your house but they have no money. Zippo. If they could come up with 5%, they could qualify for a loan and buy the house. Hey – why don’t you agree on a price 5% above your asking price, then kick back the 5% to the buyer who can get their loan by using the kickback as a downpayment?

Until Friday, this was totally legal for government guaranteed FHA loans- as long as you used a charity to stand in the middle as the go between. In recent years, up to 50% of ALL FHA loans involved downpayment “assistance.”

The housing and loan bubble was fueled by a lot of sketchy practices, and this one ranks right up there.

As I understand, Downpayment Assistance Programs (DAPs) have existed for a long time. They used to get actual charitable donations and help cash strapped but hardworking people buy houses.

In the late 1990s, a new type of DAP charity came to life. This one was closely linked to the real estate industry and, with the blessing of HUD and municipalities, pursued the seller as the ultimate donor.

The two biggest ones were Nehemiah and Ameridream. Over the last 10 years, Nehemiah has given $900 million in kickbacks, which may have supported $30 billion + worth of home purchases, mostly in low income areas.

Ameridream, founded in 1999, comes close with $400 million and $14 billion of home purchases.

This is big business, albeit one in a 501(3)c wrapper and one with crack lobbyists.

Following the money trail at quasi- charities is always fun. In this case, the loot appears to have been stashed in for-profit marketing affiliates owned by charity officials. A 2006 article tells of some house cleaning that has gone on at several organizations.

While the scandalous parts of this tale are fun, the most outrageous bit is the support these programs are still receiving from cities and elected officials.

Various parts of the Federal government have been concerned about the program from its inception. HUD and FHA don’t like it because the performance of loans with DAP is bad and they know prices are being inflated. The IRS doesn’t like phony charities. The GAO issued a scathing report in 2005.

So why did this program stay in existence for 10 years?

Because cities liked it. It clearly helped move a lot of property and may have even contributed to the boom in certain areas.

It was a quick fix to some long term, seemingly intractable problems.

The problem with short term solutions like artificially supporting the housing market is that they don’t address the underlying problems of decaying cities, the loss of manufacturing jobs and a cycle of poverty. They can even make the problem worse.

Overinflated sales prices are kind of like escalating CEO salaries. Just like the executive talent market, the real estate market is very driven by “comps” – prices that other houses in the area have sold for. And if you keep overinflating overinflated prices, pretty soon you have a bubble.

Nehemiah pioneered the seller-financed DAP in Sacramento, a city which is beginning to face the consequences of a bursting bubble. Many people, even those who can afford their mortgages, are now “upside down” – they owe more to the bank than they can clear on a home sale. Others who want to sell their homes cannot find buyers, even at discounted prices.

What was a virtuous cycle on the way up is now a vicious cycle on the way down.

You would think that officials would have learned their lesson.

Officials throughout the country are begging FHA to change its mind and continue to allow “gifts” from sellers to buyers. Nobody wants the music to end.

But it has.

Topics: Economy, Housing Bust, Real estate | Comments Off on The story of downpayment assistance programs (DAP)

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