Having sought either a regulatory or legislative remedy for concerns surrounding seller funded down payment assistance (SFDPA), Congress has responded. After 10 years of proposed rules, comments and inaction, the omnibus Housing and Economic Recovery Act of 2008 legislates an end to SFDPA programs, such as those provided by Nehemiah and Ameridream.
Unfortunately, the value of this program to originators across the country is reflected in the almost 40% of current FHA-insured production using SFDPA. While the Housing legislation does increase statutory loan limits for FHA insuring, it also increases the mandatory down payment from 3% to 3.5%.
Rather than addressing the risks with enhanced risk-based premiums or closer underwriting scrutiny, the elimination of SFDPA programs will significantly impact buyer access to funding for home purchases. While both a FHA commissioned study and a GAO study offer clear guidance on the empirical data on default risks related to loans with SFDPA, it is unclear that this data is unfavorable solely due to SFDPA and not due to a myriad of contributing factors. Interestingly enough, the revision comes after a profound change in the underwriting standards of FHA, making historical comparison sketchy at best. With new standards requiring minimum FICOs, which was uncommon 12 months ago, the caliber of the new FHA borrower is different… or would have been if they had been able to obtain a loan.
With continued pressure on housing prices and a smaller market of eligible borrowers, the removal of SFDPA can only exacerbate the issue.
