First-time buyers find another door closing

Seattle, WA — August 24, 2008
By: Michelle Archer, Seattle Times

Tiffany Doyle earns a good salary as a program manager for msnbc.com in Redmond, but she's never had enough savings for a down payment on a home.

With lenders tightening requirements and zero-down loans disappearing, homeownership looked like a dim prospect for Doyle.

But later this month, Doyle is scheduled to close on a two- bedroom Bothell town house. The current owner agreed to provide down- payment assistance to Doyle through a nonprofit corporation called Nehemiah.

"I would have had no other way to purchase a home and invest in my future without the Nehemiah program," Doyle, 36, said. "It would have taken years for me to save enough."

With Nehemiah and similar nonprofit programs, such as AmeriDream, buyers are given money for a down payment by the charity. Sellers then reimburse the nonprofit and pay a processing fee. Often, the selling price of the home is raised accordingly to cover the cost to the seller.

The organizations say they've helped more than 1 million low- and moderate-income buyers become homeowners -- 7,370 FHA-backed loans in the Seattle area have used them -- but the programs' days are numbered.

When President Bush signed the housing-mortgage relief bill into law last month, seller-assisted down-payment programs were eliminated for use with FHA-backed mortgages, effective Oct. 1.

The ban has sparked an outcry among some local real-estate agents and builders, who say many first-time buyers could be closed out of the market during a time when inventory is relatively high.

"I am going nuts because I think there is such a lack of knowledge about this program, and now we have an elimination date of Oct. 1," real-estate agent Jeanmarie Trapp said. "Before this program gets slammed shut, we could help a lot of people get into homes and get some much needed market activity going."

Some lawmakers, too, are bothered by the elimination of seller- assisted down-payment programs. The day after Bush signed the housing bill, a follow-up bill was introduced in the U.S. House.

H.R. 6694 -- sponsored by Democrat Maxine Waters and Republican Gary Miller, both from California; Democrat Al Green of Texas; and Republican Christopher Shays of Connecticut -- would allow borrowers with higher credit scores to continue to get down-payment help from nonprofits. It was introduced July 31 and referred to the House Financial Services Committee before Congress recessed for summer break. No companion bill had been introduced in the Senate.

Trapp, who works at John L. Scott Real Estate in Mukilteo, recently closed a deal on a $535,000 home in which the seller provided the 3 percent down payment and 3 percent in closing costs for a total concession of $32,100.

The buyers have four kids and qualified for an FHA loan but didn't have the $16,000 down payment required. The seller, Trapp said, was able to close a deal and keep the recorded selling price high.

"Everybody won," Trapp said.

But officials at the U.S. Department of Housing and Urban Development don't agree. The FHA's Margaret Burns testified at a 2007 House committee hearing that foreclosure rates on loans made with seller-funded gift programs are more than twice those of all other FHA-insured home loans.

Moreover, Burns said, the FHA experiences higher loss rates from the sale of the properties associated with these particular foreclosures, a reflection of the overvaluation that occurs with these programs.

"The higher foreclosure rates represent a financial burden for FHA and taxpayers," Burns testified. "But of greater concern: They hurt the families who lose their homes and the neighborhoods in which those homes are located."

Burns told the committee that the core problem with the programs was not that the borrowers they served were riskier or less creditworthy; it was that the programs disrupted the natural negotiations between buyers and sellers in a way that resulted in inflated sales prices and higher mortgage amounts.

Tiffany Doyle's agent, Michelle Hamshaw, says that of the 30 buyers she's worked with who have participated in Nehemiah-type programs or zero-down financing, not one has defaulted on the mortgage.

"All of them still own their homes, are making their mortgage payments on time and are now turning their past rent dollars into future equity," said Hamshaw, who also works for John L. Scott in Mukilteo.

The down-payment assistance programs have helped developer Steve Hager of 12th Street Partners in Everett sell three homes in an 11- home neighborhood.

"I'm finding these homes are attracting a lot of first-time buyers," Hager said. "In a case that I'm working with now, [the buyers] have the income and wherewithal to make payments, but trying to come up with the necessary down payment is a struggle, especially with home prices the way they are now."

Those required down payments are going up. Another provision of the law requires FHA buyers to put down 3.5 percent of the sale price, up from 3 percent. For a median-priced home -- $445,000 in King County last month -- the down payment would rise from $13,350 to $15,575.

Some provisions of the new law are designed to help buyers. Among them is a tax credit of up to $7,500 for first-time buyers. The money must be paid back over 15 years and is the equivalent of an interest-free government loan.

Buyers who want down-payment assistance must be approved for loans by Oct. 1.

Where to learn more

HUD: The U.S. Department of Housing and Urban Development provides information about down-payment assistance and other housing programs in Washington state. Visit www.hud.gov/local/wa/ homeownership/buyingprgms.cfm

Nehemiah: Go to www.getdownpayment.com.

AmeriDream: Go to www.www.ameridream.org.

Down-payment-assistance bill: Four members of Congress sponsored a bill to restore down-payment assistance programs for FHA-financed mortgages. Visit www.washingtonwatch.com/bills/show/ 110_HR_6694.html to learn more about the bill.

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

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