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Zero down for homebuyers almost gone
| Monday, Aug 25 2008 6:16 PM
Last Updated: Tuesday, Aug 26 2008 7:27 AM
Call it the last gasp of no-money-down. In recent weeks, homebuilders have loudly advertised zero-down options at entry-level tracts around Bakersfield. That’s because a seller-funded program — one widely used during the recent boom — is slated to end Oct. 1.
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In the meantime, billboards, printed ads and Web sites for national and local builders have trumpeted time-limited offers and blowout sales.
The demise of seller-funded down payment assistance will make it harder for credit-worthy, first-time buyers to get mortgages, those in the industry say.
But problem loans generate through the program left record losses that, if allowed to continue, could shutter the federal agency that insures such mortgages, the agency’s top official said in June.
The change came when President Bush signed the sweeping Housing and Economic Recovery Act of 2008 into law at the end of July.
One section bans seller-funded down payment assistance for loans insured by the Federal Housing Administration.
Instead, come October, buyers must come up with their own 3.5 percent cash down payment for mortgages guaranteed by the FHA.
Loans must close before October to qualify for current zero-down programs, something adding urgency to recent ads.
MIXED BAG
Bakersfield homebuilder John Balfanz said losing the program is going to hurt.
“It’s been a good thing, so I hate to see it go,” Balfanz said.
His company, John Balfanz Homes Inc., builds houses in a half-dozen communities around metropolitan Bakersfield with prices ranging from $1.6 million down to $200,000-plus units in Bella Vista, an entry-level tract south of Hosking Road on the west side of Highway 99.
Ads for Bella Vista currently tout the zero-down option, something Balfanz said will continue as long as loans continue to close before the Oct. 1 deadline.
“I think people who buy right now are going to be smiling in three to five years,” he said. “It’s a fantastic time to buy.”
Like many others involved in real estate, Balfanz thinks no-money-down loans are part of “what got us in this trouble in the first place.”
“Why not walk?” he wondered, if your own money isn’t at risk.
The market could be healthier if buyers have to “scratch and claw to put money together” for a down payment, he said.
BILLIONS LOST
In June, the housing administration’s commissioner, Brian D. Montgomery, said the agency booked $4.6 billion in unexpected losses “mostly due to the increased number of certain types of seller-funded loans” in its portfolio.
Federal data showed such loans foreclosed at triple the rate of loans made to borrowers funding their own down payments, Montgomery told members of the National Press Club in Washington, D.C., on June 9.
The loans had also become more popular, growing from about 6 percent of the FHA’s portfolio in 2000 to a third now.
While stressing the agency’s solvency, Montgomery said no insurance company could survive continued red ink.
“Unless we take action ... FHA will soon either have to shut down or rely on appropriations to operate,” he said.
In 2006, the Internal Revenue Service ruled the so-called “charitable” organizations that shuttle the down payment funds did not qualify as tax-exempt nonprofits.
The groups “are being used to funnel down payment assistance from sellers to buyers through self-serving, circular-financing arrangements,” the IRS said in a release.
Two of the biggest such middleman entities, AmeriDream Inc. and Nehemia Corp. of America, both support a federal bill, H.R. 6694, that proposes to restore seller-funded downpayment assistance.
SCRIMP TIME
Rick Roper of Golden Empire Mortgage, a Bakersfield-based lender with operations in California, Hawaii and Oregon, says the change will definitely impact the local market.
“We estimate somewhere in the area of 10 to 15 percent for our organization,” Roper said.
Borrowers will have to return to using gift funds — from family members, for example — or other remaining options allowed under the new rules, he said.
John Lara, broker of San Joaquin Realty in Delano, said about 80 percent of homebuyers his company works with make use of seller assistance.
The coming change could ultimately nudge folks back to piggy banks.
“If they want to buy a home, they have to start saving money,” Lara said.