There are times when being right is no consolation, it merely makes you angry.

Sometimes you wish you hadn’t been so right

A year ago, in a post entitled 3% altruistic, I wrote about the FHA’s ‘non-profit-donated’ down-payment program

It sounds like a misprint — a non-profit that gives low-income borrowers money for the down payment on their first home, and HUD wants to shut it down — indeed, to shut down a whole industry?  Have they got something against charity? 

Are you questioning my motives, young man?

As reported on Bloomberg:

May 8 (Bloomberg) — The U.S. Department of Housing and Urban Development plans to seek a ban on down payment assistance programs that have grown sevenfold this decade and contributed to a surge in foreclosures of government-backed mortgages.

In my post, I boiled at what appeared to be generosity – a non-profit helping struggling homeownership aspirants by giving them the down payment – down into a circular price-inflating mechanism, to wit:

In a cruder world, what the non-profits are doing might be called ‘procuring.’  In such a procurement, two entities get screwed:

What happens to those receiving a procurement

1.  The buyers get screwed.

The higher prices contribute to the increase in foreclosures by buyers who have no equity in the homes, the GAO found.  Buyers’ settlement costs also rise in some counties with rising housing prices.

2.  The Federal government (that’s us taxpayers) gets screwed.

Right in the wallet

Now it’s become clear just how badly the taxpayer has been punished, with a shocking story in the New York Times:

June 10, 2008

FHA Faces $4.6 Billion in Losses

Billion, folks.

WASHINGTON — The Federal Housing Administration expects to lose $4.6 billion because of unexpectedly high default rates on home loans, officials said Monday.

That ‘unexpected’ is naive.  In case no one has noticed, the subprime mess has claimed many victims, and this program is set up to generate more victims.

Just put down 3% and you’ll make a fortune

Brian D. Montgomery, the FHA commissioner, attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years.

At least the Times sees through the non-profit middleman to the real source: sellers who are rebating 3% of their purchase price so that 97% of the ‘price’ becomes 100% of the ‘cash’.

Under the program, a home seller arranges to cover the buyer’s down payment, using financial help from a nonprofit company, but typically adds that sum or more to the price of the house. The deal has been particularly attractive to financially struggling buyers and to owners in depressed markets, according to Congressional officials.

Certainly – it puts buyers into homes with none of their own money at risk.  As I posted a year ago:

Hard equity also serves a third purpose: it validates the reality of the purchase price.  A borrower putting down hard-earned cash, repayable only after the hard debt is repaid, believes the price to be fair.  Truthful valuations are the essence of arm’s-length dealing.  As the Cluetrain Manifesto put it, “Markets are a conversation between people who are telling each other the truth.”  That declaration of veracity is falsified if in fact the buyer is merely the seller’s puppet — and a buyer who pays nothing down is economically a puppet.

If the seller’s paying everything, then the seller’s pulling the strings

Sellers who reimburse [the non-profits] also pay [the non-profits] a service fee.

Gosh, it’s sounding more and more like the buyer is merely a patsy, and the non-profits are acting as the sellers’ paid agent. 

Come on in and buy a house!

Do the non-profits act as surrogates for the buyer, making sure prices are held down?

Sellers have tried to recover the cost of the fee they pay nonprofits by raising the price of the house an average of 3%, a 2005 study [text version here — Ed.] by Congress’s nonpartisan Government Accountability Office found [also referenced here — Ed.].  

In this little game, no one puts down hard money except Uncle Sam.

Critics say the practice puts overpriced houses in the hands of poor and minority homeowners who ultimately cannot cover the mortgage.

Guess who goes broke?

The projected loss is the highest in the home loan program since 2004, and officials said the FHA had to withdraw $4.6 billion from its $21 billion capital reserve fund in May to cover the costs. They said the agency, which is self-sustaining, would not need appropriations from Congress to remain solvent.

Only because it has much more capital remaining.  My gosh, this is outrageous, a word I do not use cavalierly.

I’m mad as hell …

But Mr. Montgomery warned that the FHA would have to renew its efforts to end the seller-financed down payment program, which accounted for 35% of its loans in 2007.

I can see we’re bleeding

The program, which accounted for less than 2% of FHA-insured loans in 2000, now accounts for more than a third of the agency’s portfolio.

Do you hear what is being said?  A program that is hemorrhaging money, that is fundamentally flawed, is skyrocketing in popularity.  What do we deduce from this?  That those rushing in to take advantage of it … are going to take advantage of it.

They might change the program soon

He said the mortgages had foreclosure rates three times those of traditional loans and would push the FHA to the brink of insolvency.

Plenty of assets … pity about the liabilities

Give Mr. Montgomery credit: he’s calling it accurately.

“Let me repeat: FHA is solvent,” Mr. Montgomery said on Monday in a speech at the National Press Club. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate.”

A seventy-year-old institution, the backbone of what we now know of as HUD, is in jeopardy, because of one program. 

FHA’s projected loss, more than four times the shortfall attributed to the home program last year, raised concerns about the agency’s ability to lead the national effort to rescue homeowners facing foreclosure.

President Bush and leading Democrats in Congress are counting on the FHA, which is overseen by the Department of Housing and Urban Development, to help distressed borrowers refinance into stable, government-backed loans.

Officials say the agency will help 500,000 people refinance by the end of the year, but a vast majority of those have made their payments on time.

One cannot lay this fault at HUD’s feet, nor at the Administration’s. 

That’s the Administration’s position

Mr. Montgomery said the agency planned to reopen the comment period on a proposed rule to the Federal Register that would ban the program.

HUD has been trying to kill it:

We keep promulgating rules, and it keeps coming back …

But the FHA has tried to eliminate seller-financed down payment loans for years, and it remains unclear whether it will be successful now.

The reason?  Congress and the courts will not let HUD kill what is obviously, obviously a profoundly flawed program and virtually a license to steal money.

It’s all in the rules

In recent years, the Government Accountability Office and the Internal Revenue Service have both raised concerns about the program.

It isn’t HUD’s fault it lost the money; Congress won’t let it kill the program.

Supporters of the loans, who include some powerful members of Congress, counter that the program provides much-needed assistance to low-income and minority families who would otherwise be unable to buy homes.

The people who have successfully managed such programs are the HFAs – who, not coincidentally, are closer to their markets and have their own resources at work.

Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, remains opposed to any FHA rule that would eliminate the program, a spokesman said on Monday.

Much though I respect Mr. Frank, I believe he is completely wrong on this issue.

Mr. Frank has said he would like to reform the program without killing it.

So would I, but in my view that is impossible. 

I’m ready to be reformed now

The program has a fundamental incurable flaw.

Some nonprofit companies that provide down payment assistance said they would continue to battle efforts to close them down.

Of course – they may be non-profit but they’re making money – at the taxpayers’ expense.

They have successfully sued HUD in the past.

This has the gall of thieves suing the police who are trying to stop their getaway.

So far, the courts have blocked the agency’s efforts, citing problems in the rule-making process of the agency, among other things.

“If there’s any justice in this country, they will fail yet again,” said Scott Syphax, president of Nehemiah Corporation of America, which provides such loans.

I have no respect whatsoever for those, like Mr. Syphax, who defend the program. 

Happier days: Celestine and Scott Syphax,

at the Kennedy Center Honors Gala White House reception, December 2, 2001

A year ago, when I posted about this, I was disgusted.  I’m even more disgusted now. 

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