Friday, August 1, 2008

Law ends loophole for down payments

Housing bill halts practice vital to recent Arizona sales

by J. Craig Anderson - Jul. 31, 2008 12:00 AM
The Arizona Republic

Since the collapse of subprime lending, Arizona's bloodied housing market has been leaning heavily on a makeshift crutch known as seller-funded down-payment assistance.

A federal housing bill signed into law Wednesday will yank away that crutch on Oct. 1.

Down-payment assistance programs allow home sellers to funnel cash to buyers through specialized non-profit organizations.

Phoenix real-estate analyst Jim Belfiore and others in the housing industry expect an artificial spike in home sales over the next two months, as potential buyers rush to take advantage of existing no-down-payment programs before the federal ban takes effect.

Once it hits, new-home sales in the Valley could decline as much as 50 percent, they said.

Down-payment assistance programs exploit a loophole in federal lending laws allowing non-profit organizations to gift mortgage down payments. In some ways, they have become a substitute for subprime loans, in that they give builders a way to place first-time and low-income buyers into new homes even when they can't afford a down payment.

Customers in outlying communities such as Laveen, Maricopa, Surprise and the Hunt Highway corridor of northern Pinal County currently use down-payment assistance for nine out of every 10 sales, Belfiore said.

"Almost every builder out there is heavily marketing homes with down-payment assistance," he said. "The hardest-hit area of the market will be the starter-home market."

Recovery from the ban's effects could take up to two years, Belfiore said, as both the market and consumer expectations undergo a major readjustment.

"We will eventually go back to the mind-set of a society where you have to have 3 percent up front to buy a home," he said.

However, Jacque Petroulakis, spokeswoman for Pulte Homes and the Communities of Del Webb, said her company expects an overall improvement in the market as a result of the housing act, though she agreed the loss of down-payment assistance could hurt sales.

"It does create some challenges for some of our buyers," she said. "How that specifically will impact our operations, I don't know."

More importantly, Petroulakis said, the bill's creation of a $7,500 tax credit for first-time home buyers, to be repaid without interest over a 15-year period, will boost the housing economy more than the loss of no-down-payment offers will depress it.

2 non-profits

Two national non-profit organizations that have become synonymous with seller-funded down-payment assistance, AmeriDream, based in Gaithersburg, Md., and Sacramento-based Nehemiah Corp. of America. They lobbied frenetically to save down-payment assistance in the weeks leading up to Wednesday's passage of the Housing and Economic Recovery Act of 2008.

Nehemiah President Scott Syphax said the ban, which technically prohibits the Federal Housing Administration from insuring such loans, could have a devastating effect on Arizona's economy because of its widespread use.

"It will further depress an already struggling housing market," he said.

Syphax chastised Congress and the Bush administration for passing the bill "knowing that millions of Americans will awake to a law that leaves them with zero alternatives for attaining homeownership."

He vowed to press the administration - and its successor, if necessary - to reverse the ban through legislation.

"We haven't given up on the American people, and they haven't given up on us," Syphax said.

Patricia Garcia-Duarte, president and chief executive officer of the non-profit Neighborhood Housing Services of Phoenix, said it is really home builders, not the American people, who are reaping the benefits of seller-funded down-payment assistance.

She said the services of Nehemiah and AmeriDream need to go because they do nothing to promote responsible homeownership and exist primarily to help builders sell more homes.

Garcia-Duarte said her organization and many other government and non-profit agencies already offer "true" down-payment assistance, a far cry from the handouts buyers have been receiving through seller-funded programs.

For instance, Neighborhood Housing has strict payment-to-income standards and requires borrowers - the assistance eventually must be repaid - to attend borrower-counseling sessions and take financial-literacy and budgeting classes.

Garcia-Duarte said the down-payment assistance services her organization provides will not be affected by the ban, which focuses solely on the seller-funded variety.

Home builders using seller-funded programs artificially inflate home prices by as much as 6 percent before passing that money to buyers, she said.

"There are good down-payment programs, and there are bad down-payment programs," she said. "The government is trying to ban the bad ones."

Surprise resident Jesse Grob disagreed, saying it's a shame first-time buyers will no longer be able to utilize seller-funded assistance programs as he did.

"I'm a hardworking guy - I'm by no means poor," he said. "I made $70,000 last year, and I still had a hard time coming up with a down payment."

Surge in calls

Phoenix loan originator Dean Wegner said lower wages and rising gas and food costs have cut about $4,500 out of the average family's yearly budget, making it harder to accumulate savings to buy a home.

He said area lenders have experienced a recent surge in calls as residents scramble to beat the ban.

"I think the word is out," Wegner said. "If they want to buy a home with no down payment, they'd better do it now."

In the meantime, home builders will be scrutinizing the new legislation in search of new ways around the ban, Belfiore said.

"I'm sure they are scrambling to understand what is allowed and what isn't allowed," he said.

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