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Congress is Costing You Thousands of Dollars...?

posted by Angie Littwin

The other day I heard an alarming advertisement on the radio. It began by warning that a new federal law could cost "you" thousands of dollars. It then proceeded to say that, if you want to avoid paying this money, you'd better hurry, hurry, hurry and purchase a home by September 30, when the statute goes into effect. The ad had the tone of a going-out-of-business sale: "Think you have all year to buy a home? Not anymore! Act now while you can still afford to make your dream of home ownership a reality! Offer (or law, in this case) expires on September 30, 2008." (Not an exact quote.) By this point, I was waiting with bated breath to find out how Congress was going to drain potential homeowners of so much money.  Didn't it just pass a law designed to help homeowners weather the mortgage meltdown?

Well, it turns out that the thousands of dollars new home buyers will be paying are their own down payments. After some careful listening and some less careful inference based on the September 30 date, I came to the conclusion that the ad was referring to the ban on seller-financed down payments in the Housing and Economic Recovery Act of 2008. The bill was signed into law on June 30 and will go into effect on the October 1 (hence the rush to sell before then). The law's main focus is providing help for current struggling homeowners, but it gets just a little bit proactive about prevention by banning sellers from lending money for down payments. This provision is intended to protect homeowners in the long run. It forces buyers to do a sticker-shock test on whether they can really afford their new homes. And it eliminates some incentives for seller-lenders to overprice houses. When a seller is financing the down payment, there's a temptation to overstate the price because, in the company's role as a lender, it will have the final say over whether the buyer can really afford to spend that much. The only pricing obstacle left to overcome is the buyer, and it's reasonable to think that buyers will be slightly less sensitive to price when they're not paying as much of it right away.

So it's easy to see why real estate developers would be against this provision. But what struck me about the ad is its attempt to pass on this sentiment to buyers, an attempt that borders on misrepresentation. While it's true that the new law "costs" consumers money in the short-term since they'll now have to pay their down payments upfront (or borrow from somebody else, anyway), a borrowed down payment is hardly the same thing as a free one. In the end, buyers who finance their down payments will almost certainly pay more for their houses than those who don't.

By the way, I was in the car when I heard the ad, so I couldn’t write down the details. I remember the advertiser being a company called Portrait Homes, but when l looked it up, all I found was a web site for Pasquinelli & Portrait Homes. Yes, it is a Texas real estate company, but, if it's the same company, its position on the Housing and Economic Recovery Act has certainly changed: the web site features an ad based on the $7,500 tax credit the new law offers certain first-time home buyers. So it sounds like Portrait Homes is treating the changing-of-the-law like a sale after all. Throughout September you'd better buy a home right away before old law expires, but if you happen to stop by on October 1, they may just have a new legislative provision that will still save you money. If any Credit Slips readers out there hear this advertisement, I would greatly appreciate a confirmation about whether or not the company behind this gem is, in fact, Portrait Homes.


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Predatory advertising. Are these the kind of values the employees of this advertiser wish to explain to their children at the dinner table?

All that over a 3.5% down payment requirement!

It may not be just a 3.5% down payment they are after but paper that is a 20% Adjustable Rate to go along with that 80% ARM. I have been seeing some funky stuff lately from builders/financers. A lady that we filed the other day was approved by a builder for 145k with her making $11 per hour with $1000 per month from child support. 6-8 months after building her home they sold the paper. You really have to do your homework when it comes to builders and them financing the note. The home BTW was built shoddy. The subcontractors working on a home next to hers even used her electricity. Weird stuff…. weird! Weird here in Texas....

The dirty secret is that large builders (toll brothers, pulte, etc) were some of the worst offenders of predatory lending during the housing boom. Most of them used the downpayment assistance programs inconjunction with sham appraisers to funnel business to their affiliated business arrangements for mortgage and title services. it wouldn't surprise me if 50% of foreclosures right now are within the subdivisions of big developers. They often lure unsuspecting borrowers by only offering "discounts and incentives" if they use the inhouse mortgage company and title services.

There is nothing inherently wrong with down payment assistance - FHA will still allow it through employers and family members, just not "non-profit groups". Buying with zero down is not bad if you have reserves and can actually show you could put the money down but chose not to. The problems are when people don't have 50 cents to their name and still buying homes.

Yes, it is the same Portrait Homes (or one of its subsidiaries)


IIRC, the FHA had been trying to get rid of DAP for some time; the foreclosure rate on the program is astronomical. However, eliminating it was a political landmine. Sure, many of the biggest proponents (and abusers) of DAP were the homebuilders. However, many *non-profits* were also pushing DAP. See "Nehemiah Program" and ACORN. For what it's worth, Rep. Maxine Waters has sworn to re-implement DAP in one form or another.

What's going to cost homeowners money is the new rule for calculating the capital gains exclusion. The 2 out of 5 rule just ain't gonna qualify for the full exclusion starting Jan. 1, 2009.

The builders were funneling it through the non profit groups. It has to go through a non-profit to meet the guidelines and cannot come from the seller directly. The non-profits such as Ameridream et al is just a money laundering scheme.

I had heard that the foreclosure with DPA is not as bad as FHA makes it out to be. The way the do their stats it includes all forms of DPA (DPA from family and employers is still ok). So if it sucks across the board, why just eliminate the seller funded dpa?

I am pretty neutral on DPA. however, I don't think it is too much to ask to come up with a 3% down payment. 100% financing is not necessarily bad, if all the other credentials of the borrower are solid - assets, income, credit. It is when those other parts of the equation are week in combination with 100% financing where we run into problems.


U.S. Mortgage Foreclosures, Delinquencies Reach Highs

By Kathleen M. Howley

Sept. 5 (Bloomberg) -- Foreclosures accelerated to the fastest pace in almost three decades during the second quarter as interest rates increased and home values fell, prompting more Americans to walk away from homes they couldn't refinance or sell.

New foreclosures increased to 1.19 percent, rising above 1 percent for the first time in the survey's 29 years, the Mortgage Bankers Association said in a report today. The total inventory of homes in foreclosure reached 2.75 percent, almost tripling since the five-year housing boom ended in 2005. The share of loans with one or more payments overdue rose to a seasonally adjusted 6.41 percent of all mortgages, an all-time high, from 6.35 percent in the first quarter.

Tumbling home prices are making it difficult for even the most creditworthy owners with adjustable-rate mortgages to sell or get a new loan as their financing costs rise, said Jay Brinkmann, MBA's chief economist. Prime ARMs accounted for 23 percent of new foreclosures and subprime ARMs were 36 percent, he said.

I was just on the phone to a FHA housing counselor here in Eugene, Oregon who mentioned that local developers were aggressively pushing people to enter into mortgage agreements before seller-funded down payments became history on October 1. She said that her office (NEDCO) had always cautioned people against such arrangements because of the affordability issue.

Dear friend,

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John Bill


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