Question Details

Pat and Steve…, Real Estate Pro in Westlake, OH

With the upcoming changes in FHA financing, what effect do you think the reduction in seller concessions from 6% to 3% will have?

Asked by Pat and Steve Pribisko, Westlake, OH Sat Jan 23, 2010

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I agree with both Dan and Tom,

To add to Dan's argument, not only do veteran's go through the training he mentioned, but any active veteran's would no better than to let a mortgage backed by the VA go to default. One call to a commanding officer would fix that problem in a heart beat. Plus, the VA has many programs in place to protect veteran's from hardship.

To add to Tom's argument, pay option loans almost always required 5-10% down. There were a few 100% options but they were tough to find from obscure lenders at the top of the subprime market. People who took these loans usually had 20% equity or put 20% down and I'm sure their not in the best financial place now.

I do know there are a very small percentage of FHA loans backed by down payment assistance programs in my area. These are essentially 100% financing loans. However, the DPA programs have hard debt ratio guidelines that compensating factor cannot account for, which may be the true telling tale. Conventional and FHA loans have always allowed compesnating factors to allow borrowers to exceed loan guidelines. Those have recently been made tighter, so we'll see where it takes us.

FHA has allowed homeowners to buy with less than 10% down for over 70 years. These loans were hardly used during the peak of the market due to the 3% down being higher than the 0% down required then and the lack of low-doc programs. I honestly think the lending guidelines available today would've prevented the current crisis we're in. Heck, many of the low-to-no down payment programs a few years ago didn't even have mortgage insurance!

To keep on track with the question above, it will affect low price home transactions only. I know Dan is eluding to it being the beginning of a long list of lending guideline improvements, but that list was started 2 years ago and being added to monthly. Small adjustment that squeezes the little guy. That's how it will affect the market.
1 vote Thank Flag Link Sun Jan 24, 2010

I agree with you about the effects of reducing seller contributions. My point is merely to get the conversation off of 1 specific aspect. The buzzwords of the mortgage crisis, "skin in the game", "subprime", "liar loan", "option arm", etc paints a poorly devoloped picture. The reality is these bad things only became bad when they were paired with other lenient underwriting guidelines. The issue is not just skin in the game, it is the rest of the criteria. FHA offers lower standards for borrower credit and debt versus income ratios, for that reason, having a vested interest in the property will do just as you say.

To move forward, we have to stop looking at individual pieces and start looking at the whole picture. For every loan product with a negative connatation, I can show that they work when offered to the borrowers for which they were originally intended and the borrowers fully understand the terms.

Our mess resulted from making specialized products mainstream and because we, as an industry, did a poor job of informing borrowers of the ramifications.

What concerns me is that FHA is serving far more borrowers then for which it was intended. Becasue of this, the insurance fund is showing signs of fracture. I agree with those that want to tighten the guidlines, howvever, tightening them too much will eliminate many of those for which the program was intended. It is a tenuos balance, but I think increased insurance premiums and decreased seller contributions are a fair tradeoff for the other liberal borrower requirements. If we do not make minor adjustments now, it is possible that this product's viablity could be in jeopardy.
1 vote Thank Flag Link Sun Jan 24, 2010
Tom, V.A. loans are all given to veterans. Veterans went through a very tough and thorough training process that instills things like honor, respect, commitment, and integrity.

I do not think the VA loans are successful because of the lending standards. I think VA loans are successful because of the kind of people who receive them.

Compare to fha loans. Use the $8k as a down payment, get seller concessions of 6%. Then get a house and walk away with money for buying the house. Then if the house value drops, we keep seeing "should I walk away" from just this kind of borrower. They only ask because the house lost value. If they had their money in it they would be a lot less likely to walk away from something they agreed to.
0 votes Thank Flag Link Sat Jan 23, 2010
Hi Pat & Steve

It will definitely negatively impact lower priced homes sells. Even more so those properties which are being sold significantly less than what they once were worth, but who's hefty property taxes won't be reduced accordingly until after the purchase...even if then. Something which is becoming an increasing common occurrence every where, especially in MI.
0 votes Thank Flag Link Sat Jan 23, 2010
I disagree with those that believe "skin in the game" is necessary. The loans with the lowest delinquency rate are those guaranteed by the VA. The majority are made at 100% Loan to Value with an additional funding fee added on top, meaning most VA loans start out "underwater." Besides the obvious aspect of being offered only to honorably discharged veterans and those actively serving, VA has adopted tight borrower guidelines. Strong credit is required, as well as conservative debt to income ratios. Unlike any other loan product, the VA additionally looks at a borrower’s net income after debts, expenses and basic household needs. This disposable income carries as much effect as the standard debt to income ratios, which are based on gross income and do not account for payments other than debt obligations.

While every other loan product has been tightening guidelines, VA has remained consistent.

That being said, FHA insured loans are extended to lower credit scoring borrowers with expanded debt to income ratios and “skin in the game” is important. For years, FHA has been a small 3% part of the lending mix, but now is well over 30%. We have yet to see how the explosive originations will truly play out, but based on their own assessment, FHA only has a portion of the reserves they should have. By law, they should have 2% reserve after anticipating losses and they are currently at .53%. The vitality of FHA insured loans is too important to risk losing and by some estimates the insurance fund is almost insolvent. Raising the insurance premiums in April is a way to increase the fund and decreasing seller contributions is a way to ensure better borrower quality.

I agree with Keane below, that this is restrictive to borrowers in the lower price range. A seller paying just a couple of closing fees could easily exceed the 3% cap. I would like to see the percentages tiered based on the size of the loan.

I think the decrease of seller contributions will have a positive impact on the quality of loans. It will keep some out of the market, but the goal is not just ownership, its successful homeownership.
0 votes Thank Flag Link Sat Jan 23, 2010
This will have zero effect in California where inventories are running low. I don't think offers with seller concessions are being considered anymore, at least not in SoCal. We're looking in the $600k-$675k range right now, and we had to stop asking for concessions to get an offer accepted.

It might be different elsewhere, and I keep hearing of this shadow inventory, but it seems to be a sellers market for anything that's reasonably priced and not a short sale.
0 votes Thank Flag Link Sat Jan 23, 2010
Christopher, that is a great suggestion

"what's next the buyers have to put down 10% on FHA loans."

Skin in the game helps people to decide to pay instead of to just walk away.
0 votes Thank Flag Link Sat Jan 23, 2010
I would have to agree with Keane it all depends on the size of the home. In the market I conduct a majority of my business the loans are under $100k and it will significantly effect the new first time home buyers. In addition with the delay in the tax credit the buyers will start to loose there zest for buying a home. In my opinion the powers to be that are making the decisions are not closely enough affected by there decision making. First higher scores, then higher FHA premiums, now smaller concessions, what's next the buyers have to put down 10% on FHA loans.
0 votes Thank Flag Link Sat Jan 23, 2010
I don't like it. Not because because transactions require more than 3% in concessions, but because it effects smaller transactions and not larger ones.

3% is more than enough on a 400k purchase but not on a $80k purchase. Why should we negatively impact low-cost housing more than higher priced homes?

Dan, I think your references are better suited for the sub-prime loans that went away a couple of years ago. 6% to 3% concessions hardly affects the market other than the low-cost homes I mentioned above. No seller concessions will never happen. You also can't use concessions as a down payment on FHA, so every buyer using FHA already has to put money down. Changing concessions doesn't affect the 3.5% required down payment.
0 votes Thank Flag Link Sat Jan 23, 2010
A lot of wonderful things will happen as a result.

You will find people will not be able to buy a house with nothing down.
We will start to have real qualified buyers buying, not just anyone.
We will see the beginning of NO seller concessions for the next change.

That means house prices will come down and some governmental policies that are distorting the market will be removed.

Who could ask for more? Ok, I could, remove the artificial interest rates also. bring up fico scores to at least 700. Make people save for their down payment... We need those changes for the health of the country as a whole. We need a solid foundation under housing.
0 votes Thank Flag Link Sat Jan 23, 2010
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