Thursday, September 18, 2008

Poser's Unwelcome

It seems incredibly trivial to talk about Sacramento real estate issues as our financial system is crumbling before our eyes, but my shady business practice alert is sounding.

I have noticed that every time the topic of down payment assistance (DPA) comes up on the Sac Bee, or anything even vaguely related, it is then commented on buy "firsttimebuyer," who then sings the praises of DPA. If I had to guess, its part of the PR campaign of Sacramento-based Nehemiah Corp. of America to win back the hearts and minds of the populace. I checked and this particular "commenter" became active this August on the Bee's website.

The timing and comments all seem very suspicious, and if it is someone from that organization posing as a "first time homebuyer" then their business practices are even more shady than the media gives them credit.

Over the last two years that I have surfed the local Sacramento real estate blogs, there have been plenty of investors, real estate agents, mortgage brokers, towing the line. But I have never seen such blatant and specific support for a particular financing issue from a single commenter (even a post with url leading to a Nehimiah sponsored website). Shame on them for this ethically questionable conduct.

While I like the theory of DPA, the practice seems fraught with peril and needs to be outlawed, at least until the housing crisis is over. DPA's wouldn't be needed if housing were more affordable for every day folk. DPA's inflate the demand for housing, and with that demand prices become inflated as well, reducing affordability. So I am not really seeing the benefits, since DPAs seem to be a self-fulfilling prophecy....the more they are used, the more they are needed. Is it just me, or does putting low income folks in homes with 100% financing in a declining real estate market seems like a really bad idea?

Of course, my usual caveat, when I am talking about things way outside my realm of expertise. I don't know much about DPA's except the recent news sound bites. I am sure there are some redeeming qualities........which "firsttimebuyer" will continue to extol.

19 comments:

sacramentia said...

Posers are lame.

The funny thing is that anyone would think they could get away with it on blogs. If there is one place where you need your facts straight it is online. It seems like everything gets questioned.

Down payment assistance doesn't bother me anymore than cash back at closing for repairs etc.. as long as the home appraises. DPA is a symptom, not the problem.

I still think one of the root causes of the problems is the appraisal methodology.

Buying Time said...

In VA, as we were preparing to sell our first home, the agent showed us the data on local comps. There was a separate category for the cash back at closing, which was considerable and prolific. The itemization was very helpful since the "sale price" of the home was almost meaningless with the rampant cash back.

And who the hell actually calls themself a "firsttimebuyer"....that's an industry term, not a common use term.

sacramentia said...

The appraisal methodology is broken because it relies mainly on price per square foot of the home and comparable sales without separating out the value of the land.

This ignores the fundamental fact that structures depreciate and land tends to appreciate.

If the appraisal would value the structure at replacement cost minus an appropriate amount of depreciation based on age (1-2% per year), and then value the land, the lenders would have a solid starting point.

If lenders then loaned 100% of the value of the home, but only up to 50% of the value of the home for land, the two values for work with each other to stabilize the housing values based on the intrinsic values of the home.

For a Serrano example. In 2006, a 3000 sq ft home would sell for 750k, even though the structure value was 300,000. Using this formula, max loan would be 450k, and a 300k down payment would have been required. In a nutshell the homes would not have run up so much.

Today, that same home sells for 410k, using the same formula, max loan amount would be 410k, essentially zero down because the property is selling for so close to replacement value. The time to zero down is at the bottom of the cycle not the top.

You can argue the percentages that are appropriate, but we've got to decouple the land and structure from each other so that the risk can be properly reflected in the loans.

PeonInChief said...

DPA has been the rule in California for first-time buyers for a long time, particularly in high-cost areas. The kind of DPA that Nehemiah does is a payment from the seller. Local governments and the state government provide DPA that operates as a "silent second" for moderate-income buyers, as well as teachers, public safety workers etc.

What this kind of DPA does is take the place of rich relatives for people who don't have them.

Buying Time said...

I thought public employees, first time buyers, and Veterans had special loan products available to then (less down, more favorable rates etc.)....I didn't realize it was a form of DPA.

"take the place of rich relatives for people who don't have them."

I must be incredibly old fashioned...What ever happened to actually saving $$ for a down payment?
___
In the spirit of full disclosure, we had a first-buyer loan and it allowed us to get into the market which was appreciating faster than we could save for a down payment.

Patient Renter said...

It's lame, but I don't see it as being any worse than deploying lobbyists to fight for the return of the DPAs, a fight which it looks like they're winning.

Buying Time said...

I think its more than lame. Its dishonest and deceptive. At least with a lobbyist there is disclosure and you know who they represent (although not always).

PeonInChief said...

BT--

Once upon a time, when I was a child, a first-time buyer with a slightly less than median income could buy a house with savings faster than appreciation would chomp through the savings. That hasn't been true, though, since about 1976 in much of California and many of the high cost areas around the country. And that's why you, and everyone else without rich and/or willing relatives, bought with assistance from one of the first-time buyer programs.

The problem with Nehemiah isn't that. The problem with Nehemiah is that it assures that the seller will increase the price to get her/his money back. Other DPA programs operate just like second mortgages--you apply for the mortgage and then find a house. The 2nd becomes part of your mortgage package, and the seller doesn't have anything to do with it.

Even with lower prices now, most slightly less than median income families would have trouble coming up with $40,000 for a down payment. Even people with larger than median incomes would have trouble doing that.

PeonInChief said...

Oh, and the very tiny to no down payment programs were first proposed for teachers etc. But they were considered fairly safe bets, as they had stable and usually rising incomes.

These programs were modeled on VA loan programs.

erin@erinattardi.com said...

What ya'll are saying resonates with me for the most part, but there are a couple points I would like to make.

-Seller-funded downpayment assistance was not popular during the boom because straight 100% financing was so readily available. This is not the cause of our current issues, but an easy target as it is making a resurgence now.

-HR 6694 which, if passed, will re-establish seller-funded downpayment assistance and add several new qualifiers for buyers (minimum credit score, cash reserves, completion of buyer education, etc). Currently, the only requirement is that the seller has to agree to it.

-Seller concessions, such as contributions toward closing costs and seller-funded downpayment assistance, are noted in MLS once a property is closed, and do not inflate values [as blatantly as one might think] as appraisers must make adjustments for comps where seller concessions were a factor. I get calls all the time from appraisers confirming seller concessions for properties I have sold.

-Yes there are lots of programs out there for PERS members, STRS members, current and retired military, and folks whose income is within 80% - 120% of the local median depending on family size...some are downpayment assistance, low interest 2nd's, silent 2nd's, and grant programs. Some must be repaid by the buyer, and some don't have to be, or fall off after a certain amount of time.

I DO NOT think that just any person off the street with no savings account and who lives paycheck to paycheck should be given a home loan...Having said that though, there is a place for seller-funded downpayment assistance. Out of 21 transactions this year, only 3 have utilized it (one buyer transaction / 2 seller transactions).

Cheers! Erin

Patient Renter said...

there is a place for seller-funded downpayment assistance

What place is that? Many of us agree with the argument that if someone is not able to save a measly 3% (or whatever) down payment they probably shouldn't be taking out a home loan.

This follows from the fact that renting is generally cheaper than owning, and if someone can't afford to sock away money while renting than they probably can't afford the jump up to ownership (or are taking out a crappy loan to do so).

alba said...

We're looking forward to becoming firsttimebuyers again, as the definition on HUD.gov defines one as a buyer and/or spouse must not have owned within the last 3 years. There is a so-called $8500 credit also, which is really a no-interest loan.

I have no knowledge of DPA. Can it be used to negotiate for the seller to pay closing costs, or further leveraging?

firsttimehomebuyer said...

I do live in Sacramento and I started looking for a home a couple of months after I got married. The house prices were so high in our area before that I never could afford anything. I did my best to keep my credit in good standing. We do not have a lot of money saved. We do have some saved and we are continuing on the path to save more. Lucky for us we also make a lot more money together than apart. We found finding a house was very disheartning with all the work required on most of the foreclosures and lots of people I know losing their houses. One time we got out bid by $25000 by a cash paying investor?? This has infuriated me. A week ago we finally were offered a house we had bid on with the Nehemiah program. Now we have been told it is to late to use the program so I am one of those crazy people who does my homework. I checked out about 15 books from the library on homeownership so I could get better educated, as well as on the internet. I guess I have gotten a little carried away thinking there has got to be other people like me in the same situation??
What would you suggest I do? if you seem to have a valid argument, I might consider it. If you have a better suggestion than waiting another 10 years before buying a house, asking my neighborhood to contribute to a "welfare" mentality, or go back to school and earn a higher degree, higher than I already have, I would appreciate any assistance.

sacramentia said...

@firsttime

Why can't you save a down payment? This is an honest question.

If you read my other post above, I think now is the time for 100% financing, but reactive legislation doesn't fix current problems.

RV6Flyer said...

"One time we got out bid by $25000 by a cash paying investor??"

You are going to start seeing more of this. We just gave a client a 40 million dollar line of credit to purchase foreclosed homes. He is buying them, putting $20,000 in improvements, then renting them for a few dollars below market to get them occupied quickly. He has a 10-12 year time horizon.

erin@erinattardi.com said...

FirstTime -
Your agent should be in the know regarding different programs that may help you. Are you or your wife a past or present PERS member? STRS member? Active or retired military? Do you have a combined income of under $85,200 (for married couple) or $99,400 (family size of 3+)? There are also other programs based on the city/county you wish to purchase. If the answer to any of these questions is yes, then you are eligible for grants, [non seller-funded] downpayment assistance, special loan programs, etc. Also there are purchase "rehabilitation" loans if you decide to buy a lower priced fixer (FHA Streamline K loan) where you can borrow up to $35k above the purchase price toward non-structural repairs, or up to $8k toward energy-efficient retrofits (EEM). These types of loans are heavily monitored (multiple inspections, appraisals, etc) and the funds never touch the buyer's hands and are held in escrow and disbursed to the contractors directly.

Sacramentia & Patient Renter -
The time and place for seller-funded downpayment assistance (and any downpayment / grant assistance) in my opinion is where the buyer DOES have savings, just not enough for the entire downpayment without depleting those funds. Buyers with zero money in the bank really should not be homeowners. Unfortunately the savings rate in the US is in the negative...

Buying Time said...

What would you suggest I do?

I can't tell you what to do, but if I were in the same situation, I would wait till home prices stopped dropping for a good 6 months. Lower prices, means less down payment needed. And if homes aren't appreciating, there is no equity built up (a main advantage of "ownership").

Given rv6Fflyer's comment, it sounds like renting will continue to be cheaper in the short run.

Why the rush?

Patient Renter said...

The time and place for seller-funded downpayment assistance (and any downpayment / grant assistance) in my opinion is where the buyer DOES have savings, just not enough for the entire downpayment without depleting those funds.

I get what you're saying, but we are talking about 3%'ish downpayments, right? That is an awefully small amount to not be able to save up.

What would you suggest I do?

To add to what BT said, wait and save up your down payment in the meantime.

PeonInChief said...

One interesting point: investors are still 20% of the market and apparently are buying houses in lots. It's possible that many of these houses will remain rentals for a very long time. (That's what happened in San Bernardino after the 1990s bust.) So renting in the Valley may be the best long-term option for many people, not because housing prices are so high, but because renting may be relatively cheap.