A rapidly growing program was helping to boost sagging real estate sales in the outer boroughs before it was banned last month, brokers said.
Seller-financed down payment assistance, which allows buyers to put no money down when purchasing a home, became illegal on Oct. 1 as part of the Housing and Economic Recovery Act signed by President Bush over the summer.
The controversial practice, which allowed nonprofit groups to help buyers qualify for mortgages backed by the Federal Housing Administration, has traditionally been far more prevalent nationally than in New York City, where most homes were too expensive to qualify for FHA loans. But brokers say the practice spread quickly in the outer boroughs this summer, after the ceiling on FHA mortgages was increased.
“It was one of the best programs,” said Lori Ojeda, an associate broker at ERA Top Service in Queens Village, who sold three homes through the down-payment assistance program since learning of it this spring. “I was very upset when they got rid of it.”
Popular with homeowners hoping to unload their property quickly, the so-called “DPA” works by allowing them to “donate” funds to a nonprofit organization, such as Maryland-based AmeriDream or California-based Nehemiah Corp. of America. The nonprofit grants a down payment to the buyer in return for the donation — usually around $500 — from the seller. The grant allows the buyer to qualify for a mortgage backed by the FHA, which until recently required 2.5 to 3 percent down. (The Housing and Economic Recovery Act raised that figure to 3.5 percent.)
As subprime mortgages have disappeared, seller-funded down payments exploded in popularity across the country. Adam Glantz, a spokesman for the New York bureau of the U.S. Department of Housing and Urban Development, said seller-funded down-payment programs now account for roughly 35 percent of FHA loans nationally, leaping from only 18 percent in 2003.
Some 1 million Americans have used DPA programs in the 10 years since a loophole in housing laws allowed them, adding up to $130 billion in mortgages, according to AmeriDream, a nonprofit that specializes in DPA.
It’s difficult to estimate the number of New York City buyers who have purchased homes through DPA, since city-specific data isn’t available. According to AmeriDream and Nehemiah, there have been more than 9,400 recipients of seller-funded down payments in New York State, generating some $958 million in mortgages.
Co-ops and condos are not eligible for FHA loans, so the practice is not common in Manhattan. And until recently, it was also uncommon in the New York area as a whole, since FHA loans could only be extended for homes less than $417,000. But this summer’s federal housing bill increased that limit to $729,750 in “high cost” markets like New York.
In January, the ceiling will fall to $625,000.
As a result of the higher limits, DPA programs experienced a surge of popularity in Queens, Brooklyn, Long Island and the Bronx, according to Martin Burger, a Queens attorney. “There was a flurry of activity,” he said.
Roughly 175 customers signed up for seller-funded down payment assistance from Long Island-based Continental Home Loans after the company instituted a $1,000-down program a year ago, said Continental president Michael McHugh.
While it lasted, the down payment assistance program was a helpful stimulant in the down economy, McHugh said.
“In a declining market, it helps sellers move their homes,” he said. The program’s elimination “throws out one type of option that was open to homebuyers that now isn’t there.”
Ojeda of ERA Top Service in Queens Village said she’d never heard of DPA before she learned of McHugh’s program this spring. But once she found out about it, “I told everybody I could possibly tell,” she said. “Now that FHA has gone up, it fits in perfectly.”
Ojeda said she is concerned that the program’s demise will have a negative impact on home sales in the area. “We’re having so many difficulties as it is,” she said. “This just made it much harder. With that program leaving, there are fewer options now.”
McHugh said the programs helped consumers who lacked cash for a down payment but were otherwise well-qualified.
“Saving a down payment is really a hard thing, and not having reserves is a scary thing,” he said, adding that his typical customer for the program was a first-time homebuyer making from $75,000 to $150,000 a year. “This really was supporting the middle of the market.”
But seller-funded down payments have come under fire from critics.
The FHA has said that roughly one-third of DPA recipients default on their loans, and those borrowers are two to three times more likely to default on their payments when they receive a down payment from a nonprofit.
Glantz said the additional cost of the down payment is often added to the total price of the home, unbeknownst to the buyer.
“I don’t think the buyer’s aware that their donation comes back into a higher price of the house,” he said. “It’s really an unfair real estate practice.”
Because recipients are more likely to default on their loans, Glantz said, DPA was on target to cost FHA up to $4.6 billion in unanticipated losses.
Burger, the Queens attorney, said he had “mixed emotions” about the program. While it helped some well-qualified families who simply didn’t have cash for a down payment, he worried that the program was being abused.
“I have a closing tomorrow where this is going to get a nice couple and their son into a house that they can afford,” he said. But in other instances, “I’ve seen the program misused by real estate brokers who will take anybody off the street.”
Rather than being eliminated, the program could have been revamped to require tighter lending standards, said Alex Brill, a research fellow at the American Enterprise Institute for Public Policy Research, who recently completed a report on the topic. Government data on seller-funded down payment defaults may be exaggerated, he added.
“Yes, there are a higher number of defaults among homebuyers that use DPA, but it’s not nearly the magnitude that’s being claimed by critics of the program,” Brill said.
“We need buyers wherever we can find them these days,” added John Grant, executive director of the National Association of Responsible Home Rebuilders and Investors. “There was no need to eliminate this thing.”