Boise Investment Blog

What are DPA programs and how will termination of these programs impact the residential rental market?

Written on September 01, 2008 by Steve Barbey

With a typical DPA the borrower would secure a 97% FHA backed loan and the seller would "assist" the buyer by crediting an amount (often as much as 6% of the purchase price) to cover the buyer's 3% down payment and the buyer's closing costs. Technically speaking, the seller would make a contribution to a down payment assistance fund (Ameridream, Nehemiah, etc.) and the fund would then credit the buyer an equal amount at close.

This worked out great for buyers. Subprime and easy 100% financing was gone, but the DPAs were there to fill the gap.

Now, however, Down Payment Assistance programs are being eliminated. All DPA programs are being terminated effective October 1st, 2008 pursuant to the "Housing and Economic Recovery Act of 2008" which was signed into law on July 30th, 2008.

There are two main reasons the DPAs are being eliminated. First, buyers that used these programs had no skin in the game. When push came to shove, if the homeowner didn't put any money down, the homeowner found it easy to walk away. According to NAR, "the default rate on loans obtained in conjunction with seller Down Payment Assistance is 28%, roughly three times the rate on FHA loans without seller-funded down payment assistance". Second, the purchase price was often increased to offset the seller's contribution. For example, the purchase price on an home with an asking price of $200,000 would be adjusted to $212,765 ($212,765 x 6% = $12,765). This extra liability meant the buyer would often be walking into the home with negative equity which further exacerbated the "no skin in the game" issue.

From a political perspective, some feel that elimination of the DPA programs will remove liquidity from the market and cause more turmoil in real estate markets across the nation. Others feel that elimination of the DPA programs will help restore integrity to bank financing and therefore stabilize markets over time. Both points are valid.

Politics aside, elimination of DPA programs is certain to have an immediate impact on the residential rental market. Although a $7,500 tax credit was also introduced with the "Housing and Economic Recovery Act of 2008", the credit is limited to first-time homebuyers and cannot be used as the down payment. The buyer must first be able to obtain funds for the down payment and closing costs, then the tax credit can be taken when filing tax returns the following year.

With sub-prime options no longer available, Down Payment Assistance programs on the way out, and no other immediate alternatives available, many would-be homebuyers will find themselves unable to purchase and forced to rent. For the foreseeable future these market factors are expected to drive tenant demand positively and push rents, and thus rental property values, higher.

Fixed Mortgage Rates Edge Lower

Written on August 27, 2008 by Steve Barbey

Rates on average 30-year fixed rated mortgage loans fell to 6.6%.

Historically speaking mortgage rates have not been this low since the early 1960s. While rates have edged higher in the past two years the numbers are still quite attractive. Rates are widely expected to increase in the years ahead as mortgage markets heal. For those positioned to do so, capitalizing on today's rates and today's discounted property values may be a smart play.

The graph below illustrates long term mortgage trends. Note 1963 on the left and 2008 on the right. Graph courtesy of mortgage-x. The peak rate was 15% in 1982.

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