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September 17th, 2010

Are zero-down FHA loans making a comeback?



Last year we said that subprime — better stated as “below-prime” — borrowers would return to the market:

Looking back to the causes and effects of the surge in subprime borrowers when the refi boom dried up in 2004 , it certainly stands to reason that due to current economic conditions and credit restrictions, a newly developed and under-served audience of “below prime” borrowers will emerge — and lenders will take notice.

The only audience being catered to by lenders right now is good-credit quality borrowers. Once that audience is tapped out, the natural progression will be for lenders to go out and seek an under-serviced audience out on the fringe.

We even said that the FHA would play a vital role in that resurrection, due to the fact that the majority of borrowers who can’t qualify under today’s much stricter lending standards would gravitate towards the FHA because of their low down-payment and credit score requirements. One Wall Street Journal Op-Ed contributor wrote:

Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.

But now it seems that 3.5% down is still too high for some potential FHA borrowers. A zero-down FHA loan has been made available to borrowers in one of the states hardest hit by the housing crisis:

The innovative zero down payment FHA home purchase program was recently introduced by The Lending Company of Phoenix, Arizona.  In order to meet the FHA required 3.5% down payment the borrower receives a 2.5% gift from a non-profit organization and the remaining 1% can be gifted from a family member.

According to The Lending Company:

The program is offered exclusively through The Lending Company, a Direct Endorsed US Housing and urban Development lender. There is no requirement for the gift to ever be repaid. It is offered in concert with an IRS approved 501(c)(3) non-profit organization.

Not only did I not think that such a risky program would be introduced this soon after the housing bust, it really shocks me that it’s happening in state with as many housing issues as Arizona.

To my knowledge, this program has only been introduced by The Lending Company in Arizona. It will be interesting to see if this program gains popularity, and if it does, just how many future defaults occur as a result of it.

With charitable organizations all hurting for donations in this downturn, we wonder: Who are these nonprofits? Who is funding them? Are they connected to the real estate or mortgage industries?

(hat tip: Seeking Alpha and Bill Zielinski)

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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